Continued Bloodbath In Financials

The financial sector continues to lead the global equity markets lower. At this point to say that they are going to lead global stocks out of the bear market is probably a little too ambitious. The more likely scenario is that financial stocks are going to be destroyed to a point that they will no longer matter in major stock indices.

We will continue to focus on the two major US financial indices: The Russell 1000 Financials Index and the Dow Jones Financials Index. The leveraged long/short ETFs that correspond to these two indices are Direxion Financial Bull 3X Shares ETF (FAS)/Direxion Financial Bear 3X Shares ETF (FAZ) and Ultra Financials ProShares ETF (UYG)/UltraShort Financial ProShares ETF (SKF).

Below are some of the potential levels for the Russell 1000 Financials Index.

Source: (TdAmeritrade Strategy Desk)

This index plunged since the beginning of February of 2009. The decline was so severe that it pierced through even the 161.8% retracement level. It might be possible for this index to go back to its previous low in the 450s but at point it is very possible that it would begin to plunge again after hitting the 38.2% retracement level at around 423.

Momentum technical indicators: Stochastics, William %R and ROC (Rate of Change) are giving us a mixed picture. According to stochastics and William %R, the index is not overbought. However, if divergence begins to form, then the index is likely going to roll over.

Thus, market actions in the next few days should give us a clearer picture. ROC is rising indicating a short term bullishness for the index. However, under the current environment, anything can change at a blink of an eye.

The Dow Jones Financials Index has a similar feel to it.

Source: (TdAmeritrade Strategy Desk)

The index breached the 153 level support tested twice previously but is currently retracing back possibly to the 61.8% level at 147. Momentum technical indicators: Stochastics, William %R and ROC (Rate of Change) are giving us a mixed picture. According to stochastics and William %R, the index is not overbought. However, if divergence begins to form, then the index is likely going to roll over.

Thus, market actions in the next few days should give us a clearer picture. ROC is rising indicating a short term bullishness for the index. However, under the current environment, anything can change at a blink of an eye.

In terms of trading the leveraged ETFs corresponding to these two indices, the time to buy FAZ/SKF should be coming very soon especially if key retracement levels are met and momentum indicators begin to show divergence or show signs of being overbought.

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