The financial services sector had an impressive 32% gain in 2021.
That strong momentum enabled it to withstand the selloff at the start of this year.
But as the selling got stronger and more widespread, it eventually caught up the Financial Select Sector SPDR Fund (XLF)…
From its January peak to its June low, XLF dropped 27%.
XLF found a base through June and July and then rallied to break above a previous price level.
However, when we looked at XLF month (red arrow on the chart below), a key indicator warned it was overbought.
Today, we’ll discuss what’s happened since then, and see what we can expect from here.
A Series of Lower Highs
On the chart, you can see how the 50-day moving average (MA – blue line) tracked sideways as we came into the start of 2022.
The 50-day MA then steadily trended downward as XLF bearishly made a series of lower highs.
But, it hasn’t all been one-way traffic…
Financial Select Sector SPDR Fund (XLF)
Source: eSignal
The 10-day MA (red line) shows XLF has zig-zagged multiple times throughout the long-term downtrend.
And our momentum tracker – the Relative Strength Index (RSI) – shows another bearish pattern…
Apart from when XLF topped out at lower highs, the RSI has remained in the lower half of its band (below the green line) throughout the down move.
XLF gapped lower in June and put the RSI into oversold territory (lower grey dashed line).
Then, as the RSI began to trend higher (red line in the bottom half chart), XLF formed a short-term base (orange line) from which it rallied.
Two key technical signals underscored this rally…
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The RSI bullishly broke back into the upper half of its range.
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The 10-day MA broke back above the 50-day MA.
XLF rallied to break through its May high. However, it also pushed the RSI into overbought territory (upper grey dashed line).
Overbought conditions caused the RSI to sharply reverse. XLF followed suit by rolling over and dropping.
Financial Select Sector SPDR Fund (XLF)
Source: eSignal
XLF’s drop saw the RSI bearishly break into the lower half of its range. But it has since reversed to the upside to track right on resistance.
So, what am I looking for from here?
It’s About Support and Resistance
Right now, action around our technical indicators is key.
If the RSI breaks back above resistance and gains traction in the upper half of its range, then XLF’s rally that began in July will go further.
The next test for XLF is to break above its August high at around $36.
I’ll also be watching our two MAs, as they’re now tracking very closely together.
If the 10-day MA stays above the 50-day MA – and starts trending higher – it’ll confirm an uptrend.
However, if the RSI fails to break resistance and instead reverses lower – and the 10-day MA crosses below the 50-day MA – then XLF could soon retest its yearly lows.
As always, we need to keep a close watch… and let our technical signals dictate any potential trades.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
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I just wanted to reach out and thank you for the expertise on these recommendations so far. I used your recommendations to make about $2,500 on the first trade and about $3,500 on the second trade.
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– Joseph Y.
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