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.
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.
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 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 ProfitableTrading.com: Technicals Point to a Quick Pop in This Financial Stock's Future
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