From January 26 to February 9, the S&P 500 lost as much as 11.84%. This initial freefall was followed by a rollercoaster-like performance.
The large February drop (340 S&P points) expanded the trading range and complicated the search for low-risk S&P 500 entries (see S&P 500 analysis).
Hunt for a Better Risk/Reward Setup
In fact, there was no low-risk setup for any of the major indexes. However, the February 11 Profit Radar Report featured the chart below and identified this low-risk sector trade:
“The Utility Select Sector SPDR ETF (XLU) dropped as much as 17.22% since its November high. As of Thursday, XLU was deeply oversold while testing a long-term support line. On Friday, XLU jumped 2.10%. The only thing missing as a bullish RSI-35 divergence at the low. The risk/reward for XLU looks more appealing. We will leg into XLU is it drops below 48.40.”
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We anticipated the S&P 500 to rally from the February 9 low, but ultimately relapse. XLU was a lower-risk vehicle to have ‘skin in the game’ just in case stocks continued higher than expected (runaway insurance).
XLU dropped below the 48.40 buy limit on February 12. Although the ride hasn’t been smooth, XLU never dropped below our entry price (allowing us to ‘play with house money’), and is currently up 3.88% (compared to a 1.30% loss for the S&P 500).
Next resistance is above 50.50, support around 49. Failure to move above 50.50 or a relapse below 49 would be a warning signal.
Although the Profit Radar Report’s analysis is centered on the S&P 500, there are times when it makes sense to think outside the box and go where opportunity takes you.
Continued updates are available via the Profit Radar Report.
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.
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