The Week Ahead: What Does The Financial Sector Say?

lthough March brought us pain off the bat, March ended up turning around for the better, eating away at the global market’s losses and pushing higher off of what I have named the, “Profitability Rally.”  Many have said we’ve hit bottom, or that a bottom is in place.  With the vigor of this rally we have on our hands, I happen to believe this statement to be true, with the simple addition of saying that 666 will most likely be tested before summer arrives.  It could be this week, it could be at the end of April; all I know is that I am quite certain that we will see this bottom again.

My thought process that delineated the title of this rally to be the “Profitability Rally” is based upon how the rally started: Vikram Pandit said CitiGroup (C) was most definitely making profits during Q1 of 2009.  After this announcement, Ken Lewis said that Bank of America didn’t need anymore government funding, and after that announcement, Mr. Dimon of JP Morgan (JPM) said, “Hell!  We’re profitable too!”  Just like that, the market went through the roof, and the world was saved.  Not to mention, we’ve have 21 bank failures in 2009, two corporate credit unions get seized by the government, GM’s (GM) lackluster CEO getting the government boot, and who could forget the billions upon billions of debt we’ve pumped into our system.  Looks like I’m going to go buy crazy because shit, this rally is just beginning!!!  Right?

MOST DEFINITELY INCORRECT.

The Financial Sector Downturn Theory, developed in mid-December of 2008 and made into a law at the beginning of January, holds firm at this stage in the game.  At that time, I had only the balance sheets to back me up.  Now, I have many solid long term technicals for big financial sector stocks and ETFs, and the first thing I’m going to post tonight are the charts I was asked to draw up.

So, without further a-do, The Chartology of the Financial Sector:

Bank of America (BAC)  60 Day, 60 Minute

Financial Sector ETF (XLF)  60 Day, 60 Minute

Ultra Financials ProShares ETF (UYG)  60 Day, 60 Minute

Direxion Financial Bull 3X Shares ETF (FAS) 60 Day, 60 Minute

As seen in the charts above, the four tickers outlined (BAC, XLF, UYG, FAS) have been developing two technical patterns that will determine the chaotic nature of the financial sector.  The first technical pattern that is seen is the ascending triangle with a strong resistance (BAC, XLF).  This pattern is normally a pattern seen before a breakout, but I’ve been on the receiving end of ascending triangle breakdowns (DRYS being my last) and with enough volume, the pattern can self-destruct in a matter of minutes.  If there is a breakdown below the trend lines that BAC and XLF have held, then the first price supports to look towards are Support 2 ($5.65) and Support 1 ($8.09), respectively.

The next technical pattern that was seen in the four charts above was what I like to call the, “Wedge of Death.”  In an positively trending market, the wedge can be used to a traders advantage, saying that the equity of choice is in the midst of a consolidation and is due for a breakout.  In this case, however, UYG and FAS are in deep trouble.  As seen on the UYG chart, either the two ETFs will consolidate and push higher or will break below the bottom trend line and into the abyss of bearish support levels.  UYG’s support level outside of the W.O.D. is Support 2 ($2.25), while FAS’ support level outside of the W.O.D. is Support 1 ($4.90).

My short strategy is finally blossoming, and my TZA/SRS trades don’t look too bad at all.  Real Estate is in for it in April, as the government will no doubt attempt to tighten the reigns a little tighter on the housing markets.  Their mortgage rate fiddling, however helpful they say it may be, sets the housing markets up to be one of the many socialistic contributions the Prez will likely make in his first term.

In other news, Econ. Data is going to be a big market factor this week.  The week itself will be very difficult to trade, but with ISM stats on Wednesday, Unemployment Rate on Friday, and other fun things throughout the week, April will surely start off with a bang.  My take on the ISM stats have not been put into play yet, for I haven’t had much time to rip the statistics apart.  As of now, I feel that if the ISM Index shows a significant increase from February, I wouldn’t mind getting long a couple of industrial names as an investment AFTER a market pullback.

As for now, I leave you with my Weekly Watch List and a Good Luck from MJTT:

• GS
• BAC
• NAL
• UYG
• XLF
• FAS
• FAZ
• SRS
• TNA
• TZA
• DXO
• ERX
• PCX
• DUG
• GLD
• UYM
• STLD
• AAPL
• ENER
• QID

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