FINANCIALS TAKE A BREATHER BEARISH CANDLESTICKS FOR GOLDMAN, MORGAN STANLEY AND JP MORGAN CHASE MATERIALS AND ENERGY FOLLOW COMMODITIES HIGHER ALCAO SURGES ON BIG VOLUME

FINANCIALS PULLBACK FROM OVERBOUGHT LEVELS... A day after the big Fed announcement, financial stocks declined from overbought levels. As noted yesterday, the Financials SPDR (XLF) and Regional Bank HOLDRS (RKH) were up substantially over the last two weeks. Charts 1 and 2 show both exceeding their 50-day moving averages and late February highs with yesterday's surge. On Thursday, the ETFs opened strong and closed weak to form long red candlesticks. As a result, dark cloud patterns emerged over the last two days. These are bearish candlestick reversals that require confirmation. The first candlestick is a long white candlestick in the direction of the short-term trend, which is up. The second candlestick forms with an open in the direction of that trend (gap up). However, the bears soon take over and push prices below the mid-point of the prior white candlestick. This marks an intraday reversal and further weakness would signal that a deeper pullback is underway. After such a sharp advance the last two weeks, a pullback or retracement would be perfectly normal. Use the Fibonacci Retracements Tool to measure potential support levels for a retracement.

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BEARISH CANDLESTICKS FOR KEY FINANCIAL STOCKS... Goldman Sachs (GS), JP Morgan Chase (JPM) and Morgan Stanley (MS) held up better than most financial stocks over the last few months. This is especially true for Goldman and Morgan Stanley, both of which moved steadily higher from their November lows. Even though both remain in uptrends, bearish candlestick patterns emerged over the last few days and these could foreshadow short-term weakness. Chart 3 shows Goldman Sachs forming a harami over the last two days. This version features a white candlestick with a smaller red (or black) candlestick inside. Harami show indecision that can sometimes foreshadow a short-term reversal. Chart 4 shows Morgan Stanley forming a bearish engulfing on Friday-Monday and then a long red candlestick today. Notice that MS opened strong and closed weak today. Selling pressure is picking up as the stock challenges the 200-day moving average. Chart 5 shows JP Morgan forming a bearish engulfing pattern at resistance from the prior highs. JPM was in dire straights a mere two weeks ago, but surged over 65% from its March lows. Keep in mind that candlestick patterns are short-term in nature.

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MATERIALS AND ENERGY BOUNCE WITH COMMODITIES... The Materials SPDR (XLB) and Energy SPDR (XLE) followed commodities higher on Thursday. Chart 6 shows the Materials SPDR (XLB) with a move above the 50-day moving average over the last few days. Despite a pretty strong advance the last two weeks, XLB is entering a resistance zone from the Jan-Feb consolidation (orange area). In addition, the ETF is already up over 19% in the last 10 days. You do not need an oscillator to know that this ETF is short-term overbought. Chart 7 shows the Energy SPDR (XLE) moving above its 50-day moving average as well. XLE is up over 17% in the last 10-days. This ETF is short-term overbought and trading in the middle of the prior consolidation (blue dotted line).

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ALCOA SURGES ON BIG VOLUME... Within the materials sector, aluminum producer Alcoa (AA) surged with extremely heavy volume. The company cut its dividend by 82% on Tuesday and announced plans to raise equity. This news sent the shares sharply lower on Tuesday with above average volume. Today the company announced that it raised $1.3 in a convertible stock offering, which was more than expected. What's important here is the reaction to the news. Alcoa gapped up and gained over 15% with volume that was almost 10 times above average. That is some serious buying that could establish support from the March lows. Also notice that AA gapped down on Tuesday, consolidated and then gapped up on Thursday. A small island reversal is in the works. Despite such a big gain, the trend is still down and Alcoa remains below its 50-day moving average. More work is needed to reverse the medium-term downtrend.

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