XLB J-hook Frypan Bottom

XLB daily chart above shows a nice move up from 11/3/16 to 12/9/16. XLB is an ETF for building materials. It may benefit if construction building picks up. Often after a strong move up, you see a pull back that looks like a cup or the bottom of a J-hook. Sometimes its a down sloping rectangle (a "flag") or a pennant.

Separately, there's a candlestick pattern that looks like a cross section of a boat with a keel in the middle. Some people say it looks like a wok for cooking Chinese food, and some people call it a fry pan bottom.

The pull back on XLB in the chart above has made a very nice fry pan bottom pattern. It even has the dimple in the middle of the bottom, which is the swing low of the pull back. I drew a thick white vertical line beginning from the swing low of the pullback on 12/30/16. This is the measured move for this trade. The top of the line is where we expect the price to go, if it makes the full move. The length of the line is the same length from the recent strong up move from 11/3/16 to 12/9/16.

The short horizontal white line at $52.32 marks the halfway mark up the measured move line. This is our first target.

Notice the 2 thick horizontal white lines going through the fry pan bottom. They are the same length. It means that the time it took to make the swing low is the same time that's elapsed from the swing low to today. Ideally, there is symmetry of time in the fry pan bottom pattern. If so, then we're about to break out to the upside.

I really shouldn't enter this trade until price has closed at a new swing high, and then continues higher the next day. So entering here is a little aggressive and more risky. So, I defined my risk by using options.

There are actually 3 targets on the chart:

1. The halfway mark of the measured move at $52.32.
2. The 127.2% Fibonacci extension at $53.18. 
3. The 161.8% Fibonacci extension, which is also the full measured move at $55.10.

I looked at March 51/52 Call spreads for the first target, March 51/53 Call spreads for the second target, and just a plain March 51 Call for the third target. I entered limit orders at the midpoint of the Bid/Ask spreads and only 2 orders were filled, the simple Calls at $1.12 and the Mar 51/52 Call spreads at $0.53. That's ok.

Fry pan bottoms can be volatile when price gets back up to the previous swing high, which is $51.69 in this case. So I'm putting my stop just below the low of the fry pan bottom ($49.50) , at $49.25.

OK, we're in a little early, so if we get a gap up we're good. Let's see what happens.

Oh, by the way, I used a simple Call for the third target because the 55 and 54 strike Call options were worth very little, so it wouldn't reduce my cost (risk) much to short those.