XLF, XLK, Small Caps

I'm looking at 3 asset groups very seriously, I think they are very near an add-to or new position area. Financials (XLF) or FAZ (3x short Financials) is one, XLK (Tech) and TECS (3x short Tech) is another, the 3rd is small caps, TZA (small cap bear 3x) is the third. I like SRTY as well as you know as it was added last week as this market has a very dangerous feel to it.

Small Caps (TNA 3x Long Small Caps)  has the exact same H&S type price pattern that the IWM so being long SRTY (3x short IWM) and TZA (3x short Small caps) defeats the purpose, take a look, it's pretty amazing how tight the correlation is.

TNA (Small Caps) in green vs. Russell 2000/IWM (red) they are virtually identical so you gain nothing really being in both trades unless you want to try for some minor diversification and take on both positions, but in such size that together they'd represent 1 position for risk management purposes, you never know, you might get a little better relative performance here and there. You definitely get better relative performance with TZA vs short IWM as it has 3x leverage, the comparable trade would be TZA or SRTY, both 3x leveraged (small caps and Russell 2000 respectively).

Since I've already started a position in SRTY, I'll probably stick with it, but the H&S tops and being at the top of the right shoulder is VERY enticing for a new or add to position in either.

As for confirmation (volume) of TNA's (3x long Small Caps) H&S pattern, here's the same quick custom cumulative volume indicator I put together so you don't have to trace volume bars at each rally and decline. The importance of volume confirmation with a H&S top and even more so with a H&S bottom is paramount, there are a lot of traders who got slapped hard from the 2010 H&S top price pattern which DID NOT show volume confirmation.

What you are looking for is falling volume (red arrows) on rallies, especially at the head and right shoulder and rising volume on declines, especially at the decline from the head and to the right to the decline from the right shoulder which we haven't seen yet. This is reversed for an inverse H&S, but volume confirmation is even more critical with an inverse H&S and both MUST have preceding up trend (for a top) and downtrends (for a bottom).

This is a solid H&S pattern, as good as it gets and with confirmation everywhere in multiple assets.

In any case, this first look is at XLF, Financials which I like a lot, the trade of choice for me on an initial break is FAZ, 3x short Financials. Getting the sector and timing is hard enough with a top, picking the right stock can sometimes be too much so going broadly with the sector, especially with some leverage (SKF offers 2x leverage short financials, FAZ offers 3x leverage short financials) for me is a better choice than an individual asset, especially if it has dividends, but there are areas and times when I prefer the individual stock over the ETF, usually after the first decline so I can see what is struggling the most with relative performance and the first consolidation/correction, then I want to move to individual names as the margin situation is better as you are actually short rather than long an inverse ETF.

 XLF is a different pattern altogether, it's much more like the SPX's 3-month range and the move above that area, but quite a bit weaker with a small double top (not a true double top) which has declining volume and RSI as well. Stops would be lined up just below support, back in the range and more hardcore longs will have stops below the range, that's also where most retail shorts would likely come in so that's an area I'd avoid if I were looking to short XLF or go long FAZ.

Just like small caps and the IWM are very closely related, the SPX has substantial financial exposure among component stocks , not as tight of a correlation as the previously mentioned, but if I were very short Financials , I'd consider that in shorting the SPX.

 XLF 60 min

XLF 15 min, I'm looking more to the far right on this chart at the small double top area.

XLF 10 min at the small double top area, there was strong distribution on the first top and then some smaller accumulation to create the second which is seeing a negative divegrence in to it, I'm also looking far to the right at the bear flag that we have seen in the market since last week, it's a bit more clear here than in most of the averages.

 This is the 5 min chart, this is the one I am watching the most before taking any new action, the flag to the right specifically is what I'm most interested in as far as any tactical entries.

The intraday charts at 1 min as it is the fastest, would go negative first and if the divergence in the flag area is strong enough (negative), that 5 min chart should go negative and then we have more or less a full house across all the timeframes, here you can see that process has begun.

And at the 3 min chart, just below the 5 min, it is migrating to that chart so I suspect it will hit the 5 min chart soon, perhaps later today or tomorrow. I also have to consider the resistance formed by the two small tops, as that is a possible head fake area as the resistance is very close at both, so I'll be watching that. If there's a head fake move above those two tops or bounces, I'd seriously consider XLF puts so long as there's solid confirmation that it's a head fake move.

More to come...