The Bulls' Last Hope

Bank stocks hold the key to the stock market's next move.

 

Financial stocks lead the market. If we're ready to rally, we'll see strength first in the financial sector. And if the market is about to fall, the banks will serve as our canaries in the coal mine and warn of the danger before it happens.

 

The canaries were coughing during the 150-point Dow Jones rally on Tuesday.

 

The Dow Jones Industrial Average gained nearly 1.5%, but the Financial Sector Select ETF (XLF) was only up 1%. In fact, XLF actually dropped into negative territory at one point during the day. This isn't the sort of action that inspires the bullish case.

 

More important than the performance of one day, however, is the action of the financial sector over the past few months. Here's the chart...

 

 

 

XLF has been stuck in a sideways consolidating pattern for six months. It has been bouncing back and forth between support at $13.50 and resistance at $15.30. It is currently trading at the bottom of that range.

 

The last hope the bulls have to save this market from a significant correction is for XLF to bounce strongly off of support immediately. If it fails to hold at $13.50, then the next level of support is all the way down at $12 per share. The upside breakout from that level last July was quick and violent. A downside break of support this time around is likely to be just as fast.

 

If the canaries start dropping dead in their cages, then the rest of the market won't be far behind.

 

Adding to the potential bearish case is the action in the Moving Average Convergence Divergence indicator (MACD), which measures momentum. XLF has been falling, and the MACD indicator has been dropping right along with it. This action confirms the downtrend is strong and likely to continue.

 

But there's still hope. If the financial stocks can bounce right away, we can wipe the perspiration from our brows, let out a sigh of relief, and ride the bull a while longer.

 

On the other hand, if XLF drops and closes below support at $13.50, the canary is dead and it's best to get out of the coal mine for a while.

 

Best regards and good trading,

 

Jeff Clark

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