As the Financials Turn

Feb 12, 2008: 6:07 PM CST

The Financial Sector has experienced a bit of rampant volatility since 2008 began. Let’s look at two ten-day periods and see the absolute returns and how they differ for that period for the XLF sector ETF.

Everything was rosy as could be from January 17th until January 30th, 2008:

The Financial Sector (red bar on right) XLF increased 12% over this ten day period, and money was starting to flow into Consumer Discretionary Spending (blue bar, up 9.8%) as well. These were positive signs as the economy was responding to interest rate cuts.

But the great bullishness that appeared in this chart was not to be – it was only a mere deception… a temporary mirage.

January 29th to February 11th was not so kind for the Financial Sector:

The most recent ten day period has the Financials (XLF) down 7%, meaning the prior move was likely a perverse short-squeeze play.

Let’s look at the chart itself for some perspective:

Notice first the two divergences that resolved nicely back to the 20 period moving average for a profitable ‘scalp’ style quick trade.

Price is still in a confirmed downtrend, and price is currently beneath all key moving averages and the averages themselves are in the most bearish orientation possible.

While the momentum oscillator recently made a new high, price failed to confirm this new momentum high.

I believe odds are high – for the meantime – that the most recent price strength represented a short-squeeze, rather than a massive influx of new buyers. The news has been so bad and newer (and experienced) traders were loading up short positions, and something had to give (at least from a contrarian’s perspective).

Will price make a higher swing low now? Time will tell, but due to the prevailing downtrend, odds favor lower prices. Notice how the momentum oscillator seems to be building buying pressure (with the three higher lows). This is a hint that should not be ignored, should there be hidden strength we are unaware of currently.

Do we even want to glimpse at the weekly chart? Sure, why not:

Price inflected off the falling 20 week moving average to the penny (green arrow). This is what we would expect in a down-trending market.

I do want to note one important fact. Notice the “flatline” momentum divergence, in that as price continues to make new lows, the momentum oscillator is only flat-lining (or forming a potential triple bottom) pattern. This is a non-confirmation for lower prices and may also be hinting at potential underlying bullishness which has yet to surface.

Let’s keep a close eye on this sector, because this sector has been known at times to lead the market both up and down.

2 Comments

2 Responses to “As the Financials Turn”

  1. Education » As the Financials Turn Says:

    […] Afraid to Trade.com Blog – Overcoming Stock Market Fears wrote an interesting post today on As the Financials TurnHere’s a quick excerpt The Financial Sector has experienced a bit of rampant volatility since 2008 began. Let’s look at two ten-day periods and see the absolute returns and how they differ for that period for the XLF sector ETF. Everything was rosy as could be from January 17th until January 30th, 2008: The Financial Sector (red bar on right) XLF increased 12% over this ten day period, and money was starting to flow into Consumer Discretionary Spending (blue bar, up 9.8%) as well. These were positive signs as the […]

  2. Stock Market » As the Financials Turn Says:

    […] Corey Rosenbloom wrote an interesting post today on As the Financials TurnHere’s a quick excerptThis is what we would expect in a down-trending market. I do want to note one important fact. Notice the “flatline” momentum divergence, in that as price continues to make new lows, the momentum oscillator is only flat-lining (or … […]