Whenever there are moves in the markets that do not seem like they make sense, like a sudden drop in a sector that seemed to be doing well, I always check what the financials are doing. They have a significant influence on the overall market and there will be no sustainable rally without them.

If this sector is facing strong resistance, expect to see a pullback in ETFs that track the sector like the Financial Select Sector ETF (NYSE:XLF) or the Direxion Daily Financial Bull 3x Shrs (NYSE:FAS) as well as the overall market. This has been the case several times over the past few months and will continue to be so.

What are the financials telling me now? Here’s the chart:

Financial Select Sector ETF (NYSE:XLF) Daily Chart

Financial Select Sector ETF (NYSE:XLF) Daily Chart have been expecting this rally, as mentioned in a previous article, and what has unfolded so far has been encouraging. There seems to be an inverse head and shoulders pattern developing here. This is where a low (shoulder 1) is followed by a lower low (head) which in turn is followed by a higher low (shoulder 2). The peaks of these three formations is called the “neckline” as marked by the blue line in the chart above and in this case, resides at around $15. This pattern is confirmed by a sustained break above the neckline and the bullish pattern is complete.

Since this is on a shorter time-frame, this should point to a shorter-lived rally.

The resistance at the neckline is from the 200-day moving average. Many sectors, including the major indexes, have broken above this resistance in previous rallies but have subsequently broken down as the financials did not follow suit.

As earnings season continues, the financials will need to make a decisive move in order to power the markets higher. Should this happen, it is very likely that we may have seen a bottom at least for the medium-term. A break of the neckline could see (NYSE:XLF) at $16 as a first resistance level. If this pattern breaks down, it will likely remain range-bound for about another month or so.

Keep a close eye on (NYSE:XLF) for a breakout or breakdown and you will have a clear picture of what to expect from stocks. Updates on this ETF will follow soon, so make sure to stay tuned and receive updates by email.

Direxion  Daily Financial Bull 3X ETF (NYSE:FAS) Visit Our (FAS) Category: HERE

Financial Select Sector SPDR ETF (NYSE:XLF) Visit Our (XLF) Category: HERE

Direxion  Daily Financial Bear 3X ETF (NYSE:FAZ) Visit Our (FAZ) Category: HERE

Written By Jordi Perez From Market Space Trading

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NYSE:FAS, NYSE:FAZ, XLF