The Financial ETF – Dissecting the Chart

Over the weekend, I covered the financial sector in depth.

Last week, the Volcker rule was rolled back, while the Federal Reserve decreased dividends paid to shareholders and ruled against corporate buybacks. One would guess that the rollback of the Volcker Rule should have more impact, as this could be longer-lasting. With some big banks now able to invest money, that ruling is not likely to change. However, the Fed’s ruling to decrease the dividends banks pay and keep banks from doing corporate buybacks is most likely temporary.

Many expected the market to fall hard. Instead, the Dow rose 580 points, and the rest of the indices climbed too. The Financial sector also rose, but we will need to see more.

XLF, the ETF for the big banks, is a remarkably interesting looking chart. For starters, today was an inside day (inside yesterday’s trading range) and a doji day (open and closing levels basically the same). Also, although the high of the day touched the 50-DMA, it could not clear in price. The slope on the 50-DMA remains positive, making this a confirmed, yet weak, bearish phase.

In addition, the black horizontal line I drew across the lows of the last 2 trading days shows a longer-term support zone (22.45). That same line shows a gap up from late May that has not been filled. Real Motion continues to show a positive divergence, with the price holding the 50-DMA. I also read that the short float – the number of shares outstanding that are betting the financials will sink – is at oversold levels.

If momentum is correct, we can expect to see XLF regain its price rise. And that, like a boost from a long lost uncle, should help the rest of the Economic Modern Family.

Here is my latest StockCharts TV Presentation, in case you missed it:

  • S&P 500 (SPY): Cleared back over the 200-DMA, making 301.67 support and 308.50 resistance
  • Russell 2000 (IWM): 140-141 back to support – 142.65 gap to fill
  • Dow (DIA): Held the 50-DMA; 250 support, 258.50 resistance
  • Nasdaq (QQQ): 239.68 Friday low pivotal, 244.50 resistance
  • KRE (Regional Banks): Went back into an unconfirmed recuperation phase – has to confirm
  • SMH (Semiconductors): 150.60 level is the resistance to clear. 140.75 the 50-DMA
  • IYT (Transportation): 161 resistance, 154 support
  • IBB (Biotechnology): 134 support. Needs to clear 136
  • XRT (Retail): Looks good, especially if it can clear 43.50. 41.00 area key support
  • Volatility Index (VXX): 34.50-38.50 range
  • Junk Bonds (JNK): 100 big support
  • LQD (iShs iBoxx High Yield Bonds): 134.90 the high to clear

Mish Schneider

Director of Trading Research and Education