Right now, there’s a lot of blood in the streets.

It’s a perfect storm of risks that are battering the markets.

Between the ongoing war in Ukraine, rising inflation, and an increasingly hawkish Fed – there’s no doubt investors are feeling the pain.

While this may present rare opportunities to pick up deep value at great discounts, I believe there’s still more pain to come…

One sector that’ll remain vulnerable to today’s storm is financials.

The Financial Select Sector SPDR ETF (XLF) is down over 17% from its January high of $41.42. XLF is now trading at around $34.

That’s quite a beatdown.

And this exchange-trade fund (ETF) doesn’t seem ready to rebound.

In fact, I have my eye on a support level that comes in at around $31 (red line on the chart).

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Let’s take a look at the XLF price chart…


On this chart, I outlined two important things:

  1. The bearish head and shoulders pattern that completed last week.

    This classic reversal pattern frequently forms at both major market tops and market bottoms.

    It has three key defining features – the left shoulder, the head, and the right shoulder.

    The pattern is complete once prices break and close below the neckline. The neckline (blue line) is a trendline that connects the bottom points of the left and right shoulders.

    For XLF, the pattern completed on April 26.

  2. The potential support level that comes in at $31.13.

    $31.13 is an important level for XLF. It represents a major top from which prices broke down on February 2020.

    Markets have long memories. It’s common for them to re-test past important levels like this one.

    So, I wouldn’t be surprised if we test this level over the next several days.

For short-term traders, this could be an opportunity to ride XLF lower…

Or you could wait for that level to be tested, to see if an opportunity to go long will materialize around the $31.13 price point.

Either way, I’ll keep a close eye on this ETF and provide another update once XLF looks ready to turn higher again.

Happy trading,

Imre Gams
Analyst, Market Minute

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Do you think it’s better to go long or short on XLF?

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