Financial Sector ETF: Breaking Down or Primed for a Bounce?

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January 29, 2016 5:06pm NYSE:XLE NYSE:XLF

financial banksRick Pendergraft:  The materials sector has been the worst-performing sector so far in 2016, but do you know which sector is the second-worst performer? Most people would probably say energy because there has been so much press coverage about the fall in oil prices and the noticeable drop in gas prices each time we stop to fill up.

financial sector ETF

However, the energy sector is actually performing better than only two sectors: materials and financials. That’s right, the financial sector is the second-worst-performing sector so far in 2016.

Using the select sector SPDR ETFs as a gauge, the materials sector is down 14.14% through the close on Monday, Jan. 25, and the Financial Select Sector SPDR ETF (NYSE:XLF) is down 12.51%. Just for the record, the Energy Select Sector SPDR ETF (NYSEARCA:XLE) is down 11.9%.

The three sectors mentioned above are also the worst three performers over the last six months. This selling pressure has brought the XLF down to a critical support level and it has put the fund at oversold levels not seen in three years.

Looking at the daily chart, we see that the financial sector ETF is oversold based on the 10-day RSI as well as the daily stochastic readings. These indicators have been in oversold territory for quite some time now. We also see that there aren’t any support levels in the picture from the last nine months, barring the Aug. 24 extreme low when ETF pricing was off.

financial sector etf daily chart

When we step back and look at the last three and a half years on a weekly chart, now we see a support level and we see extreme oversold levels from the oscillators. First, we see that the fund found support at the $21 level back in October 2014. The price has dropped below the $21 level, but the XLF has managed to close above that level each of the last couple of weeks. If this support holds again this week, it would help the XLF tremendously.

financial sector etf weekly chart

The second thing we see on the weekly chart is the oversold levels on the 10-week RSI and the weekly stochastic readings. While the RSI has been in oversold territory in the recent past, the stochastic readings haven’t been this low since June 2012, right before the XLF rallied sharply.

The financial lagging the other sectors is a bit concerning as it was the first sector to enter bearish territory back in the bear market of 2007-2009, but that bear market was induced by the financial sector and credit tightening that took place.

Despite the fact that the last bear market started with the financial sector, it is a little concerning to see the sector among the three worst-performing sectors over the last six months.

What I see happening is this: If the XLF can close the week above the $21 level, I see it rallying over the coming weeks. It might be a short-term rally that takes the fund up to the 104-week or 52-week moving average, and then we could see selling resume.

I would wait to see if the $21 level holds up this week and then make a bullish play. Once it gets up in the area of the moving averages, I would keep a close eye on how it reacts and be ready to pull the plug on the trade if the fund struggles at all.

This article is brought to you courtesy of Rick Pendergraft from Wyatt Research.

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