Financial stocks have been an interesting sector to watch as of late. For a while it was the sector to watch from 2008-2010, if financial stocks went up the market followed, Bob Paisini loved to mention the correlation. Now it seems financials are either being looked over by the market, when it can be giving a huge early warning sign that a downward movement is on the horizon.
Financials have been slowly declining throughout the last month or two, even as the market rallied. Our post on GS mentioned to watch the key $148 level, after breaking that GS fell to $141. There was a similar support level on XLF that was broken on Friday.
XLF closed below $15.87 a key support level. The support level was created in December after XLF broke out and started an uptrend to new highs. It was then a support twice during XLF's decline, providing a launch pad for the ETF. But the third time this support level failed and XLF closed at $15.77. In addition to this being a support level, the support level makes up the base of a descending triangle pattern. This is a 1.14 measured triangle and this move would put XLF around 14.77ish.
By breaking this key support level XLF is looking very bearish unless it can regain the 15.87 level. It has one last support level to break and that is the 200 ema of 15.77, which it closed right at. A break of this would confirm the descending triangle pattern and the break of support. In addition to this, the uptrend line from August was broken in early May, signaling a possible trend change. If XLF does decline, the next support level that may provide a bounce is 15.61-15.37, still a 1% drop, the total measured move up be more then a 6% drop.
Eventually, the market will take notice of the drop in Financials since the are a "crucial" part of the economy (I was asked by The Bernake to put that in) and either this will cause more selling of the market, which us bears would like to see or they might be seen as a bargain and catch some buying pressure. But realistic the charts are pointing to more downside for XLF and financials. Keep an eye on the XLF this week and watch the $15.87 level.
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