Over the last couple of days the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) has been steadily moving higher, making new all time highs. Many media outlets and so call experts are calling for the bull market to continue its rise. However, many cracks are starting to emerge, one must understand these, exercise caution and be ready to trade both sides.
Among the different sectors that I pay close attention to is the Select Sector Financial Slct Str SPDR Fd (NYSEARCA:XLF). This sector has been unable to make new highs, even as the light volume continues to float the markets higher. Banks such as; JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), Goldman Sachs Group Inc (NYSE:GS) and other important financial institutions have been falling, in many cases putting lower highs in place and trading below their 200 day moving average as of the close on 4/28/2014
The Select Sector Financial Slct Str SPDR Fd (NYSEARCA:XLF) has been trading in an upward channel for about a year now. Looking at the chart below, please note how each of the bounces have become less sustainable in time. The bottom trend line has been tested multiple times. The first two tests of the line resulted in move away from the bottom of the channel for about four months. The third test resulted in only a two month move away from the line, and the forth hit lasted for only about a month.
Within the channel, a new trendline emerged which has kept the Select Sector Financial Slct Str SPDR Fd (NYSEARCA:XLF) from moving higher. Notice the sideways pattern developing right above the bottom trend line of this channel. This is telling us that financials are getting ready for another move lower. Perhaps a test of the 200 day moving average is in the cards. The Select Sector Financial Slct Str SPDR Fd (NYSEARCA:XLF) has not tested this important moving average since November, of 2012. Many would consider a move down into the 200 day moving average a buying opportunity. I would not agree with that buy level as the average is now a minor support level due to the consolidation above it.
When financials cannot move up with the markets, we must pay attention as it has often served as a warning signal. Banks such as JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS) and Bank of America Corp (NYSE:BAC) are important global financial institutions. If the smart money is shying away from these equities, there must be a reason. As technical traders we do not need to know why. All we care about is the price action, and at the moment, price action is indicative of weakness creeping into the markets.
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