Financials on the Brink of a Major Sell as U.S. Indices Pull Back

While, after today’s (April 30) pullback, U.S. indices are once again coming near their intermediate-term supports, one sector’s chart reveals just how likely a severe correction in stocks is. Below we examine one of the most popular Spider ETFs, used as a proxy for U.S. financial stocks (the Financial Sector SPDR Fund – XLF), and its most recent price action.

Technical Overview

  • XLF has flatlined since the mid-March correction ensued. While naturally its chart is very similar to that of S&P 500, there is one major difference – XLF failed to move above its March 2 low ($27.89) on several occasions (March 2 low – bright blue arrow; resistance – red horizontal trendline; failed attempts of moving above $27.89 on closing basis – red arrows in Figure 1).
  • XLF’s intermediate-term support is currently at $27.25 (green trendline). Note, the 200 SMA is overlapping the intermediate-term support almost perfectly (currently at $27.02 – not shown).
  • October 2017’s high has turned into support on 3 occasions since November (support – violet horizontal trendline; retests – violet arrows).
  • Throughout most of April, XLF traded within an even tighter range, with the red trendline serving as resistance and the $27.30 – $27.50 area serving as support (orange horizontal trendline).

Figure 1. XLF Daily Chart

Implications

  • In general, a security trading above a significant support level is considered more likely to continue moving higher than to reverse. In the case of XLF, its inability to come closer to the origin of the mid-March correction (white ellipse), along with its multiple failed attempts to move above the March 2 low (support-turned-resistance), increases the odds that the ETF will break its intermediate-term support.
  • Potential breaks of the intermediate-term support and $26.95 (violet line) will have significant bearish implications. If it were to occur, it is likely to happen at the same time as NASDAQ and S&P are breaking their respective intermediate-term supports. However, limited short trades recommended until XLF confirms and closes below $26.95.

 Outlook

  • Neutral with a bearish bias.
  • Short-term bullish if the red trendline is broken to the upside on a closing basis.
  • Short- and long-term bearish if the green and violet trendlines are broken to the downside on a closing basis.

Featured image courtesy of Shutterstock.

Author:
http://www.linkedin.com/in/konstantindimov