How I'd Trade These 3 Widely Held ETFs: XLF, XLE, EEM

Fighting the trend or entering the market late in a bull run are sure ways to earn mediocre returns, or worse. That's why prudent investors should use charting techniques to swing the odds in their favor.

To show you what that entails, I've provided a technical breakdown for three popular ETFs and how to trade them. But first, let me tell you what tactical asset allocation is and why it's vital for reducing risk and outperforming the market...

A good friend of mine recently asked me how they should use asset allocation in diversifying their portfolio -- a harder question than it first appeared. Primarily, many chief investment officers look at their clients risk profile and time horizon to build a custom asset-allocation model. This particular method was wildly accepted as the standard way to approach asset allocation. However, the method alone has certain limitations when constructing a portfolio for a particular client in today's turbulent marketplace.

The new standard in building customized models is tactical asset allocation. This method considers the asset class and specific sectors within those asset classes. The belief being: allocating capital to sectors will help reduce risk and generate outperformance.

Asset allocation and tactically allocating to various sectors is all well and good, but it begs the question -- how does it protect investors and help them outperform the broader market? The answer lies in the fact that investors cannot position themselves effectively unless they are aware of what the markets are projecting.

Charting techniques along with various technical studies allow an investor to prudently define their allocation profile, risk parameters and profit objectives prior to making investment decisions. Understand that human behavior tends to be repetitious and predictable. Pricing patterns can be analyzed and efficiently forecasted, because investors consistently act in similar fashion over time.

To answer my friend's question, I performed a "technical" deep dive into three ETFs...



Financial Sector SPDR (NYSE: XLF) - Weekly
Intermediate Trend (12 Weeks): Negative

Since posting a high of $17.20, during the week of February 14, 2011, the Financial SPDR has been in a downtrend, underperforming against most other sectors. In addition, the 100-Day Moving Average Line (red) has been negatively sloped for the past seven weeks, implying the "crowd" is generally short this sector.

NOTE: The M. A. line has been guiding the near term overhead resistance. Additionally, the longer term outlook depicts a market which is trading just below the midpoint of a broad sideways channel, dating back to June 2009. Major resistance and support of the channel is denoted by the blue horizontal lines, and are represented by $17.50 & $13.20 respectively (see chart above). At this juncture, if you're looking to bargain hunt, use tight stops with no more than $0.50 per share at risk.

Energy Sector SPDR (NYSE: XLE) - Weekly
Intermediate Trend (12 Weeks): Positive

XLE fell 13% to $70.45 four weeks ago from a high near $81.00 during the last week of March. The dip lower was short lived, and the market is now threatening resistance near the $78.00 region. At this point, I would remain long Energy Sector SPDR, but would go net short if a Weekly Settlement (Friday close) below $74.70 is posted.

iShares Emerging Market Index (NYSE: EEM) - Weekly
Intermediate Trend (12 Weeks): Neutral

EEM has been trading within a $6.20 range for the past nine months, dating back to October 2010. The sideways channel, which was formed as a result of price consolidation, is defined by support at $44.25 and resistance at $50.45.

The current price action is somewhat neutral, trading near the mid-point of the channel. The 200-Day Moving Average Line (green) is neutral as well. To avoid a price retrace and test of key support at $44.25, a Weekly Settlement (Friday close) above 47.25 at minimum is required.

Action to take:
Financial Sector SPDR (NYSE: XLF) - If you're looking to bargain hunt, enter at current levels and use tight stops since the trend is still negative. Limit risk to $0.50 per share.

Energy Sector SPDR (NYSE: XLE) - I remain bullish on XLE, but would go net short if a Weekly Settlement below $74.70 is posted.

iShares Emerging Market Index (NYSE: EEM) - At this juncture, a Weekly Settlement above 47.25 is required, at minimum, to avoid a price retrace, and continue the current upside.