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After rallying 32% last year, the financial sector has been much tougher for investors in 2022.
It initially held up well at the start of the year. But the heavy selling that swept the market as the year went on eventually pulled down the Financial Select Sector SPDR Fund (XLF).
By the time XLF bottomed out mid-year and began to build a base, it had lost nearly 30% of its value.
Yet it rallied from oversold levels through June and July. That saw XLF break above its May high.
However, that momentum dried up and then reversed in August, and XLF was soon back at its yearly lows.
When we last looked at XLF in October (red arrow on the chart below), XLF had just retested and bounced off that base. After subsequently retesting and holding that level again, XLF then rallied to match its August high.
However, now XLF is struggling to hold that level. So today, I’ll discuss what’s coming next…
Will Support and Resistance Hold?
The long-term 50-day moving average (MA – blue line) in the chart below shows us that XLF is essentially a chart of two halves…
First, its downtrend started to accelerate in mid-March. Second, a sideways pattern began to emerge and build from August onward.
Take a look…
Financial Select Sector SPDR Fund (XLF)
As you can see by the shorter-term 10-day moving average (MA – red line), XLF has made multiple countermoves within both major trends.
However, I’m going to concentrate on the action within the current sideways trend – that is, between support and resistance (upper and lower orange lines).
We know that the longer a support or resistance level holds, the stronger those levels become. And it becomes a bigger deal when those levels are broken.
The chart shows that XLF tested its support level (lower orange line) numerous times – in June and July, and then again from September through October.
And in all those cases, that support level ultimately held…
XLF then went on to rally as the Relative Strength Index (RSI) trended higher and bullishly broke into the upper half of its range (red lines).
Take another look below…
Financial Select Sector SPDR Fund (XLF)
The rally in August then peaked and reversed (A) when the RSI formed an inverse ‘V’ and retreated lower.
With this current rally (B), I’m looking to see if that pattern repeats because that could present us the opportunity for a potential short trade.
However, while support has been tested and held numerous times, we don’t yet know how strong resistance is (upper orange line).
So what am I looking for around here?
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We Need to See a Clear Reversal
Since reaching its August peak again at ‘B,’ XLF has struggled to maintain that price level so far…
For XLF to transition from a sideways pattern into an uptrend, it’ll need to break clearly above resistance.
And that brings us back to the RSI…
After reversing near overbought territory, the RSI has drifted lower this past week. For XLF to break resistance, we will need to see the RSI begin to track back higher.
The longer the RSI can track in the upper half of its band without a clear reversal, then the chance of XLF breaking higher will increase.
However, if momentum continues to wane, then we know that XLF has peaked for now. That would mean XLF will likely remain in a sideways pattern.
The RSI slumping back down through support (green line) and into its lower range could then see XLF retesting its long-term support – once again.
Editor, Trading With Larry Benedict
Do you think XLF will continue to trade sideways for a while? Or do you think it’ll soon break out?
Let us know at [email protected].