It’s been a tough month for banks…

Only a week after news of the Silicon Valley Bank (SVB) and Signature Bank collapse, the market was dealing with the unravelling of Credit Suisse.

Many fear that other banks might follow suit. And this has added another layer of uncertainty to the markets.

Yet despite all the bad news, the Financial Select Sector SPDR Fund (XLF) has not dropped below its October 2022 low – which was also the same price level as XLF’s June and July 2022 low.

In fact, XLF is now testing a key support level. So today, we’ll see what’s in store from here…

XLF Peaked Before Banks Collapsed

On the left-hand side of the chart below, you can see the last leg of XLF’s downtrend that started back in January 2022.

A flattening, 50-day moving average (MA – blue line) shows this downtrend started to transition into a sideways move by mid-year.

Take a look at the chart…

Financial Select Sector SPDR Fund (XLF)


Source: eSignal

XLF’s support at ‘1’ coincided with the Relative Strength Index (RSI) making a series of mini ‘V’s’ and rallying (left red line) from oversold territory (lower grey dashed line).

When buying momentum is increasing (a rising RSI), it makes it increasingly difficult for a stock to keep falling.

As the RSI pushed up through resistance (green line) and gained traction in the upper half of its range, XLF continued to rally.

Then, XLF peaked and reversed in August. And the RSI made an inverse ‘V’ and reversed from overbought territory (upper grey dashed line).

Soon after, XLF fell back to support and repeated this pattern at ‘2.’

But this time, XLF rallied strongly into 2023 despite a brief pullback in December. By mid-February, XLF was trading at 10-month highs.

Take another look at the chart…

Financial Select Sector SPDR Fund (XLF)


Source: eSignal

As you can see, XLF topped out at ‘A’ and started to drift lower well before any news of bank failures.

By the time SVB and Signature Bank collapsed, XLF’s chart was already showing two bearish signals…

  1. The RSI was trading in the lower half of its range (below the green line).

  2. The 10-day MA (red line) crossed below the 50-day MA. You can see the strength of that down move by how sharply the 10-day MA accelerated below the 50-day MA.

But now, XLF is trading back around support again. So what can we expect from here?

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Will the Pattern Repeat a Third Time?

The key is to see whether XLF’s previous pattern at ‘1’ and ‘2’ will repeat at ‘3.’

If the RSI continues to track higher (right red line) and XLF holds support, then we could be due for a short bounce. And that could provide the setup for a potential long trade.

If the RSI tracks up toward resistance (green line), we could see XLF trade back up around $33.

However, it’s still early days with this move. Just because a level has held in the past, doesn’t mean it will hold in the future.

If the RSI sinks and XLF breaks through support, then that could be the start of another leg down.


Larry Benedict
Editor, Trading With Larry Benedict

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