The Financials Sector (XLF) has received considerable attention as of late, but let’s look at the chart for a few more insights:
The small horizontal hash-marks represent the series of lower lows and lower highs which have defined the prominent downtrend, and this structure has not been broken yet.
Price recently formed a higher low, but the pattern appears to be forming a consolidation pattern â€“ perhaps a symmetrical triangle in development. After the large volatility move down in this sector, a period of consolidation is welcome.
Recall that there has been a relationship between the Financials Sector and the overall Stock Market, so if we see any signs of strength here, that would be an excellent (bullish) sign for the overall market.
What would look encouraging? A solid break above the declining 50 period moving average and a decisive break above the developing triangle consolidation formation. In fact, if we saw price stay above $28, that would be a rather bullish development.
The weekly chart supports this thesis that the $28 level is quite critical to overcome:
There is a significant down-trending channel that has been in place since October, 2007.
$27.00 seems to be a critical level to overcome, as it is the price where the declining 20 weekly moving average appears, as well as the top of the declining channel. Taking out this level with force and stabilizing above $28 would trigger significant technical (chart) significance and could cause funds (and traders) to act in concert, whether they initiate new buying or buy back old short-sale positions.
To help the bull’s case, there is a positive momentum divergence forming on the last two price swings.
Also, volume has surged through 2008, which could indicate the potential for a capitulatory bottom (where everyone sells indiscriminately, leaving few traders left to sell).
Keep an eye on this sector, for I believe a significant break of the $27 or $28 level could change the calculus for the broader stock market.