2023 was a mixed bag for the Financial Select Sector SPDR Fund (XLF).
Back in March, several high-profile bank collapses beat down XLF. The ETF invests in banks, insurance, and financial services companies.
XLF gradually recovered through July. But then it rolled over again.
By the time it bottomed out in late October, it was trading within just a dollar of its yearly low.
Yet since then, XLF has rebounded strongly, caught up in the broad market rally due to expected rate cuts.
XLF has surged 20% in less than two months. And it is now trading at its yearly highs.
But signs hint that it may be overheating. So today I want to check what’s coming next…
Extra Confirmation
On the left-hand side of the chart below, you can see XLF’s dramatic sell-off from the collapses of Silvergate Bank and Silicon Valley Bank in March.
After losing over 15% in under a month, XLF established a base and slowly started to recover:
Financial Select Sector SPDR Fund (XLF)
Source: e-Signal
XLF’s trough in mid-March coincided with several bullish technical signals.
Our momentum indicator, the Relative Strength Index (RSI), rallied from oversold territory (lower grey dashed line).
The 10-day Moving Average (MA, red line) finally broke above the 50-day MA. And both MAs rose.
Lastly, in the bottom part of the chart, you can see a third bullish signal. The MACD (blue) line crossed above the Signal (orange) line.
We discussed the MACD in more detail when we looked at Coinbase (COIN) recently. The most important thing to remember is this. When the blue and orange lines cross or diverge, it can often help us identify trading opportunities.
So this MACD crossover pattern further confirmed an emerging move.
And after XLF reversed in July, these same bullish patterns repeated. See XLF’s low in late October.
But in this rally, there is a big difference in the MAs.
In XLF’s current rally, the 10-day MA crossed and accelerated above the 50-day MA at a much steeper angle, showing the huge momentum pushing it higher.
Take another look:
Financial Select Sector SPDR Fund (XLF)
Source: e-Signal
Yet that momentum surge has pushed the RSI well into overbought territory. It is zig-zagging above the overbought line.
If the RSI tracks lower from here, XLF’s rally will come under more pressure.
So what should we look for next?
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Looking for a Crossover
The RSI tracking lower often signals a reversal (and can help provide the setup for a short trade).
But I’m also going to be watching the MACD closely from here.
As you can see in both February and late July (black arrows), when the MACD line crossed beneath the Signal line, it added confirmation of XLF’s emerging down move.
Now look at XLF’s current move. Although the RSI is tracking lower, we don’t yet see a MACD crossover.
So that’s where my focus will be now.
The MACD crossing beneath the Signal line (in addition to the RSI tracking lower) could provide the setup for a potential short XLF trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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