A make-or-break setup in financial stocks

The latest rally in US stocks off the late-June reaction lows has seen broader-based participation, and that included a rally by the all-important financial sector. Through the lens of technical analysis, the financial sector has now arrived at a crucial crossroads where a make-or-break setup is in progress.

This week will be the busiest week for US corporate earnings and depending on how investors decide to react to these earnings it could result in a key setup for stock indices.

I always discuss the importance of the financial sector and in particular the price action of banking stocks. Looking at the financial sector of the S&P 500 as represented by the SPDR Financial Sector ETF (XLF) through the multi-year weekly lens, we see that financial stocks as a whole are still making a series of lower highs versus the summer 2015 top but also that a series of higher lows have formed since that same time. 

The blue 100-week simple moving average is currently also lining up with the defined black diagonal line of resistance, which gives this current juncture further importance. A decisive weekly break and close above this area of resistance could be a bullish confirmation while a notable bearish reversal would be just that.

While from a fundamental perspective I see little reason for financial stocks to break higher on a sustainable basis given the slowing global economic growth and ultra-low interest rates, I must respect the price action. 

On the daily chart we see that after a few rally weeks, XLF has over the past few session churned below this confluence area of resistance made up of diagonal and horizontal resistance as marked on the chart. The longer this ETF can hold here without breaking down, the more bullish the recent price action could have been.

Management and risk description

I am not looking to anticipate any price action from here but rather will look to buy a breakout past the aforementioned technical resistance, particularly if the breakout persists on a weekly closing basis.

Parameters

Entry: buy the XLF or CFD thereof upon a clear daily or preferably weekly close above $24.

Stop: $23.40.

Target: $25.

Time horizon: two to four weeks.

— Edited by Michael McKenna

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Non-independent investment research disclaimer applies. Read more