As The Market Rips, These 2 Sectors Dip
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– ETF Watchlist –
Monday proved to be a great day for the bulls with green across the board, not just in the tech sector. While financials lagged a bit, it still did participate in the rally a bit. The most positive development was both the S&P 500 and Nasdaq reaching milestones of above 4300 and above 15,000, respectively.
Investors should be cautious, however, there is economic data set to come out this week that usually will have some effect on the market, as well as a FOMC meeting takin place on Wednesday. This are big hurdles that the market must overcome, but if the data and meeting goes well, that could be just what the markets need for another leg to this rally.
Since the markets are flying high right now, there are a couple areas we can find high probability trades in, like energy or healthcare. As money is poured into sector such as tech and consumer cyclical, the money has to come from somewhere.
In times of rallies, the sectors that tend to see the most outflows are the more defensive sectors, as everyone rushes to participate in the stocks and sectors pushing the market higher. Today, we will take a look at Energy for a potential short play.
Energy Select Sector SPDR ETF (XLE)
The energy sector relies heavily on the price of oil. If the price were to fall, it takes many stocks with it. Right now, oil is sitting at just under $70 per barrel. If the price can push up more, it would be a good risk to reward ratio to take a reject.
The rational behind this trade is looking at 69-70 as a zone for a potential reject, especially as rallies in all of the higher risk, higher reward sectors take place. As money is sucked out of the energy sector, you can reasonably assume prices will fall, but remember to also consider the price of oil.
The resistance level on XLE to watch in correspondence to this level on crude oil prices would be around 82-82.25. Keep this trade on watch if you are bearish the oil sector at the moment.
Health Care Select Sector SPDR ETF (XLV)
The same rationale can be applied to the healthcare sector. The XLV has resistance around 131.33, but I think the better risk vs. reward would come closer to 132 instead. This gives you a little bit better risk vs. reward ratio and if the reject takes place sooner then we just move on to the next trade.
Again, it is important to remember all the extracurriculars are going on in the market. While they may not dictate the trend, they can still jolt the market and certain sectors to move in one direction or the other. Keep these events on your radar always, they could help your entry.
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