While the broader markets have mostly stagnated this week as they continue to digest their recent gains, one area that is beginning to perk up is the financial sector. The financials have been laggards over the last several months, but today's strong action tell us that they may be ready to play catch up now. Its too early to tell if this move will be part of an overall sector rotation or just an isolated rally in a sector, but astute traders should begin eying this group for potential moves.
Looking at a chart of the SPDR's select sector financial etf (XLF), we can see that the sector has actually been steadily rising over the last month as it attempts to recover from the sharp sell off we had in early march.
Notice the long lower wicks on several of the candles during this move indicating healthy demand. With Wednesday's strong close, XLF is now above its important 50 day moving average and poised to challenge the $17 price level.
As I've mention before, incorporating multiple time frames into your analysis of an equity will give you a tremendous advantage by not only perfecting your entry, but will also improve your overall probabilities by forcing you to wait for multiple confirmation signals. Stepping back and looking at the longer term picture of XLF on the weekly chart, it becomes evident that the recent sell off could have been nothing more than healthy consolidation in the form of a bull flag.
Traders should always make it a habit to keep remain grounded and keep an eye on the bigger picture as this can help them understand and ultimately ignore the short term noise that may hamper them from recognizing a pattern in a chart. From this perspective, XLF pulled back in an orderly manner to its rising 20 day moving average, found support and is now beginning to break out from a short term descending channel.
If we take this to the other extreme, and zoom in to a 15 minute time frame, we now notice that XLF has been forming a variation of an inverted head and shoulders.
While this may not be a classic example, what is important in technical analysis is not to be a stickler for details, but to understand the underlying psychology behind a pattern. In this respect, XLF faced a clear line of resistance, made a pivot low (left shoulder), proceeded to make a new pivot low (head) and finally made a higher pivot low (right shoulder) before proceeding to move above the initial line of resistance. After that, it formed a nice bull flag for those traders that were either hesitant to buy the break at today's open or wanted to wait for additional confirmation. Traders that saw this pattern were rewarded with a nice follow through at the end of the day on several stocks in this sector. Below are a few charts to watch in the event that this move can continue over the next few days.
Citigroup (C ) had a nice move on wednesday and doesn't offer the best risk reward here, but is capable of offering a nice momentum trade if the sector catches fire tomorrow. C will also present a nice opportunity if this move stalls out and it begins to consolidate just under its 50 and 100 day moving averages.
Fifth Third Bancorp (FITB) has run into some resistance at $14, and is currently attempting to not only break through this level, but also overcome an internal trendline that has served as a persistant anchor on it throughout this year. Both of these trendlines also converge with its 100 day moving average, and a break above them will have bullish consequences.
J.P. Morgan Chase (JPM) had a strong breakout from some key resistance today as well, and is another signal that perhaps this sector is ready to assume some leadership in this market. Momo traders can take a shot on a break of today's highs while more conservative traders can wait for either a flag or a retest of its breakout area.
Suntrust Banks (STI) had a healthy breakout today as well, but still has some overhead resistance to overcome. It had a quick failure the last time it contended with its 50 day moving average around the $30 level, and is likely to have a rematch tomorrow.
US Bancorp (USB) had a broke out of its recent downtrend solidly today and was able to reclaim several key moving averages. USB provides a clear cut trade here as a loss of today's lows would also mean a reversion back under several averages and an important trendline. A move above its 50 day moving average is likely to lead to a retest of previous highs.
Wells Fargo & Company (WFC) was able to emerge from its tightly contracting range this week and closed above its 50 day moving average with a surge on wednesday afternoon. WFC appears ready to begin probing higher and ultimately retesting its previous highs.
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