Big Banks: A Look At The Bullish & Bearish Patterns In The Financial Sector (XLF, FAS, FAZ, UYG, SKF)

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December 12, 2011 3:06pm NYSE:FAS NYSE:FAZ

David Gillie: Financials (the big banks) are the all important sector of market internals. All through 2010 and 2011 the financials have underperformed the overall market. Without the participation of the banks, no bull market is sustainable. This has created a wall of worry over the past two years.

In the past few months, Europe’s crisis de jour exacerbated this with rumors that “everything is going to just fine” and the rating agencies threatening downgrades creating wild swings in the financials – the most effected by Europe’s circumstances.  In the past week, we’ve seen a change in market internals – the financials have kept pace with the market and have even outperformed on up days. However, the chart can be viewed much like the the Salvador Dali painting above depending how you look at it. Let’s take a look at the daily Financial Sector chart (NYSEARCA:XLF).

Another mess of lines and circles but at least it’s colorful! I’ve tried to keep this to pertinent information.

We’re going to read this chart in a different way than we usually do. Because it’s a mixed bag of bearish and bullish patterns, I’ll outline which is which.


— Then red dashed trend line makes no mistake that the financials sector has been in a long downtrend.

— The October rally exhausted exactly at the long term trend resistance. Even with volume, it couldn’t break through — Current volume is less than the October rally volume

— Midpoint (orange dashed line) between support (red line) and resistance (green line) is often a place that a trend pauses to define direction. — Long candles this week are indicative of market tops and bottoms.

— A gap between 12.20 and 12.40 has yet to be retraced and filled.

— Friday’s recovery was still and “inside candle” not reaching or exceeding Thursday’s highs.


— An Inverted Head and Shoulders pattern is a reliable bullish pattern.

— Even with the selling on Thursday, the 50 DMA (aqua line) was not breached and it has turned upward — The neckline (red support) establishes a “base” and calms fears of a “bottomless pit”.

— A rising channel (blue dashed lines) has been established — The .VIX has held below the critical 30 level

Although there are more bearish events, the bullish events are actually stronger indicators.

This is where subjective analysis comes in — and this is what I perceive — which makes me believe the market is 60/40, bullish/bearish:

The European drama is becoming tiresome. The market isn’t reacting with the same extremes as it has in the past. There’s a general belief that they’re going to find some sort of a ‘fix’ even if it’s with duct tape and bailing wire. This isn’t Europe’s first pony ride. They’ve had centuries of empires rising and falling.

I personally believe they’re playing America like a fiddle. Americans are young (as a nation) and impatient and Europe knows it. After all, we came up with $600B on a Sunday night written on a cocktail napkin. The longer Europe fumbles, the more impatient the US market and politicians become – especially in an election year.

The party in power isn’t going to win with Europe falling apart. Bottom line: the US will bail out Europe. It’ll be behind closed doors, through the IMF and with lots of smoke and mirrors — but it will be done.

Another subjective factor is that investors want to be optimistic – very much a part of the American psyche. They’re tired of all the pessimism in the market. Where else do they have to invest to get any return on their money? Cash buried in the back yard? Treasuries not keeping pace with inflation? They’re being  forced into the market because many need an income from their money. This is all quite intentional by the Fed and powers that be.

Thirdly, more speculative than subjective, fund managers don’t make any money sitting on cash. Mutual funds pay them as much as 8% commission for buying their funds. They also have the year-end report to show and being non-invested is not acceptable (neither is losing or high risk, but they have no choice). It appears that some of this money is flowing back into the market that’s been on the sidelines for months. When it comes to a fund manager making the boat payment or putting your money at risk, guess which one wins.

Last week we suggested entering a position in (NYSEARCA:SSO) and we’ve had a nice gain on it. It remains a “Hold”. However, unless the (NYSEARCA:XLF) breaks the major trend line (red dashed line), this is just another bear market rally and unlikely the overall market will continue to rise significantly.

A MAJOR date we have to pay close attention to is January 21st. This is Options expiration.

January options expiration is especially significant because it is not only the quarterly expiration but the annual options (Leaps) expiration. Another factor in play is that bear market rallies are often played with options rather than putting capital at risk buying stocks. And finally, options are often used to defer taxes at the end of the year.

It’s common to see significant fluctuations at options expiration. Although, the options expire on the 3rd Saturday, Friday’s market close is the last chance traders have to settle out their positions. Many don’t wait that long and we usually see some of the effect during Thursday’s market session. Even if this current counter trend becomes a reversal by breaking the major trend line, we still have a lot of resistance at 14.50 on the (NYSEARCA:XLF) chart. It will take some serious fundamental reason and volume to push through this level. More likely, the price will retreat to the 13.40 level and establish a new support level.

Keep your eye on the (NYSEARCA:XLF) and be vigilant around the January 21st options expiration.

Related: Financial Sector ETF (NYSEARCA:XLF), Direxion Daily Financial Bull 3X Shares ETF (NYSEARCA:FAS),  ProShares UltraShort Financials ETF (NYSEARCA:SKF), Direxion Daily Financial Bear 3X Shares ETF (NYSEARCA:FAZ), ProShares Ultra Financials (NYSEARCA:UYG).

Drop me a note if you have any questions:

Written By David Gillie For The ETF Digest

ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds. ETF Digest was founded in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing.  Even if you’re not a fan of chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.

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