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After a tumultuous 2023, the Financial Select Sector SPDR Fund (XLF) took off in late October.

XLF is an ETF that holds a swathe of bank, insurance, and financial stocks. And at that time, it was trading close to its yearly low.

But XLF soon got caught up in the huge “Fed pivot” rally. It gained over 20% in a month and a half.

Despite that huge turnaround, XLF has struggled to maintain that strong momentum more recently.

Even last Friday’s big earnings beats from big banks couldn’t do the trick. Banks like JP Morgan (JPM) and Bank of America (BAC) failed to drive XLF higher on the day.

So today I want to check out XLF’s chart and see what we can expect from here…

Bearish Signals

XLF had worked its way higher after its March 2023 low. Yet the chart below shows that it peaked and rolled lower in July.

XLF steadily fell through October, making a series of lower highs:

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

XLF’s downtrend coincided with two bearish technical signals:

1. The Relative Strength Index (RSI) retraced from overbought territory (upper grey dashed line). Then it tracked predominantly in its lower band (below the green line).

2. The 10-day Moving Average (MA, red line) crossed beneath the longer-term 50-day MA (blue line). This had both MAs tracking lower.

But a reversal of this pattern caused XLF to reverse and rally hard from late October.

As the chart shows, XLF had a strong surge. The 10-day MA broke back above the 50-day MA at a sharp angle.

And after breaking through resistance, the RSI burst higher and tracked in the upper half of its range.

Also notice the bullish action of the MACD throughout XLF’s current up move. The blue MACD line broke above the orange signal line. And both lines then rose higher.

After that strong surge, though, XLF’s rally has weakened since around mid-December.

Take another look:

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

Although XLF has made higher highs (upper orange line), that once-strong uptrend has started to flatten out.

All the while, the RSI is making lower highs (lower orange line). So buying momentum is waning. This diverging pattern often precedes a correction.

So how should things play out from here?

Crossover Pattern

If the RSI and XLF continue to diverge, we can expect falling momentum to eventually pull XLF lower.

We’d also look for the 10-day MA move down and hit the 50-day MA as further confirmation of a down move.

Beyond that, we’ll need to watch the MACD closely from here.

When we last checked in on XLF on December 20, we saw the MACD rolling over (left and middle red arrows). It was further evidence of XLF’s down moves.

With that crossover playing out once more, I’ll see if this down move accelerates and shows us a potential short trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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