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

    ETF Analysis: First Trust Dorsey Wright Focus 5

    Take a closer look at the First Trust Dorsey Wright Focus 5 ETF, a unique and innovative fund of funds based on momentum and relative strength.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  3. Mutual Funds & ETFs

    Top 3 Switzerland ETFs

    Explore detailed analysis and information of the top three Swiss exchange-traded funds that offer exposure to the Swiss equities market.
  4. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  7. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  8. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  10. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Lion economies

    A nickname given to Africa's growing economies.
  4. Factor Investing

    An investment strategy in which securities are chosen based on ...
  5. Reverse Gold ETF

    Exchange traded funds that are designed to trade in a direction ...
  6. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  1. 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 >>
  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 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 >>
  4. 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 >>
  5. 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 >>
  6. What are some of the most popular ETFs that track the retail sector?

    Some of the most popular exchange-traded funds (ETFs) that track the retail sector include the iShares S&P Global Consumer ... 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!