Like the market in general, XLY has been on the rise since hitting the Great Recession bottom in 2009. The most recent leg up began, again like the general markets, began on Oct. 4, 2011 from $33.07 and has carried the price to all-time highs exceeded anything seen before since trading began in 1999.
|XLY 3 years 2-day bars
The Elliott wave count is a bit messy because the wave 4 correction to the right has exceeded the peak of wave 3. However, this is allowed under the wave-counting rules for a flat correction, which is what appears to be developing at the start of wave 4.
One characteristic of a flat is that it is -- well, flat. It doesn't trend and so is not a promising chart characteristic to support a directional trade.
As an alternative, it is possible to count wave v and the larger wave 3 as incomplete, allowing for a continued uptrend.
At this point, the chart is too ambiguous to support either count, and so I've chosen the most pessimistic, from a bullish perspective, for my preferred.
XLY was one of eight symbols from Monday that survived my initial screening, seven having broken out to the upside. (See "Monday's Prospects".) I've mentioned XRT above as a near twin of XLY.
Four symbols, A, ISCA, JBHT and XRT, failed confirmation by falling back within their 20-day price channels.
The fund VTI tracks the total market. I rejected it because it's just too broad a brush for my purposes.
The one bear signal, ICPT, lacks options and so can't be traded to the downside.
XLY covers the sectors we spend on when we have a choice: Restaurants, hotels, luxury goods, media, autos and on down the list. The fund's top five holdings, about 30% of the total holdings, are Comcast Corp., Amazon.com Inc., Home Depot Inc., Walt Disney Co. and McDonald's Corp. It's a very mixed bag.
XRT's top five holdings are Rite Aid Corp., Ascena Retail Group, Safeway Inc., Finish line Inc. and Office Depot Inc. Note the non-discretionary items in the mix -- we all need food and meds.
XLY on average trades 7.7 million shares a day. It supports a wide range of option strike prices spaced a dollar apart, with open interest running to three and four figures. The front-month at-the-money bid/ask spread on calls is 2.3%.
Implied volatility stands at 15%, in the lower half of the six-month range. It has been falling since Oct. 9 and rose somewhat today.
Options are pricing in confidence that 68.2% of trades will fall between $59.33 and $64.87 over the next month, for a potential gain or loss of 4.5%, and between $60.77 and $63.43 over the next week.
Contracts today are trading to the put side, where volume is running at nearly 50% above the five-day average. Calls are trading at 76% over average volume.
XLY goes ex-dividend in December for a quarterly payout yielding 1.32% annualized at today's prices.
Decision for my account: I don't intend to open a bull position in XLY (or XRT) today because of the ambiguity in the chart, discussed above. A directional positional in a sideways trend is a certain way to lose money.
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.