Sunday, June 15, 2008

Financial Sector Review


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I periodically monitor the Financial Select Sector SPDR ETF (AMEX:XLF) to help me gauge the overall health of the market. The financial sector is overflowing with pessimism, doom and gloom these days. Everywhere, everyone is talking about shorting the financial stocks. But what does the chart say?

When Lehman's warned of their upcoming earnings miss earlier this past week, pessimism was at its highest. Interestingly enough, the Lehman's warning drove the financial sector (AMEX:XLF) down, but it did not violate the mid-March low of 22, which also happens to be the point in time when Bear Stearns got taken out by JP Morgan. Regardless of your bias (long or short), it's not hard to see on the above chart that there is a potential double bottom forming at the 22-22.3 level.

Other interesting observations:
- BPFINA, which is the bullish percent index for the financial sector, dropped down to 25 on the day Lehman's announced its earnings warning, and has now started to bounce back up. In Jan/08, it dropped down below 10 before bouncing, and it dipped below 20 on the day Bear Stearns was taken out.
- the ADX line is currently at 37.81. Breaking above 40 signals that the prevailing trend is in its latter stages.

Of course, I acknowledge the fact that the low put in this past week did not occur with as much volume as the Bear Stearns low of Mid-March. Also, the overall market has not yet found a bottom either, so there clearly more risk of further downside.

But from my point of view, the technicals point toward an increasingly higher probability of a bounce in the coming days. The 22-22.3 level for XLF is a key support level to watch in the coming weeks.

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