As the cause of the global financial crisis, the financial sector caught the brunt of the melt-down — falling 85% between 2007 and 2009 versus SPX’s mere 57%.
Since bottoming in Mar 2009, it has continued to move in exaggerated fashion relative to sectors receiving lesser freebies from its servants on Capitol Hill and Constitution Avenue. In major rallies, XLF has averaged 1.44X the size of equivalent SPX rallies. Its declines have averaged 1.34X SPX’s.
In important declines, it has led SPX more often than not — putting in a top 4 1/2 months before SPX in 2007 and 2 1/2 months in 2011. In important rallies, it has launched in unison with SPX.
Like SPX, it has ignored some of the normally influential patterns of the past several years. Access to cheap free money has trumped the valuation disasters lurking on balance sheets of companies that are legally exempted from accurate reporting.
So, it’s with some trepidation that I point out a few approaching trip wires.
continued for members…
The most obvious approaching harmonic target is the .500 retracement of the 2007-2009 drop (yellow) at 22.01. But, the previous Fib levels covering the same period have not proven effective.
We’re had a little better luck with patterns drawn off the May 15, 2008 high (white grid.) There were decent reversals at the .382, the .500 and the .618. The recent zip through the .786 suggests the .886 might come into play at 22.36.
Other, smaller patterns include the purple 1.618 at 21.06. Combined with the purple 1.618 at 21.06, the highest potential Fib-based reversal is in the range of 21.06-22.38.
From a channel standpoint, XLF is much easier to chart on an arithmetic basis than a logarithmic. XLF recently topped the .618 line and is closing in on the .786 at a pretty good clip: the latest red channel has a slope equivalent to that of early 2009.
There are plenty of potential reversal lines, but nothing that really jumps out at me. Those that intersect with the above mentioned Fib levels are good candidates: 21.06 on Aug 14, 21.30 on Aug 28, 21.44 on Sep 6, and 22.01 on Aug 22 or Sep 12…
The most interesting channel feature is the intersection between the bottom of the red channel and the purple channel midline occurring right now. XLF bottomed there Friday, putting in a slightly lower low than on Jul 29.
Also, there’s a IH&S target at 21.42 — right next to the Grey 1.618 at 21.44.
I don’t see a clear enough pattern to justify a downturn at this point. I view the above-mentioned intersection as potential support, and would expect a few more percent on the upside as a result — probably to 21.06-21.44.
GLTA.