A Look at the Carnage in Financials Tuesday XLF WFC C

Jan 20, 2009: 10:15 PM CST

Financial stocks were hardest hit in Tuesday’s market decline and I wanted to highlight the XLF Financials ETF (which broke its November lows today, falling 16%), Wells Fargo (WFC) which fell 24% today, and CitiGroup C which declined 20% today.

First, the broader XLF Financial ETF:

I’ll take a quick view of each stock’s technical position and leave the discussion of the news and fundamentals to other excellent sites.

First, what’s most concerning is that the XLF broke to new lows, shattering its November 2008 closing low, as I analyzed it was likely to do.  I mentioned there was no further support beneath the red horizontal trendline and we see that price moved like a magnet was pulling it lower down to test and break the significant lows.

Looking back, we had a flag into resistance in October and a rising trendline violation in early December and then a ‘rectangle range’ that formed until mid-January 09 which was broken to the downside.  Price was unable to test its falling 50 day EMA which was a sign of weakness on the part of the buyers.  Once support was shhattered at $11, bears came out of the woodwork.

This does not bode well for the broader US Equity Indexes, as today’s price action showed.  Traditionally, Financial stocks lead the broader market, and if we’ve already broken the November lows here, odds are we’re going to break it on the Equity Indexes before long so watch this.

Let’s move on to a couple of selected examples that bore the brunt of today’s selling in the Financial Sector.

Wells Fargo & Co (WFC):

Wells Fargo fell almost 23.82% today, clearly shattering the November lows on massive volume – over 200 million shares were traded today, though that isn’t a record.

I wanted to highlight WFC because of the clean triangle formation that occurred through December which drove price all the way to the apex (point of convergence) of the symmetrical triangle pattern.  I wanted to highlight the price principle “Price Alternates Between Range Expansion and Contraction.” After the careful consolidation – or balance – that formed in December, price ‘expanded’ forcefully out of balance to the downside into today’s new lows.  Keep watching this company.

Citigroup Inc (C):

I wanted to highlight Citigroup because its share price broke beneath $3.00 per share today – a reality that was not even a remote possibility over two years ago.  Volume fell just shy of 400 million shares today, which is overshadowed by a few more trading days over the last few months.

Price also formed a flag into resistance in November before breaking sharply and completing a “Measured Move” of the prior impulse down (actually exceeding it).  Price formed yet another bear flag into resistance in December (notice the angle of the correction) before stalling at the 20 day EMA, testing it again, then plunging 60% from its resistance high of $7.00 per share.

We’ve made new price lows not seen since 1992!

Continue to watch the Financials for any sign of strength… though we may have to wait a while longer for life to return to these critical stocks.

UPDATE:  Check out this chart from the Art of Trading which shows in graphical format the difference in selected banks’ market cap from early 2007 to preent.

Corey Rosenbloom
Afraid to Trade.com

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4 Comments

4 Responses to “A Look at the Carnage in Financials Tuesday XLF WFC C”

  1. chartsandcoffee Says:

    Using BAC as a market indicator – http://chartsandcoffee.blogspot.com/2009/01/bac-watching-bank-of-america-will.html

  2. Paul Says:

    Corey, there could be a surprise to the scenario. Financials are now less than 10% of S&P with today’s decline. I think we could see the market try to recover w/o them. I know to a lot of people this may seem impossible, but that’s what market did w/o tech after dot.com bubble burst.

  3. Anonymous Says:

    Nice blog.

    Andy

    http://chaudhryandcole.com/

  4. Corey Rosenbloom Says:

    Paul,

    Surprises are rarely fun for traders.

    And you may be right – I had not thought of that or compared the Tech crash to Financials crash.

    It’s just that Financials may be essential to a recovery in terms of liquidity, ease of cash-flow (in terms of lending/funding new businesses/home purchases), etc. It’s almost like we need the Financials strong to be a solid foundation for a recovery.