Short setup in Technology (XLK)

There is a clear bearish Anti setup in the Technology Sector SPDR (NYSE: XLK.) Linda Raschke first wrote about this pattern, and created the name for it. I have found it to be one of my most reliable trading patterns, and cover it in detail in The Art & Science of Technical Analysis. In this case, consider three parts to this setup: (A) A market in a strong uptrend makes a trend termination pattern. In this case, a small failure test above the channel (indicating slight potential exhaustion), but this pattern alone is nowhere near enough to justify a short, in my opinion. However at (B) a strong countertrend selloff develops, which is followed by a consolidation (C) near the lows of that downthrust. This setups up the potential for another leg down on a breakdown out of consolidation. Ideally, you want to enter on momentum below support, so many traders will have entered short in yesterday’s session. A further entry is possible today on weakness below yesterday’s low, with a stop somewhere in the high 31 area.

Note that this pattern can be useful in another way—a failure of this bearish pattern could result in a strong rally in the broad market. So, whether you intend to trade the short or not, it can be useful from a timing and monitoring perspective.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 2 Comments

  1. Michael Arold

    saw this too, but wondered if a similar pattern in XLF might be even better. Reasons:
    – potential “mini” blow off top prior to the decline
    – Failure test of 2012 March high on weekly chart
    – Stronger A-B decline

  2. rick

    does anybody know where Adam went? been mighty quite here lately!

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