Monday, May 16, 2011

Are Financials Signaling a Lower Market

Something I will start delving into in more detail is sector analysis -- that is, breaking the various markets down into smaller components to see what those sectors tell us about the overall markets.

However, the financial sector of the market (ETF: XLF) may be telling us a weaker market lies ahead.

Financial stocks have been an interesting sector to watch as of late. For a while it was the sector to watch from 2008-2010, if financial stocks went up the market followed, Bob Paisini loved to mention the correlation. Now it seems financials are either being looked over by the market, when it can be giving a huge early warning sign that a downward movement is on the horizon.

Financials have been slowly declining throughout the last month or two, even as the market rallied. Our post on GS mentioned to watch the key $148 level, after breaking that GS fell to $141. There was a similar support level on XLF that was broken on Friday.

XLF closed below $15.87 a key support level. The support level was created in December after XLF broke out and started an uptrend to new highs. It was then a support twice during XLF's decline, providing a launch pad for the ETF. But the third time this support level failed and XLF closed at $15.77. In addition to this being a support level, the support level makes up the base of a descending triangle pattern. This is a 1.14 measured triangle and this move would put XLF around 14.77ish.

Click on the link for the full story.