I still vividly remember my emotions when I first started trading.

I was so eager to be in the big leagues.

I wanted to be like my high rolling peers… making massive trades and driving a Rolls-Royce.

After seeing the sheer number of trades – and money – they were making, I committed myself to learning everything they knew.

So, every day I’d run through dozens of charts… watching each and every tick.

Chasing a move – any move – just to be part of the action.

The only problem was, doing so cost me a lot of my money. So much so, that I burned right through my trading account several times before I figured it out.

Perhaps you can relate to that part of the story.

As we’ve been discussing this past week, there are times when markets clearly trend up or down… and other times when they simply trade sideways.

We know that in either scenario, though, we can still make money.

The problem comes when we try to trade a market that’s right in the middle… when it’s still unclear what type of pattern is unfolding.

To see what I mean, let’s look at a chart of the Financial Select Sector SPDR Fund (XLF) – an ETF that represents the financial services sector…

XLF looks ready to break out, but it’s still too early to tell.

To get a better idea of its trending patterns, let’s start with last year’s action.

Having traded off its March lows, XLF really got moving from May into June. On June 5 (the red arrow on the chart), XLF looked to be heading in only one direction… up.

That’s exactly the kind of breakout traders look for.

But, things didn’t quite work out that way.

As it turns out, that was the peak of that particular move. XLF fell from its high shortly after.

From June to late November in 2020, XLF traded in a tight $3-$4 range.

The uptrend didn’t start until XLF gapped higher last November.

And that uptrend lasted right up until this June (the blue arrow on the chart). From there, as you can see, XLF retreated lower.

By mid-June, XLF began to trade in a sideways pattern again… right up until this last week.

The most recent price action shows XLF could be breaking above its current sideways pattern. If that happened, XLF would move above the upper blue line on the current trend.

Again, like June 2020, this current move could really pull you in as a trader. If you’re right and XLF continues to run, you could get in early on a really profitable trade.

Yet, as we also saw also in June 2020, a promising break higher can quickly turn around.

This recent price action could just be an aberration – a false move before XLF returns to a sideways pattern.

So, what to do?

The answer lies in the recent Goldman Sachs (GS) trade that we covered over two parts last week (here and here).

If you recall, when GS rallied and failed to break above its previous high, it confirmed that the uptrend was over.

In this XLF example, we can also use the most recent high as our reference.

So, let’s take another look at the XLF chart…

In this case, XLF needs to break above the previous high (the blue arrow), before confirming it’s in an uptrend.

Until then, I’d be sitting on the sidelines.

Don’t worry, when XLF broke higher last November, it rallied for eight months. If it rallies again, there’ll be plenty of time to get in on the move.

When you see a price breaking out, it’s tempting to jump straight in.

After all, that’s what I did when I was starting out. I can tell you, though, it cost me a lot of money.

That’s why it’s best to be patient. You need to be sure the correct pattern is forming before you consider placing a trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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