The fourth-quarter (2014) earnings season kicks off this week, and a plethora of banking and financial companies are scheduled to report their numbers. Financials as a group — as represented by the Financial SPDR (XLF) — have traded in a choppy range since early December, which is concerning as we head into this week’s earnings results.
As a matter of principle, during earnings season I tend to take a step back, reduce my single-stock exposure and focus on either the indices or trading setups after any given company has reported its numbers. While certain options strategies that focus on a specific outcome of an earnings report — or rather, the stock’s reaction to it — can pay off, “guessing” on earnings outcomes over time is a losing strategy.
Some of the financials reporting earnings this week: Bank of America Corp (BAC), Citigroup Inc (C), Charles Schwab Corp (SCHW), Goldman Sachs Group Inc (GS), Wells Fargo & Co (WFC), JP Morgan Chase & Co. (JPM).
XLF Charts
Looking at the multiyear weekly chart of the XLF ETF, we see that it continues to hold its 2011 uptrend (red dotted line). Since May 2013, the ETF has traded in a defined upsloping range — though one that came on waning upside momentum, as represented by the Relative Strength Index (RSI) at the bottom of the chart. Through this lens, we also see that both the bottom of the trading range (black parallels) as well as the 2011 uptrend line roughly coincide, which is to say that if and when a break of the $23 area were to occur, a better multimonth correction could be taking place.
Closer up on the daily chart, we see that the XLF ETF has a clearly defined line of support (black horizontal) around the $23.75 area, which currently also coincides with the rising 100-day simple moving average (blue line). We also note that the late December highs marginally took out the early December highs, but then quickly got rejected as price fell back toward the support line.
Last Friday, the XLF dropped 1.35%, marking the daily chart with a bearish reversal/bearish outside day.
While one day does not make a trend, last Friday’s highs near $24.50 should now be closely watched during this week’s earnings-filled action, for a daily close back above there could get the financials moving back higher. And as long as this area isn’t taken out, the bear case sees the XLF ETF working its way toward the $23 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
