One Sector Starting to Rebound

In Monday's newsletter, I showed how the recent pullback, when put into perspective, was both on schedule for a short-term cycle low, and typical in the length and duration. In most of the major indexes, the past two trading sessions have produced a consolidation, while in the NASDAQ Composite, a bounce off the likely short-term low and the 50-day moving average (and a stochastic buy signal) suggest a rebound of some type is forming.

While there is the chance the market could turn south and resume the process of clearing out the sellers, there are some quality stocks that have reported good earnings, and buyers are snapping them up. This is a good time to pick up some stocks that have been on our watchlist. Just coming off short-term lows, we can set tight stop-losses to maximize the risk-to-reward ratios in these trades.

Trolling for trade candidates, I noticed one major sector ETF is showing more strength than the other sectors, and is offering a good, higher-probability setup. XLB, the SPDRs Materials Sector ETF, is rebounding off a 2-month support level. A nice, clean stochastics buy signal has formed. The volume on the past two rebound days has been above-average.

Just looking at the chart, a stop-loss could be picked just below the support, say at 43.10. XLB's recent moves off short-term lows have averaged around 3.5 points, and it already has moved about a half a point. So there could be 3 more points of upside, and with a stop-loss at 43.10 providing 1.23 points of downside risk, the risk/reward ratio (which really is a reward-to-risk ratio) is 3/1.23 or 2.4 to 1.

That's a conservative trade, and a sensible approach to taking a bullish stance on the current market.

The next step is to go to XLB at finance.yahoo.com and check the top 10 holdings of XLB. Investigate each one, looking for the component stocks that have good fundamentals and similar higher-probability setups. There may be one or more trade candidates offering even better trade setups, and possibly dividends to boot.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, including what to do right now after last week's market drop, type in www.markettamer.com/seasonal-forecaster

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

 

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