Despite a positive start to this year, a run of regional bank failures put the Financial Select Sector SPDR Fund (XLF) through the ringer…
In February, XLF was trading within 12% of its all-time high. But by mid-March, it tanked and was almost in freefall.
From that February high to its March low, XLF plunged by 18%.
But after bottoming out, XLF began to slowly grind higher. Strong earnings from sector heavyweights like JP Morgan and Wells Fargo spurred it on.
Now, that rally has stalled. So, what’s coming next?
Pattern Break-down
You can see the tail end of XLF’s 2022 downtrend on the left side of the chart below…
After a sharp trend down, the 50-day moving average (MA, blue line) flattened out around mid-July.
The 10-day MA (red line) has crossed the 50-day MA many times since in both directions — a common sideways pattern…
Financial Select Sector SPDR Fund (XLF)
Source: eSignal
When we checked out XLF on April 19 (red arrow), we noted some other common patterns…
When the Relative Strength Index (RSI) rallied (red lines) from oversold territory (lower gray dashed line), XLF held support (orange line) and rallied higher.
Those up moves from ‘A’ and ‘B’ then gathered strength along with two bullish signals…
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The RSI broke through resistance (green line) and rallied into the upper half of its range.
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The 10-day MA crossed above the 50-day MA.
We also discussed how those moves petered out… And XLF rolled over when the RSI reversed and trended down from overbought territory (upper gray dashed line).
You can see that in August, December, and February.
That most recent move down in February accelerated into March after news broke of the regional banks’ collapses.
The RSI bottomed out at ‘C’ (repeating the pattern at ‘A’ and ‘B’), rallied, and had just broken through resistance. That was about a week ago.
We noted then that for XLF to keep rallying, the RSI would have to gain further traction in the upper half of its range…
And from there, we would look for the 10-day MA to cross above the 50-day MA to confirm that up move.
However, as you can see inside the red circle, the RSI has turned down. It’s now testing support. And the 10-day MA is yet to cross the 50-day MA.
So, what can we expect from here?
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Holding Support Is Key
For XLF’s rally to resume, the RSI needs to hold support then move higher. The longer the RSI stays in its upper band, then the longer that rally could last.
But right now, that’s hanging in the balance.
We’ll need to keep a close watch on it over the coming days.
If the RSI instead moves lower and gets stuck in its lower band… XLF’s recent pullback will turn into something bigger.
A prolonged stay in this lower range could see XLF re-testing support (orange line).
If the 10-day MA reverses and accelerates below the 50-day MA, that would also add weight to any down move.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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