The collapse of Silicon Valley Bank and Silvergate Bank earlier this year spooked the markets.

Many feared that other banks could soon follow suit. That saw the Financial Select Sector SPDR Fund (XLF) lose around 15% in just a few weeks.

But after the panic died down, XLF quietly built a base and began to rally.

When we checked in on XOP in late May (red arrow in the chart below), though, that rally looked like it could be stalling.

After holding a key level, that rally resumed. And XLF now trades close to where it was before those banks collapsed.

Today, I want to see what’s in store from here…

Overshoot to the Downside

XLF was trading in a sideways pattern in the second half of last year. You can see this in the 50-day Moving Average (MA, blue line).

Within that sideways pattern, there were several big swings.

Each of these swings reflected the Relative Strength Index (RSI) crossing between overbought and oversold territories (orange circles).

Financial Select Sector SPDR Fund (XLF)

Source: e-Signal

However, as we came into 2023, XLF started to break higher. Its peak on February 7 represented XLF’s highest level since April last year.

But as buying momentum reversed in February (as it had in August and December), XLF also rolled over and fell.

This RSI reversal in February started around a month before news of the bank collapses…

However, as that story broke, XLF’s sell-off accelerated quickly. You can gauge the strength of that down move by the steep angle as the 10-day MA fell below the 50-day MA.

But just like any big moves in the market, XLF overshot – in this case, to the downside.

With sellers exhausted, XLF was able to build a base and rally while the RSI formed a ‘V’ and tracked higher from oversold territory.

As you can see, that trend has continued since. The RSI has made a series of higher lows (orange line).

Take another look:

Financial Select Sector SPDR Fund (XLF)

Source: e-Signal

This steadily increasing buying momentum caused XLF to also trend higher (red line). When the rise stalled in May, XLF bounced off the red support level at ‘A,’ which showed that its rally remained intact.

Its initial move faltered in late April. But the 10-day MA crossed back above the 50-day MA last month and has now begun to accelerate higher. That’s added to the bullish sentiment.

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Higher Lows and Higher Highs

The steady climb in momentum has driven XLF’s rally. And for the rally to continue, positive momentum will need to remain – with the RSI tracking in the upper half of its range.

The 10-day MA accelerating above the 50-day MA will add further evidence of XLF’s up move.

While its $37.11 February high this year is still a long way off, the next test for XLF is the same as any other rally…

That is, it needs to continue making higher lows and higher highs.

We need to keep a close watch, however, if the RSI tracks and reverses from overbought territory…

Such a move could see XLF retrace within the longer-term uptrend.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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