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Financial Stocks Likely to Lead S&P 500 Higher


Daily and weekly charts of the XLF exchange traded fund suggest more upside is on the way.

After a three-day push and now the beginnings of a retrace, we are already hearing that there is a need for another catalyst to take the stock market higher. Really? It's not enough for the stock market to just want to gravitate higher?

Of the majors, the strongest two indices over the past month have clearly been the Dow Jones Industrial Index (INDEXDJX:.DJI) and the S&P 500 (INDEXSP:.INX). In both cases, what's driving both of these higher is the financial sector.

With the rejiggering of the Dow Jones a couple months back, ostensibly to better track the industrial might of the US economy but more likely to boost its performance, the end result was that the performance of the index is increasingly tied to the performance of the financial sector. That was hugely true of the S&P 500 as well until the 2008 crash, but after that, its importance declined with the relative underperformance of the sector. If you look at the recent internal weightings inside the SPDR sectors, you will find that the financial sector, as represented by the Financial Select Sector SPDR (NYSEARCA:XLF), is also the largest sector by far. So the correlation is clear. Where the financials go will have a huge impact on the performance of both the Dow Jones and the S&P 500.

So where is the XLF going?

Here are daily and weekly charts of the sector. Both exhibit breakouts -- trend transitions and trend reconfirmations. Both are suggesting more upside is to come.

On the weekly chart there is support just below the current price point, and a potential retest and regenerate sequence may play out. In that scenario, the push higher would be delayed rather than immediate but, as described below, with multiple swing point breaks on multiple time frames, that isn't the high runner case.

The current projection on the daily chart is the $22 area, and though it, too,could retrace to retest and regenerate higher, the fact that there are multiple swing-point breaks on this time frame in addition to the weekly chart suggests that a further extension north is most likely. That's another 4% to 5% from current levels. Those are not small numbers, and with the most important sector poised to move higher, one can only assume that the rest of the market will follow.

Twitter: @tatoday
Positions in SPY, XLF, KBE and KRE.
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