While tech stocks were getting smashed at the start of 2022, financial stocks like the Financial Select Sector SPDR Fund (XLF) were initially performing better.

However, eventually XLF caught up with the widespread selling and signalled bearish sentiment with a series of lower highs.

On June 8 (red arrow on the chart), XLF showed signs of an emerging uptrend. But that move soon fizzled out and XLF subsequently fell.

Today, I’m going to discuss what we can expect next in the financial sector.

Check out XLF’s chart…

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

On the chart, you can see XLF’s long-term downtrend.

After initially trading flat from late 2021, the 50-day moving average (MA – blue line) began trending lower around early March.

Later that month, the 10-day MA (red line) crossed below the 50-day MA, further confirming the downtrend.

As XLF’s selling accelerated, the 50-day MA’s downtrend steepened. From its January peak to its June low, XLF fell 26%.

The numbers on the chart (1-6) highlight the series of lower highs XLF made to complete a common bear pattern.

Each fall was followed by a countertrend higher, which topped out at a lower high than the previous peak.

Another clear bear pattern was the action of the Relative Strength Index (RSI).

Take another look at the chart…

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

Throughout XLF’s downtrend, the RSI also made a series of lower highs.

But when we looked at XLF on June 8, the RSI had just broken above resistance (green line).

For that to emerge into an uptrend, the RSI needed to remain above resistance and in the upper half of its range.

But that move faded out…

The RSI reversed back down through support before bottoming out in oversold territory (lower grey dashed line).

Now, the RSI is trending higher and XLF is again showing promising signs of an emerging rally.

But for that to happen, the action around the RSI’s resistance is vital.

If the RSI breaks back above resistance and gets traction in the upper half of its range, then XLF’s current rally will gain some much-needed momentum.

The next test for XLF would be to break back above the price level from the peak numbered “6” (around $33).

For any long-term uptrend to emerge, XLF needs to take out the peak numbered “5” from May.

Such a move would lead the 10-day MA to break back above the 50-day MA. And this would add further evidence of a genuine uptrend.

However, if the RSI reverses again, then this current move will fade out at what would become “7.”

From there, XLF’s fall would likely take out its June low.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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