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Are Financials Ready for a Bounce Higher?


Financials have been lagging the market for the past three months, but the charts are now flashing some bullish signals.

It's no secret, the financial sector has been underperforming the broader market for the past three months. As the financials outperformed the market over the past two days however, and also developed bullish candlestick formations, I thought it would be worth a closer look at where they stand.

Starting with the popular Financial Sector ETF (XLF), we notice it briefly made marginal new highs versus the 2010 highs this past February. That point also marked the so far 2011 high, and the XLF has made lower highs ever since.

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The XLF is now also attempting to fall out of a triangle shaped topping pattern. However, and potentially more importantly, notice the 200-day moving average (red line) just beneath current levels. Historically the 200 dma has been well respected by the XLF. Should the 200 dma not provide much support, we believe the $15 area should do so. In 2010 the $15 area served as resistance for several months, which now could serve as support.

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The AMEX Broker/Dealer Index (XBD) is not surprisingly showing similar developments. On the weekly chart the XBD has now come down to the 50% Fibonacci retracement level of the entire move up from September 2010 to February 2011.

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On the XBD daily chart, that 50% retracement level also happens to coincide with the 200-day moving average (red line). The long tail on yesterday's (Tuesday May 18) candlestick bar could also signify that some investors have taken the opportunity of lower prices to nibble on some financials from the long side.

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We like to see multiple signals line up simultaneously to give us a clearer trading edge. Given that financials have already been lagging the market for the past three months, coupled with the technical support areas mentioned above, we have reason to believe a bounce in the sector may be in the cards.

On an individual stock level, JP Morgan (JPM) is in the market for a major share buyback program. While the current $43.80 level of JPM stock may not be the best bargain on the block, I would like to note that the $43.80 area is also the 10 -year regression price level of JPM stock. Maybe, just maybe that level is attractive enough for JPM to start buying back stock.

Happy Trading!
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No positions in stocks mentioned.

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