This Sector’s Bounce Could Be Short-Lived

Tech stocks and the broader S&P 500 sank last Friday. But one sector headed the other way…

The Financial Select Sector SPDR Fund (XLF) invests in banking, insurance, and other financial stocks. It finished the day up 1.5% from its previous close.

That move came from recent earnings beats from heavyweight stocks JP Morgan (JPM) and Bank of America (BAC). This added some much-needed reassurance to the sector.

But other big-name stocks are set to announce earnings over the coming weeks. And volatility is on the rise.

So let’s check out XLF’s chart to see where it might be headed from here…

A Converging Pattern

The left-hand side of the chart below shows XLF trading in a sideways pattern.

The 50-day Moving Average (MA, blue line) meandered sideways with the shorter-term 10-day MA (red line) crossing it in both directions.

This pattern also appeared in the action of the Relative Strength Index (RSI). It swung between the upper and lower halves of its range. That showed fluctuating momentum…

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

XLF reversed higher from the lower half of its range in late October. This coincided with a common reversal pattern.

As XLF was making lower lows (upper orange line), the RSI was trending gradually higher (lower orange line).

When momentum is building like this, even slowly, it will eventually stop a stock’s fall.

XLF’s rally got underway as the RSI broke up through resistance (green line) and gained traction in its upper band. It stayed there throughout XLF’s rally.

Beyond the RSI, there were also two other bullish signals…

1. The 10-day MA crossed above the 50-day MA with both MAs trending higher.

2. The blue MACD line crossed above the orange Signal line. And both stayed above the zero (0.00) line.

Then, as the chart shows, XLF’s rally topped out and reversed early this month. The RSI formed an inverse ‘V’ and retraced from overbought territory (upper gray dashed line) down into the lower half of its range.

Take another look:

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

That move also saw the MACD line bearishly cross below the Signal line. And it is currently tracking in its lower range (below the zero line).

Adding to the bearish sentiment, the 10-day MA recently crossed below the 50-day MA.

So what should we watch for next?

Pushing Short-Term Resistance

After bouncing from near oversold territory, the RSI is now pushing up against resistance.

There might be enough momentum to push the RSI into its upper band in the short term. But the real test depends on what happens with the RSI in the long term.

If the RSI falters and can’t stay in its upper band, that could set off another wave of selling.

After a period of volatility, I’d look for the 10-day MA to track further below the 50-day MA as further confirmation of any sustained down move.

The other thing to watch is the MACD.

For this jump to last, the MACD line needs to cross back above the Signal line with both breaking above the zero line. Otherwise, any bounce in XLF is likely to be short-lived.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict