Of the top 10 holdings in XLF, only Berkshire Hathaway (BKA.A) has a current price pattern that is in an uptrend (including through this morning's big market rally). The remaining nine top holdings represent around 46% of XLF's total weighting. The fund itself has been down five of the last seven trading days, with the down days having significantly higher volume than the up days -- another sign of distribution for XLF.
There are a few ways to profit from a potential downturn in financials. It all depends on how aggressive you want to be. More conservative investors should use the ProShares Short Financials (SEF). At the time of publication, this fund was trading at around $34.85. If it clears resistance at $35.60, it should go to $38 and then potentially to $40 per share. Place a stop at $33.95 for this trade, which boasts a handsome three-to-one risk-to-reward ratio.
More aggressive traders could invest in the ProShares UltraShort Financials (SKF). The main difference is leverage, as SKF returns twice the inverse of the daily performance of the Dow Jones U.S. Financial Index. This morning, SKF was trading at $56.41. If yesterday's high of $56.94 is taken out, then $67.60 is a target for SKF, followed by $77. Place a stop at $53.85, risking only 5% from current levels.
Traders looking for even more of a pop can use the 300% daily inverse leveraged Direxion Daily Financial Bear 3X Shares (FAZ). Be careful with this one. FAZ was trading this morning at $39.33. Yesterday's high of $41.99 coincides with the 50-day moving average. Should FAZ clear that level, it would have a price target of $46.45 and then $52. Use a stop at $37 for FAZ.