Symmetry Setups

2016-05-04 | Henry Gambell

Symmetry is one of the most helpful concepts I’ve found in trading. As any student of the markets will tell you, “we’re trying to make predictions on the future based off analysis of the past”. Another way of saying it might be “If it’s done this before, maybe it has a chance of doing it again”. I’ll also quote symmetry as defining the personality of a market. If it tends to correct in $20 declines, you can’t be upset buying at extensions and then having to sit through a $20 decline.

A current example of this that’s worth looking at comes from the weekly chart of XLF.
Symmetry Setups - XLF 1

One thing about symmetry is that if I’m actually going to call a given level “symmetrical” it needs to be exact. That would be symmetry. But I don’t mind also including similarity, which gives us a little more leniency around a given price. That’s what we’ve seen from the February lows made earlier this year to the April highs in relationship to the rally seen before the “Flash Crash” – the October 2014 lows running up to the July 2015 highs.

Symmetry Setups - XLF 2

When you look at the numbers, the rally in XLF from those 2014 levels into the high of $25.62 was a $4.07 rally. The rally we’ve seen this year has been $4.24. Not exact, but similar. Now if that’s not enough for you to want to make a decision off of, let’s step back to the highs made in 2007. This was a very similar situation and the ascent seen here took us from $34.18 to a high of $38.15, a difference of $3.97.

Once again, very similar. The last comparison I wanted to make on this chart was how long this particular rally took. From that $34.18 low, we saw the advance run 12 weeks before finally slipping. The rally from the February lows of this year to the high we made last week? Also 12 weeks. This is known as symmetry in time, and tends to be a great compliment to the same work on the price axis.

Symmetry Setups - XLF 3

Combining the technical side of this analysis with the activity we’re seeing in the August XLF 21 puts, and if nothing else you’ve got a low risk setup that will take advantage of any sharp drops the financials may undergo in the months ahead.

Symmetry Setups - XLF Options Chain

Disclosure: Currently long XLF puts in AUG and SEP

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