A few weeks ago, we checked out the Financial Select Sector SPDR Fund (XLF).

It’s a sector that was off many investors’ radars in 2021, despite it generating a 32% gain.

However, this year has been more challenging for XLF…

After initially holding up through early 2022 (while the broader market fell), XLF had a wave of selling in mid-March.

By the time XLF hit its May low, it was trading 23% below its yearly high from January.

When we looked at XLF on May 19 (red arrow on the chart), it was in the early stages of a bounce.

I was looking to see if that buying would gain momentum or fade out like the previous moves.

Today, I’m going to discuss how that panned out. Plus, we’ll look at what’s in store from here.

Now, let’s take a look at XLF’s chart…

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

The 50-day moving average (MA – blue line) shows XLF’s long-term trend. XLF steadily climbed in late 2021, before flattening out in early 2022.

But as the selling gathered pace from March onwards, that long-term trend turned down.

The short-term 10-day MA (red line) shows just how much XLF has moved about within that overall trend.

The 10-day MA zig-zagged strongly across the 50-day MA multiple times. The last crossover was in early April when the 10-day MA moved below the 50-day MA.

From there, it accelerated further away from the 50-day MA as the downtrend gained momentum.

At the same time XLF made those lower highs, the Relative Strength Index (RSI) also made lower highs – showing declining momentum.

However, I was watching something else with the RSI…

For XLF to rally, the RSI needed to break above resistance from those series of lower highs. The red line in the lower half of the chart represents that resistance level.

Next, I was looking to see if the RSI could then break back into the upper half of its range (above the green line).

With XLF’s bounce gathering momentum in May, the RSI has now broken above both.

So, what can we expect from here?

Well, let’s take another look…

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

The orange line represents short-term support for XLF. The RSI’s move higher over the past weeks has helped XLF hold this level.

For XLF to rally higher off this support level, the RSI needs to stay in the upper half of its band.

The longer the RSI stays in this upper band, the more prolonged XLF’s rally will be.

The next test for any rally would then be for the 10-day MA to cross back above the 50-day MA.

Right now, we’re still early into this move. So, we must remember how fickle this market has become.

If the RSI instead falls back below the green line – and XLF breaks below short-term support – then this rally will quickly fizzle out like the previous ones.

Meaning, this latest bounce would prove to be yet another false breakout move…

And this could cause XLF to retest its May lows soon after.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

What are your expectations for XLF? Will this bounce be the start of a new rally?