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  • Writer's pictureTrader Stewie

Analyzing ETFs - A Closer Look at SOXL!

Hi Folks,

I just wanted to review a recent trade and Top Pick of the Week that the Art of Trading made within the private group, $SOXL. I've received some good questions about the trade and trades similar to this one over the weekend so I thought this would be a great place to take a look at the how and why behind the trade!

I will break this educational step by step post down into two parts:


you can simply click the section you want to review and it will take you to that part. Lets get started!

The Technical Setup Behind the Trade

In the private group The Art of Trading members took $SOXL for a swing trade on February 1st and as the Top Pick of the Week on the Monday of February 5th. Even though the trades were for two different strategies the technical premise and reasoning behind the trade was the same.

$SOXL caught my eye because of the recent pullback it had made from January 25th highs. Often it takes more then just 1 or 2 trading days to setup a tradeable pullback. $SOXL made new lows from the previous days, four days in a row. Which resulted in a pullback from a $39.50 high into a $31.15 low, roughly a 20% pullback in 5 days. Keep in mind $SOXL is a leveraged 3x ETF so moves are going to be amplified.

During the time of the pullback and into the lows it made, it didn't break the underlying trend on the daily timeframe from November 2023 into where it settled. Which was a strong indication of underlying strength!

Risk to Reward was setting up strong in terms of the underlying trend and the overall strength of the semi conductor sector. More importantly though, it started to show some classic technical analysis characteristics that built a strong case for a bounce higher.

Those two technical characteristics were:

  1. A falling wedge setup

  2. A Holy Grail setup

This is what that looked like on the chart at the time:

The idea behind a Falling Wedge technical pattern is the stock is in a strong uptrend, makes a new high in that trend and then pulls back from the high in steep fashion but holds up above the underlying, long term trend before finding support and making a reversal higher.

The Holy Grail Setup is a trading technique that uses strongly trending (in this case bullish) stocks, that first pullback to their 20 Day Exponential Moving Average, losing the moving average intra-day and then reclaiming and closing back above that moving average in the same day! Often forming a hammer candle or something similar.

The Holy Grail Setup Technicals:

In a textbook example of a Holy Grail Setup the stock makes the reversal off of the 20EMA and makes a continuation move higher. Many other factors can be at play that's why its important to analyze each angle of the trade and not basing it off of just 1 single key indicator. Often 2 - 3 strong technical attributes that work in tandem set up a strong trade. This is exactly what we did here! Here is how a textbook Holy Grail sets up and trades:

Ok, now that I have strong technical backing for the trade how do I manage risk on a trade like this?

Once you encounter a qualifying "Holy Grail" setup you can use the price points on the "Holy Grail" setup candle to help guide you through the trade. Ideally your stop loss should be slightly below the Holy Grail setup low from the previous day. If its a swing trade give the trade a few percentage points (or less) to breath. You do not want to see the stock close below the holy grail setup low. This would disqualify the setup at that point.

My stop on this particular trade was set at $30. Keep in mind that this is a leveraged ETF so the stop needs a little more room then a conventional trade since leveraged ETFs naturally trade a wider daily range.

As the trade quickly accelerated higher I made sure to realize partial profits on the way up. I sold half at $34.60 on February 5th and close the rest of the trade out as well as the Top Pick of the Week out at $38.85 on February 9th.

This swing trade realized a profit of +14.93% in 6 full trading days. I've included this trade along with the rest of the swing trades AoT has taken so far in 2024!

Diving Deeper into the Trade: How to analyze an ETF

You can take the analysis on a trade within a concentrated ETF a step further and analyze the weighting of each holding and explore the technicals of the charts that have the most influence on the ETF. This is good practice if you're trying decipher a "healthy pullback" from maybe a pullback that could potentially break further down.

You can do this with any concentrated ETF really as long as the top 10 holdings carrying significant weight within the ETF. This weight influences the ETF because if the stock moves it actually has an impact on the ETF. Think $ARKK, $TQQQ, $TECL, $SOXL, and many more.

I like to go to the website of the ETF to find the most up to date weighting. This is what $SOXL (LINK) looks like:

As you can see $AMD, $AVGO, $NVDA, $INTC and $QCOM carry significant weight at the top 5 and even the remaining 5 make a large portion of the weighting up!

If you were quickly analyzing this group to identify underlying weakness from the pullback it had made from January 25th you would quickly realize that $INTC's weak earnings lined up with that weakness. $INTC's earnings created short term weakness in the sector. $AMD made a 10% pullback on the back of $INTC, $AVGO and $QCOM followed around that time too. $NVDA held strong. One thing $AMD, $AVGO, $NVDA and $QCOM had in common at the time though was that they all held onto their strong underlying up trends. Which translated over to $SOXL strength when they rallied back higher.

This same type of analysis can be used on any concentrated ETF and often can help create a stronger understanding of your technical trade. Building a strongly defined trade and ultimately confidence as a trader!

Thanks for reading this step by step educational post diving deep into our $SOXL trade and how to analyze an ETF. I have a post dedicated just to the "Holy Grail Setup" with many other examples that you can view here:

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