The bull case for US Equities involves Financial stocks (including banks stocks and broker dealers) gaining traction as a group and leading to the upside. Unfortunately, the current charts suggest the Financial sector will likely continue to correct, either through time or price.
All three heavy lifters, financials, Regional Banks, and Broker Dealers / Exchanges are also struggling.
Three issues that are pertinent in the cases of all three of these groups are:
- Prices below a downward sloping 200 day moving average.
- Prices testing a strong confluence of resistance or recently confirming a failed breakout.
- Bearish divergences in momentum or momentum maintaining its bearish range throughout the February-April counter-trend rally.
Given these conditions, it remains appropriate to maintain a neutral/bearish stance in these markets. With that being said, these sectors could work through their overhead supply and bearish conditions by continuing to correct through time. I think that is the lower probability outcome, therefore I’m going to outline where they have the potential to go if they correct through price.
The first group is the Financial Sector ETF (XLF).
As the chart above shows, prices are once again failing at former support of 23.75 and are now testing their uptrend line from the February lows. A break of this trendline and support at 22.75 would confirm the bearish divergence in momentum and trigger a continuation of the long-term downtrend represented by the downward sloping 200 day moving average. If the financial sector breaks down, it will likely test former support / resistance near 21.50 and the February lows near 19.50.
The second group is the Regional Banking ETF (KRE).
As the chart above shows, prices recently failed a test of a confluence of resistance at former support and the 61.8% retracement of the November-February decline near 41. Prices consolidated for the past several weeks as they attempted to work through the overhead supply in a healthy way, but are now resolving to the downside and confirming the bearish momentum divergence. KRE looks likely to retest the uptrend line from the February lows and support near 38.60. If that support fails to hold, prices will likely test former support near 36, followed by the February lows of 32.63. And this would weigh heavy across regional bank stocks.
The third and final group is the Broker Dealers & Exchanges ETF (IAI).
As the chart above shows, prices recently put in a failed breakout above the March highs and are now closing decisively back below them. With momentum in a bearish range and prices below a downward sloping 200 day moving average, weakness in this group is likely to continue if prices remain below those March highs. It looks likely that prices will test the uptrend line from the February lows and former support near 36.25-36.50. If prices close below that confluence of support, they’ll likely test the February lows of 32.69 followed by the 161.8% extension of this counter-trend rally at 29.22.
The Bottom Line: Regardless of whether these financial sectors continue to correct through time or price, these are the road-maps I’ll be following over the next several weeks. If you’re looking to get short stocks, it pays to do so in sectors and individual securities exhibiting these types of bearish conditions and where the risk is well-defined.
Ultimately I think these sectors continue lower and that current levels offer an elevated risk/reward potential on the short side, but I’m remaining open-minded and will adjust my thesis if prices can get decisively back above the resistance levels outlined above. Regardless of the outcome, I’m excited to see how Financials perform going forward as they have major implications for the broader market.
Thanks for reading and, as always, if you have any questions feel free to reach out or comment here and I’ll get back to you as soon as I can.
The author does not have a position in any of mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.