With stocks like Goldman Sachs and Berkshire Hathaway being a key part of the financial sector’s holdings, it’s one of the most closely watched sectors of the market.
It held up better than most other sectors at the start of 2022 before eventually getting pulled into the widespread sell-off.
By the time the Financial Select Sector SPDR Fund (XLF) bottomed out in July, it had dropped by almost 30%.
When we last checked XLF just over two weeks ago (red arrow on the chart below), we saw it had found a base to rally strongly off its July lows. And after a pullback, it looked set to rally higher.
However, that move lost momentum and XLF is now rolling over.
So today, we’ll see what’s in store for this important sector.
A Consistent Bearish Trend
On the chart, you can see how XLF made a series of lower highs as the 50-day moving average (MA – blue line) started heading lower.
This downtrend began to accelerate in April before flattening out in early July. But notice the action of the short-term 10-day MA (red line)…
Financial Select Sector SPDR Fund (XLF)
Source: eSignal
After breaking below the 50-day MA in early April, the 10-day MA bearishly remained there until XLF’s rally began to gain traction around the middle of July.
That rally petered out in August (A) when the Relative Strength Index (RSI) went into overbought territory (upper grey dashed line) and reversed back to support (green line).
When we looked at XLF on September 12, there were two key technical signals I was looking for if XLF was to resume its July uptrend…
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Having just broken back up through resistance, the RSI needed to remain in the upper half of its range.
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The 10-day MA needed to start accelerating higher above the 50-day MA.
However, as you can see below, both those moves failed to pan out…
Financial Select Sector SPDR Fund (XLF)
Source: eSignal
First, the RSI reversed sharply down through support and into the lower half of its range. And although the MAs briefly tracked parallel to each other, the 10-day MA sharply crossed below the 50-day MA and began to accelerate downward.
That downward move has now put XLF right on its previous support (orange line). Meaning XLF won’t bounce if it can’t hold this level.
So what am I looking for around here?
Momentum Is Key
As you can see, XLF’s strong move down over this past week has put the RSI into oversold territory (lower grey dashed line).
If the RSI can form a ‘V’ and bounce back toward resistance, that’ll vastly improve XLF’s chance of holding support… and potentially set us up for a trade. Nimble traders could then capture a short-term bounce.
The key (as always in volatile markets) is to be ready to take your profits when you see them. But don’t forget that action around XLF’s support level remains critical…
If the RSI fails to bounce – causing XLF to fall through support – then any chance of a bounce will disappear.
Instead, this year’s downtrend will have further to play out.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, subscribers share their profitable experiences with The S&P Trader service…
Hi, I participated in the Quad Witching trade. I bought three contracts at $7.50 and sold when the market opened the next morning at $20.60. This was my first time trading this type of trade. I wanted to thank Larry’s excellent service. It has changed my life. I’m averaging $5K weekly doing one or two trades a week. Thank you.
– Robert B.
What a great, welcome transaction. For my opening transaction, I bought 30 at $7.30 – expecting to hold until expiration – and sold when you directed for $28.90. Thank you!
– Curtis W.
Hi Larry, it must have been beginner’s luck. I made my first ever option trade with your advice and bought one contract at $7.70 a share. The next day, as per your instruction, I was able to sell at $33.60 a share for a $2,590.00 gain! Pretty cool! I want to learn more about options trading. Thanks for the advice and guidance!
– Robert Q.
I’m writing to thank you for teaching me how to sell put and call spreads on the SPX. I had lost a lot of money trying to use “stop orders” and not paying enough attention to my indicators (RSI and MACD) to make a trade. I think I’ve found the method. I’ve traded for the last six days selling either call or put spreads daily on the SPX.
I’ve been using same-day expiration – and for the last six consecutive days – I’ve averaged about $1,000.00 per day. I’m playing a game with myself seeing how many consecutive days I can garner positive returns. I do have a lot of money to make back for the year. But by selling put and call spreads, I’ve done quite well so far.
I’ll update you again with my consecutive positive trading days. However, I’ll be totally happy making an average of $1,000 per day.
– Doug T.
Thank you as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].