XLV (SPDR health care sector ETF) made a move this week. After facing resistance at the 50-day for several sessions, it bolted past that average Tuesday. Wednesday added another 0.5 percent, but the session was also unable to hang on to all of its gains, leaving behind a candle with a wick.
Wednesday’s intraday high of 83.15 can potentially act as the right half of a head-and-shoulders pattern (chart below).
For the week, the ETF is up 1.3 percent. The daily chart is beginning to look extended. In the past couple of sessions, it closed well outside its daily upper Bollinger band.
Should it come under pressure, there is support at the 50-day, followed by five-month horizontal support just under 81. The latter in particular is important. Persistent defense of that level in the first three weeks this month led the foundation for the latest rally. This also makes up the neckline of the head-and-shoulders in question. If it gives way, the bears could be eyeing 77.50.
In a situation like this, particularly if it involves options as described below, it is best to go on the sidelines and wait for the next reliable signal.
Last Friday, an XLV bull put spread was hypothetically initiated for a net credit of $0.70. With the ETF at $81.58, December 82 put was sold for $1.28 and 80.50 of the same expiration bought for $0.58. With the rally this week, these puts are now cheaper. Closing out this spread costs $0.35, as shown below.
XLV Dec 2017 (expires 22nd):
- Long 82 put for $0.66
- Short 80.50 put for $0.31
The difference of $0.35 – credit of $0.70 minus debit of $0.35 – is kept.
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