Financial Stocks hit One Out of the Ball Park

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For months on end there has been lots of bashing and negativity on the financial stocks.  Uncertainty and fear and anger over the unjust billions lost and sloshing around in that sector has turned a lot of mainstream opinion quite negative on this sector.

From many trader’s perspectives I believe this was also the case.  For every positive story I read or heard on the financials stocks it seems there were at least 4 that were negative in terms of fundamentals or technicals.  I must admit I also have had a bearish take on the large and somewhat lengthy broadening topping pattern in the XLF financials ETF. 

It was hard to get bullish on this large pattern because it seemed to be  not only a rounding topping pattern but also a very bearish broadening topping pattern.  I tried shorting the XLF a couple times towards the end of 2009 with very meager results.  I remember sitting in those trades all excited about a huge expected break down.  But then I also remember total frustration at how the XLF time and time again just would not break support or get enough selling power to cause some real trend breaking type moves.

So here we sit now and I see the financials breaking north big time and GS and HBAN making very nice moves topside.  I cannot deny it, the chart structure in the financials XLF ETF looks superb to me.  We briefly fell under the 50 day moving average and now are marching in a trending fashion back above it with the 200 day moving average as wind at its back.

xlf2010107

You have to give the bulls credit here in my opinion and try to make an honest analysis that what is going on here is real.  Not just real, but real bullish.

When a large bearish pattern such as a broadening top fails then you have to take an opposite stance on the situation and go with the flow.  That appears to be what is happening here.

So what was the correct analysis that was needed during the formation of this pattern to clue us in that it would resolve bullishly ?

There are a few answers.  One of them is that the support line that made up the structure was never broken or significantly violated.  Secondly, we do need to keep in mind that the financials as a whole basically had a multi year crash that literally resembles a straight line down move into a bearish climax that was the most oversold in at least 100 years.  So given that fact, I think a broadening topping pattern or rounding topping pattern has a lot less credence than if we were dealing with a formation that had formed after a multiyear overbought advance.

There are more clues to such as moving averages being in bullish stances and a few others I cannot think of now as well.

So I would say at least based on how things look to me right now, be very careful about being too negative on the financials for any reason.  Sure, if the pattern somehow changes character and goes bearish then follow that, but for now I am seeing very constructive price work in this HATED sector.

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