Shares of CME Group (NASDAQ:CME) bounced nicely in recent days as the financial sector continues to support the broader market's rally. This operator of derivatives and futures exchanges has offered up a number of high-probability trade setups over the past 18 months, and if financials can hold their recent bid, then another chance at short-term profits looks to be on the horizon.

Whenever I see a trade setting up in a financial stock, I feel compelled to reiterate the sector's importance to the tone and strength of the overall stock market. Not only is it one of the largest industries in the United States, but it is intertwined with just about all other industries.

Of particular interest from an investing and trading perspective is watching the large bank stocks, which often act as a leading indicator for the broader market. This makes sense considering bankers' insight into business activities, which in turn, causes them to either expand or rein in lending.

In addition to banks, it is helpful to watch insurance companies, brokers and exchange operators such as CME Group for signs of relative strength or weakness.

In that vein, the following chart compares the SPDR S&P 500 (NYSE:SPY) in blue with the Financial Select Sector SPDR ETF (NYSE:XLF) in red, and we can see the close correlation.

XLF vs SPY Chart

Besides being a near-term leading indicator, the financials are also helpful in confirming the health of a trend. Applying this reasoning, the broader market's rally off the August lows could be labeled healthy since the financials have participated. In fact, XLF is breaking out to new highs along with the S&P 500, Dow and Nasdaq.

With the financials supporting the bullish trend in stocks, let's look at the weekly chart of CME.

CME Stock Chart - Weekly

After falling into the abyss during the financial crisis, the stock has worked its way back up with a series of higher lows. CME is now pushing up against a diagonal resistance line dating back to the late 2007 highs, which makes it a crucial level through a technical lens.

Momentum, as represented by the Relative Strength Index (RSI), diverged from price in late 2013 and early 2014, forecasting the drop in price that occurred in the early part of this year. Now, however, it is moving up along with price, and that is bullish.

Zooming in on the daily chart, the stock dropped for a few weeks following its July 31 earnings announcement, but ultimately managed to hold above its 100-day simple moving average, which has acted as solid support/resistance over the years.

CME Stock Chart - Daily

CME then began to rally last week along with the financial sector, and on Tuesday, it broke past its July highs, which is important from a momentum perspective.

The stock now has a natural attraction point near the $77.80 area, which is where it found resistance this spring. Beyond that, CME has plenty of upside potential, particularly if the melt-up in financials continues.

Recommended Trade Setup:

-- Buy CME at $76 or higher
-- Set stop-loss at $74.30
-- Set initial price target at $80 for a potential 5% gain in 2-4 weeks

P.S. -- CME Group has demonstrated the growth and sustained momentum necessary to make it a potentially winning trade. My colleague Amber Hestla has a keen eye for similarly profitable trades in our premium newsletter, Income Trader. It's not "dumb luck" that every one of her closed trades is a winner -- 52 trades, 52 winners in the past 12 months. Amber's strategy works. You won't want to miss her next recommendation.

This article originally appeared on Technicals Point to a Quick Pop in This Financial Stock's Future


Related Articles
  1. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  2. Investing Basics

    Tops Tips for Trading ETFs

    A look at two different trading strategies for ETFs - one for investors and the other for active traders.
  3. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  4. Mutual Funds & ETFs

    Top 5 Emerging Market ETFs

    Find out which emerging markets ETFs have enough of an asset base, trading volume and low fees to be considered top choices in the segment.
  5. Mutual Funds & ETFs

    How to Profit From Market Volatility Using ETFs

    Volatility funds offer exposure to high greed and fear levels while avoiding predictions on price direction.
  6. Mutual Funds & ETFs

    The Best Currency ETFs

    We look at the best currency ETFs for gaining exposure to various global currencies, based on daily volume and performance.
  7. Chart Advisor

    Trade Base Metals With These 3 ETFs

    News out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
  8. Mutual Funds & ETFs

    Top 3 German Bonds ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and private bonds issued by Germany with different duration yields.
  9. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  10. Investing Basics

    The 4 Biggest Bond Myths

    Bonds can be a great addition to a portfolio but be aware of these four myths.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  6. Are there leveraged ETFs that follow the retail sector?

    There are many exchange-traded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!