A Look at XLF Financials Sector

Jan 15, 2009: 11:57 AM CST

We need to pay attention to what the Financial Sector is doing on its charts because it has a tendency to lead the broader market, and many eyes are focused on news from this sector.  Let’s take a quick look at the Daily and Weekly charts of the XLF.

XLF Weekly:

A quick overview tells us we don’t want our portfolios anywhere near the Financial sector, at least from a trend perspective.  Price continues to make lower lows and lower highs while the moving averages are in the most bearish orientation possible.

Rather than making a positive divergence like the broader indexes did in November, the XLF weekly momentum actually made new lows, hinting that new price lows are yet to come.  The momentum oscillator is ‘rolling over’ and cracking through the red ‘trend’ line at the moment.

From a cursory glance, it would appear that we’re in the down-swing now that will break the November lows, which bodes negatively for the broader market.  Let’s drop down to the daily chart for more insights.

XLF Daily:

Again, we see a similar picture in that the trend is clearly confirmed as down, the moving averages are in the most bearish orientation possible, and price appears to be in a downswing that will take us to new lows in 2009.

We did have a positive momentum divergence in November, but that was quickly worked out and now no longer has much influence on the price action as sellers are claiming the momentum again and could push us to a new momentum low as price falls to test support at the November lows.

Also, you can draw various trendline interpretations, but what I’ve down is shown a rising blue trendline has been broken to the downside and confirmed as resistance to the upside (just shy of the falling 50 day EMA).

Also, I have us breaking down out of a descending triangle which is classically a bearish pattern with a measuring objective that takes us down to the November lows.

There is absolutely no further support to stop us from hitting the sub-$9 per share level and odds are that momentum (sellers) will continue, forcing a new price low in 2009 which most likely would precede a new price low in the S&P 500 and other US Equity Indexes.

Continue to study the XLF charts and apply your own analysis and be aware of what it might mean for the broader market.

Corey Rosenbloom
Afraid to Trade.com

6 Comments

6 Responses to “A Look at XLF Financials Sector”

  1. Tom, Wappingers Falls, NY Says:

    Corey, I’ve always heard this also; however, an overlay of SPY and XLF over the last year (on a dual axis chart, not percentage) shows essentially identical timing of dip and rise. What exactly are you going to look for?

  2. J Says:

    Corey: How do you interpret the reverse and crossover of the slow STO on XLF’s daily chart? Thanks.

  3. Corey Rosenbloom Says:

    Tom,

    There are slight nuances between them. For example, the S&P broke above its daily 20 and 50 EMA which was a sign of strength; the XLF stayed beneath them both.

    The XLF is further along visually in its swing down than the S&P – but that’s more of a gut thing.

    The XLF also broke its horizontal support line a day or so prior to the S&P breaking it.

    It’s not so much you get a large lead by any means, but rather in the subtle nuances of technical analysis and price structure.

  4. Corey Rosenbloom Says:

    J

    I used to use the Stochastics quite a bit but do not do so any longer. I see the Slow Stoch is crossing over into a buy signal now. I just don’t look at that anymore – I find that price analysis based on the principles of price behavior to be more rewarding to me than any indicator. Just personal experience.

    But the classic way to interpret the stoch now would be that of a buy signal, indeed.

  5. dacian Says:

    Corey, do you think there is a chance we might finnished 5.1? (I mean in case this is the 5th wave)

    http://api.ning.com/files/eGzzv7CIH9SSbV3bwfT4eoRUi4YfkgXZtmOS5Tw1agMotQGjZgh6AFHvb80PbUqs2cSemG7NcrG2vcf40szCJEjoiYCFbBwW/daily.png

  6. Corey Rosenbloom Says:

    Dacian,

    I like the structure of your chart.

    That’s the count we have which is particularly confirmed with the 60 and 30 minute intraday structure (in terms of a 5-wave impulse down with the expectation of an abc back up).

    Problem is, I’m not certain which “5” we’re in. It’d be nice if we were in the 5 of your count (meaning this is the large-scale 5) but I still can see the case for us being in 5 of the larger-scale 3 wave down, then we’ll have a big 4 up.

    I vacillate between the two counts but we’ll know soon enough I hope.