Why the Market Will Fight Over This Key Level

Around two weeks ago, we took a close look at the financial sector.

Despite being one of the more resilient sectors in the first quarter of 2022, eventually it got caught up in the heavy selling.

By the time the Financial Select Sector SPDR Fund (XLF) established a base in June and July, it had lost 30% of its value.

It rallied strongly off that base through August. However, that buying momentum then reversed, causing XLF to roll over once more.

When we checked XLF on September 28 (red arrow on the chart below), it had fallen and was trading back at a key support level.

Although that level has held so far, XLF is still looking vulnerable. So today, we’ll examine how things could play out from here.

Establishing Support

On the chart below, the 50-day moving average (MA – blue line) shows XLF’s long-term downtrend.

It tracked sideways at the start of the year, then it began to trend down in March.

Take a look…

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

XLF made a series of lower highs as the Relative Strength Index (RSI) remained bearishly in the lower half of its range (below the green line).

However, as the RSI rallied out of oversold territory (lower grey dashed line) through June and July (red line), XLF was able to establish support (orange line).

Then, as the RSI bullishly broke up through resistance into the upper half of its range, XLF’s rally gathered momentum.

But that rally quickly petered out. The RSI formed an inverse ‘V’ and reversed out of overbought territory (upper grey dashed line) in August at ‘A.’

XLF had a brief countertrend rally that peaked in mid-September, but the RSI broke back down through support, sending the stock price lower.

And our two moving averages further confirmed this down move…

After tracking closely together through mid-September, the 10-day MA crossed sharply below the 50-day MA and began to accelerate lower.

Take another look…

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

That put XLF back at the support level it held throughout June and July.

For XLF to rally again, it was vital for XLF to hold this support. And the RSI needed to form a ‘V’ to rally out of oversold territory.

Although this pattern did play out, now the RSI is right on resistance.

So what comes next?

An Emerging Uptrend?

For XLF’s bounce to continue, the RSI needs to break back into the upper half of its range. The longer it stays in this range, the more prolonged any rally will be.

Any longer-term up move beyond that would then depend on the 10-day MA breaking back above the 50-day MA.

The big test for any genuine emerging uptrend would be for XLF to take out its August 16 high at $35.97.

However, it’s still too early to tell with this move.

If the RSI instead reverses off resistance and remains in the lower half of its range, then it’ll become increasingly difficult for XLF to rally and to hold support.

A break below support – along with the RSI continuing to track in its lower range – would increase the odds of XLF moving another leg down.

As always, let’s keep a patient watch and be ready to act when an opportunity arises.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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Reader Mailbag

In today’s mailbag, a subscriber to The S&P Trader shares their experience with trading and thanks Larry…

Hi Larry,

It’s a pleasure to write in to thank you for your service – and for the good amount of trade suggestions each week. It gives us novices an opportunity to observe a master at work. Since the occasional trade does go awry, it gives me a good excuse to explain my own bad trades to my wife by saying, “Hey, even Larry was off on one or two trades this week, so spare me the grilling!”

In recent days, the market has been opening bullish and then crashing. I mostly trade futures, so I’ll be up $1K to $3K within two hours of the market opening – and then end up squandering a good chunk of it in the remaining hours. I have yet to master the art of walking away from my desk after achieving my daily target – or of anticipating a huge reversal that may be just around the corner.

Your options trades have been the only thing that have saved the day.

Occasionally, I’ve bought back a trade to minimize the loss. As a rule, I follow the spirit of the trade suggestions and run them out. Another variation I do on your trades is to push them out, settle for less premium, but do two or three contracts. I do this typically when I pick up the trade suggestion late by an hour or two.

There isn’t that much premium available a couple of hours after market open, so I reduce the risk of the trade while settling for lower premium. Thank you for the valuable service of teaching us how to fish and for providing the fish in the meantime.

– Chani P.

Thank you as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming [email protected].