CME Group Skating on a Thin Support Zone

by Serge Berger | April 17, 2013 1:17 am

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free weekly newsletter here[2].

CME Group (NASDAQ:CME[3]) — Since mid-2009, this derivatives exchange has traded in an orderly sideways fashion, where rallies and sell-offs eventually reverted to a mean. This is in stark contrast to the stock’s wild times from 2004 to 2008, which saw a massive multi-year rally followed by a crash.

CME Chart
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So far in 2013, the stock has enjoyed a healthy rally. More specifically, in late February, CME broke out past a key resistance line that led to a 7% rally in a matter of three weeks.

By mid-March, however, as broader market internals started to weaken, the stock topped, but unlike the broader market, did not follow through to a new 2013 high earlier this month. As such, the stock was flashing negative divergence, not unusual near a medium-term market top given the financial sector’s early cyclical nature.

Monday’s sell-off in CME brought the stock back to the very trendline that it broke above in late February, thus putting it in an interesting spot.

CME Chart
Click to Enlarge

On the closer-up daily chart, the current juncture also involves a key support line that, if broken, may allow for the stock to drop toward its 200-day simple moving average, currently near $56.

Medium-term holders of the stock may want to evaluate the risk/reward of holding the stock through a potential 6% drop, while more active traders could consider a short-side play with defined risk.

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