The stock market is on fire so far in July.
The S&P 500 is up 3% already this month, and lots of folks are talking about a “breakout” and a move back up to new all-time highs. But if the market is to do that, then it’s going to need some help from the financial sector.
Two weeks ago, I wrote about how the financial sector was “The Sector to Watch This Month.” The Financial Select Sector Fund (XLF) had dipped below its lower Bollinger Band. And, most of the time when that happens, XLF tends to reverse higher right away.
So, we saw that as a good sign for financial stocks. And since the financial sector tends to lead the broad stock market, a rally in XLF should lead to a rally in the stock market.
So far, so good. XLF has had a nice bounce over the past two weeks.
But that bounce is now stalling. XLF is struggling near resistance. And that could be a sign of trouble ahead.
Take a look at this updated chart of XLF…
Right now, XLF is trading right in the middle of a descending triangle pattern. If it can break out above the resistance of its 50-day moving average and the downtrending resistance line of the triangle (both at about $27.40 per share), then it could spark a strong rally for the financial sector – which, in turn, would spark a strong rally in the broad stock market.
On the other hand, if XLF breaks down from the triangle, by closing below $26.50 per share, then it’s likely headed lower. And a selloff in XLF will likely cause a selloff in the broad stock market.
Two weeks ago, we gave the bulls the benefit of the doubt. Now, though, it looks to me like the bears may have the edge.
Despite a rally in the stock market on Friday, bank stocks traded poorly. XLF lost 0.44%. That’s not the sort of action that’ll lead the stock market to a breakout move higher. Indeed, it just might be the sort of action that points to an impending reversal.
The jury is still out. XLF is still inside its triangle pattern. So, in theory, it could break either way. But if we’re going to get a breakout rally in the stock market, then XLF needs to start moving higher right away. Otherwise, the market may be nearing the end of its summertime rally phase.
So, just as I said two weeks ago, the financial sector is the sector to watch in July.
Best regards and good trading,
In today’s mailbag, a frequent reader uses the value of the Minute to full advantage…
I placed a trade on USO and purchased a small position on some puts based on your essay on oil. I was able to close those out for decent 30% gain on Tuesday.
Not sure if I chose the best strategy, and was losing some value in those options prior to the drop in oil, but I was happy to take the gain! Thanks for putting that out there!
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