I am watching the XLEs for a potential short. If the $74 level breaks and they get to $73 I will short it.
My stop-out will be $74. This is a logical level to have it at because it has been support since May. If it does break to the downside, it will most likely become a resistance level. A break back above this could mean it is going to rally back up to the $78 level, which was where the top was in January and May.
My target to cover will be $69. I think that there will be support around $68.75 because it was the top of the range from February through April.
Here are my 7 Trading Rules as applied to this trade:
1) IT IS MORE IMPORTANT TO KNOW HOW TO SELL THAN TO KNOW WHAT TO BUY. YOU SHOULD NOT ENTER A POSITION WITHOUT HAVING YOUR TWO SELL STRATEGIES DEFINED. THE OPPOSITE IS TRUE FOR SHORTING.
My buy to cover target is $69. My buy-stop is $74.
2) ALWAYS THINK ABOUT RISK
If I short it at $73 and cover at $74 it is a one point loss. If I short it at $73 an cover at $69, it is a four point gain. 4 to 1 Potential Profit / Loss Ratio is appealing.
3) UNDERSTAND AND CONSIDER THE POSITION-SIZING DYNAMICS
I am not oversizing this position...I am using no more than 5% of my capital for this trade. This is my maximum amount to put in any trade.
4) LEARN HOW TO DEVELOP YOUR OWN IDEAS
I came up with this idea by analyzing the SPDRs
5) HAVE A VALID REASON TO TRADE
Break of a support level
6) DON'T BE MARRIED TO AN IDEA
I have a clear stop out strategy
7) DON'T OVERTHINK
I have clearly defined all aspects of the trade