Trade of the Day: Financial Select Sector SPDR (XLF)

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The bears are looking to do further damage and are challenged the second waves of support again Wednesday. The two main clues I’ve been watching for this week were the transports and the financials, via the Financial Select Sector SPDR (XLF), both of which are struggling.

The Dow Jones Transportation Average ($TRAN) traded down to 7,811 in Wednesday’s session and held the 7,800 level. But last Friday, the transport’s backtest to prior support at 8,000 failed to hold the 50-day moving average, which was a bearish development. If 7,800 fails to hold, a retest to 7,700-7,500 is likely.

The Financial Select Sector SPDR (XLF) held the $22.50 level, but a “death cross” has officially formed on the chart, with the 50-day moving average now below the 200-day moving average. A test on Tuesday to $22.46 fell below the early-September low of $22.50, which was tested twice.

A drop below $22 is where I might target the XLF to go “short” with put options. However, I might to do that early on a break below $22.40, as I mentioned that a retest to $20-$18.50 and the late-August intraday lows could come into play.

If the bears crack $22, the XLF Oct. 16th $22 puts (XLF151016P00022000) could be targeted for a test to the low $20s or high teens. These options offer a great risk/reward setup, and the breakeven point is around $21.74. A move below this level will start to make the puts profitable.

The XLF Nov. 20th $22 puts (XLF151120P00022000) would give the bearish trade more time to play out. The break-even point would be $21.49 at current levels.

I continue to hold call options on PayPal (PYPL) that I recommended last week with the same parameters of a $2.10 target and no stop loss. But, as I mentioned on Monday, there are a couple things that worry me about this market, so keeping some put strategies in play could pay off.

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