Major Divergence and Cradle Trade in XLF Financials

Apr 14, 2009: 3:16 PM CST

The Financial sector has fared mighy well since the interum bottom on March 6th.  Let’s see the unique 5-Swing (Quintuple!) Positive Momentum Divergence and the famous Cradle Trade that formed recently under price.

Let’s start with the Positive Divergence.  Generally, you identify a divergence by comparing one swing to another – such that price makes a new low while your oscillator (in this case, the 3/10 Oscillator) makes a higher low, creating a non-confirmation and signal.

Generally, divergences are good only for a scalp back to the 20 period EMA (reversion to the mean), but sometimes divergences directly precede trend reversals.  When you pair multiple divergences together, it is almost always a precursor for at least an intermediate if not major trend reversal.

In this case, we have five-swings down that formed a lengthy positive momentum divergence (labeled on the chart).  While it won’t guarantee a true price reversal, it strongly suggests one is developing, or has already formed.

Second, just like the S&P 500, the XLF Financial Sector just formed a “Cradle Buy Trade,” which sets up when the 20 EMA crosses over the 50 EMA to form the ‘cradle confluence’ zone.  When price pulls back into this area, it sets up the Cradle Trade.

The Cradle Trade also is a precusor to a Trend Reversal, and is often the “last point of supply” (to borrow a Wyckoff term) or the ‘line in the sand’ between the continuation of the downtrend and the birth of a new uptrend.

Until the Cradle price of $9.00 per share is taken out, we have to assume – via a technical purist perspective – that XLF is now in a freshly confirmed uptrend until proven otherwise.

Corey Rosenbloom
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2 Responses to “Major Divergence and Cradle Trade in XLF Financials”

  1. Anonymous Says:

    I was playing XLF (actually UYG and FAS) long. However, I don’t like that GAP from the other day when WFC gave their surprise “earnings” numbers.
    Today, GS cooked numbers didn’t impress. So, in a nutshell, I’d like to see this close that gap and bounce off the 20 or 50 day ema with some vol to get long again.

  2. Corey Rosenbloom Says:

    Gaps often beg to be filled, so it’s reasonable to expect that. Would certainly be a good (low-risk) buy if the gap is filled… but if it’s a break-away gap, it won’t get filled.