Friday, September 26, 2008

A Closer Look At the Financial Sector

Considering the financial sector has been he focus of a great deal of talk lately, let's see how this sector is performing from a technical perspective.

On the yearly chart, notice the following:

-- Prices are still in the downtrend that started about a year ago. While prices spiked to the 200 day SMA on talk of the bail-out, they quickly retreated to below the downward sloping trend line again. In fact, prices opened above the line and then closed below the line.

-- Since roughly mid-July, prices have moved in a tighter pattern, moving primarily sideways. Prices moved between essentially 20 and 23. While we saw moves below that level last week, we can attribute that to extreme market responses to the AIG/Fannie and Freddie situation etc...

The yearly chart highlights the need to understand technical developments in a fundamental light. While reading charts is incredibly important to understanding the market, this chart especially would be a bit hard to understand without an understanding of the fundamental backdrop.

On the three month chart, notice the following:

The 10, 20 and 50 day SMA are in an extremely tight range, highlighting the fact that traders are equally split between bullish and bearish sentiment. The big uncertainty is the bail-out package. Until that situation changes I wouldn't expect the sector's outlook to change.