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Not So Fast on the XLF

The patient trader will be rewarded when it comes to this financial ETF


Video Transcript

Let’s have a look at the financial sector since this week we have a very big earnings week in that sector specifically. Quickly looking at the S&P 500 first, note that given last week’s rally, we’re just about 7% or 8% off of the 2007 highs, so it’s not going to take much further until we get to that point.

Let’s look at the Financial Select SPDR (NYSE:XLF), the financial ETF and see what we can find here because, of course, financials are a very important part of the broader stock market and, specifically, the S&P 500. [The XLF’s top 10 holdings are Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), Bank of America (NSYE:BAC), Citigroup (NYSE:C), U.S. Bancorp (NYSE:USB), Goldman Sachs (NYSE:GS), American Express (NYSE:AXP), American International Group (NYSE:AIG), Simon Property Group (NYSE:SPG) and Berkshire Hathaway.]

If we look at it from a longer-term point of view on a daily chart, note the big sell off in 2007/2008. Then, like everything else, it bounced back very strongly off the 2009 lows.

If we zoom in a little bit more closely, however, note that we have gotten to a very important point over the past few weeks. That’s really a point of resistance that has acted as resistance for the third time since 2010. In the video, I draw on the chart so you can see it a little more clearly, but the level on the XLF is somewhere near $17.20, give or take 10 or 20 cents; you can’t be too specific here, but that’s, more or less, where it’s gotten to.

It rallied of the October lows in 2011. Now, of course, the question is what to do. Do we buy, or do we sell here if and when we break above it?

My simple point of view of looking at these kinds of things is you always want to have a look of how steep the move was before we get to a resistance point. So, in this case, the XLF rallied off the November lows. It rallied just about 14% in a matter of a month and a half. That’s quite steep for a big ETF like that.

So, at this point, even if we were to break above it on earnings this week, I wouldn’t want to chase this. The trade here to do is to wait for consolidation. Whether that consolidation happens below this resistance point or just above it almost doesn’t matter. The point is if we break above on some great earnings reports from any of the big banks, you don’t want to chase it.

But you also don’t want to short it blindly. You wait for consolidation and then start looking at little closer up on the candlestick patterns and momentum type of indicators, and I will do that as earnings come out this coming week. We’ll do another update via video.

I hope this serves you well.

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for hisfree weekly newsletter here.

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