Knowing what not to trade is often more important than knowing what you do want to trade.
That’s because the number one priority for every trader should be capital preservation.
If you run out of money, you won’t be able to keep trading. It’s an expensive lesson that every seasoned trader has learned the hard way.
That’s why today, we’re going to look at real estate, a sector that’s been struggling for nearly two years. The SPDR Real Estate Select Sector ETF (XLRE) has been in trouble since December 2021.
Let’s look at a chart of XLRE below. We’ll walk through what I see on the chart and why it’s likely best for most traders to avoid this sector for the time being.
Since December 2021, the trend in XLRE is clearly to the downside.
The simplest definition of a trend is a series of swing points moving together in one direction. A downtrend must have a series of lower lows and lower highs.
You can see the swing points marked on the chart courtesy of the red arrows.
But even the fiercest of trends has to take a breather every now and then. Think of it like this – if a sprinter runs 100 meters as fast as they can, they’ll need a break before they can race again.
It’s the same with markets. After a market has a strong directional move, there will always be some kind of pullback.
These pullbacks come in all kinds of shapes and sizes. And right now, XLRE is tracing out a triangle pattern. Triangles are typically trend continuation patterns. Just like any other pullback, they’re a temporary interruption of the larger trend.
Once a triangle pattern is completed, it will break out in the direction of the larger trend.
In this case, traders should be on the lookout for a break below the supporting line of the triangle. That’s the first clue that XLRE is ready to resume its downwards slide.
Now I’m not necessarily suggesting you should rush in and play the downside. That’s definitely an appropriate strategy for some traders, but it just might not be suitable for others.
Just because my analysis tells me that something is going to break down doesn’t mean I have to play the short side. Sometimes, it makes more sense to simply avoid that market until it finds support and starts a new trend that will take the market higher.
Remember, analysis is simply a mastery of observation. It’s all about reading price charts and market sentiment. Trading, on the other hand, requires a mastery of the self. You have to know what kind of trader you are.
If you’re aggressive and happy to play either the long or short side, then this is might be a great trade setup. If you’re more risk averse, then it might make sense to avoid the real estate sector for now.
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Source: Jeff Clark Trader