A Look At The XLF Financial Sector

Since all eyes seem to be on the Financial Stocks, let’s take a brief look at the XLF Financial Sector SPDR ETF (XLF) to see if we can gather any clues from its technical structure.

XLF Financial SPDR:

(Click to Zoom-in on a larger than normal chart)

One of the first things we notice is the power and strength of the current downtrend.  Price really hasn’t made any meaningful bullish moves since two exhaustion gaps in September.  Though price may have made impressive percentage gains at some points, they were all erased and more, particularly as the XLF made fresh new lows in January.

The moving averages are in the “most bearish orientation” possible and price is currently beneath all key averages, most notably finding resistance via two tests of the falling 20 EMA (forming dojis at those averages).

Price appears to be forming perhaps a symmetrical triangle at the moment as the market has swung back and forth, trying to digest the news of the week regarding the Bail-Out and proposed Mortgage Relief plans.  Headline (News) Risk is high both for longs and shorts, as one false (or correct) move by the government or an agency could send the market up or down sharply, leaving little chance to adjust if you’re caught on the wrong side of the move.

There is a multi-swing positive momentum divergence in place, but as I’ve discussed before, sometimes it’s best to turn off indicators when there is a strong, prevailing (powerful) trend in place and focus instead on moving average analysis (particularly pullbacks and EMA structure).

The feeling is that because XLF made a new 2009 low, then the US Stock Market will also make a new 2009 low under the idea “Financials Lead the Market.”  Watch carefully in the coming week(s) to see if this indeed plays out as people expect it to.

Keep watching the financials and particularly leading banks/institutions within them for signs of further weakness or developing strength, and what that might mean for the broader market.

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