Financial stocks were hot in late 2016, but have fizzled out in 2017. While the S&P 500 is up 7.4% in 2017, the Financial Select Sector SPDR Fund (XLF) is up only 1.4%, and the SPDR S&P 500 Regional Banking ETF (KRE) is down -4.3%. More importantly, both these financial ETFs are at critical technical junctures. Their price action has been getting squeezed along support following a weak rally in January through March. If these ETFs breach support it indicates the prices could slide much lower. On the other hand, a breakout above the short-term ranges these ETFs have formed over the last few months indicates another rally could be in store.
The Financial Select Sector SPDR Fund has been respecting a support region between $23 and $22.85 since January. The ETF retested this area in March, April, and May. If the price falls below $22.85, the downside target is $20.40. This is based on a head and shoulders pattern that has been forming since December. The pattern isn’t complete until the price falls below $22.85. At that point, the height of the pattern ($2.45) is subtracted from the breakout point to provide an approximate target. $20 is the next major support area, as it was the security’s former resistance and a breakout point back in November.
The alternative is an upside breakout. The price has been ranging between $22.85 and $24.09 since late March. If the ETF can close above $24.09, there may be enough momentum to push it up into the $25 region.
The Regional Banking ETF has already fallen bellow January lows (unlike XLF), indicating a downtrend may already be underway. A decline below the March low of $51.17 would add further evidence that another leg to the downside is commencing. A decline below $51.17 also completes a head and shoulders topping pattern, with a downside price target of $44 (height of pattern subtracted from breakout point). That target aligns with an old resistance level (now possible support) from November.
The price has been moving mostly sideways since late March, so a close above $56.10 would break the range and indicate possible upside into the $58 region.
The Bottom Line
Weakness and lagging performance warrants caution on the long side in these ETFs. Be cautious of breakouts to the upside that quickly falter (false breakouts) as swift declines typically follow these types of moves. This is why it is better to wait for a closing price breakout, preferably with increasing volume, if looking to buy on an upside breakout. Below the head and shoulders patterns, there is little support, which means a decline of 10% to 15% could occur over the next few months if a downside breakout develops. Keep risk on any single trade to a small percentage of account capital.
Disclosure: The author doesn’t have positions in the ETFs mentioned.