The last time I wrote about the Financial Sector ETF (XLF) was around this time last year.
I’d identified a large head and shoulders pattern. Long-time readers will know that this is a classic bearish reversal setup.
And indeed, XLF followed the script, selling off almost 14% in two months.
What’s fascinating is that almost exactly a year later, XLF is printing a very similar setup.
It’s no secret that banks have been under tremendous pressure…
A string of highly publicized banking failures including once-darling names like Silicon Valley Bank and First Republic Bank have shaken confidence in the entire sector.
If this new head and shoulders pattern works out like the previous one, then XLF could be due for another double-digit crash.
Let me walk you through an updated chart of XLF below so you can see what I mean.
The key feature of this price chart is the ominous head and shoulders pattern I’ve labeled.
This pattern has four components. The left and right shoulders, the head, and the neckline. The neckline is a trendline drawn by connecting the bases of both shoulders.
A head and shoulders pattern is complete once prices break below the neckline. What happens next is usually a swift breakdown in the market, drawing prices to the next level of support.
The next major support level in XLF comes in at $26.24, when the market put in a top back in June 2020.
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The question on the minds of traders and investors right now is how many more banks will fail.
On the one hand, the authorities are telling us that the system is safe and sound. On the other hand, regional banks are clearly in trouble.
America is a global banking anomaly with over 4,000 small banks. That’s more regional banks than the entire European Union combined.
The latest regional bank looking for a buyout is California-based PacWest. Since February 2022, PacWest shares have declined by over 93%.
And investors don’t think it’s likely that the contagion stops here.
The scary thing is that we haven’t really seen mass-panic selling in the financial sector… yet.
I don’t know if we will see such an event occur, but if it does, then the head and shoulders pattern in XLF could carry prices even lower than my initial target of $26.24.
Just remember that as of writing, the pattern hasn’t completed.
We still need to see a decisive break below the neckline to trigger the head and shoulders.
Happy trading,
Imre Gams
READER MAILBAG
What’s your prediction on the financial sector?
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