This Sector is Worth Watching, Not Just For Itself But as a Market Bellwether
Last week, I drew your attention to the fact that out that three US market sectors had experienced bearish two-bar reversals on the weekly charts and were likely to retrace some of their previous advances. I also pointed out that this was only one piece of negative evidence and that we also needed to see some form of downside trend action as confirmation. That confirmation, in the form of a negative 10-week MA crossover or up trendline violation, never came, so the three patterns failed.
Formations that fail to work are typically followed by an above-average move in the opposite direction, as traders scramble to get back to the right side of the market. That's what is happening for the SPDR Financials (XLF), as you can see from Chart 1. A key characteristic of whipsaws and failed patterns is that the vast majority are counter-cyclical in nature.
That certainly is the case when we observe Chart 2, which shows the XLF to be in a strong uptrend, with no signs of a reversal.
That said, Chart 3 indicates that the 9-day RSI is very overbought at a time when the price has experienced a huge upside gap. In the vast majority of cases, gaps are either filled or a good faith effort at a closing attempt is made. Consequently, Wednesday's unfilled gap adds further weight to the idea of a brief correction prior to a resumption of the uptrend.
Chart 2 reflected a strong long-term uptrend for US based financials, but Chart 4 displays the global picture in the form of the iShares Global Financial ETF (IXG). As you can see, this fund has only recently emerged from a multi-year consolidation pattern, which indicates a strong foundation for higher international financial stocks over the course of the next few years.
Financial Outperformance is Bullish for The Market in General
Charts 5 and 6 compare the S&P Composite to the long-term KST monitoring XLF relative action. In this instance, rising momentum indicates superior performance by the XLF and vice versa. The red vertical lines in Chart 5 indicate KST sell signals, most of which are followed by a weak S&P.
On the other hand, Chart 6 features the buy signals, the vast majority of which are associated with upward slanting green arrows reflecting S&P rallies. Indeed, there is only one instance of a false positive, which occurred in 2,000. Since the KST has just exceeded its MA, it's a positive sign for the XLF and the market in general.
Finally, Chart 7 compares the RS line itself to its short- and intermediate-term KSTs. Since both have just reverted to a bullish mode, a breakout for this RS line is over the near-term. If so, that will also build on the positive long-term relative KST buy signal in Chart 6.
Financials vs. Technology
Chart 7 compares financials to technology (XLF/XLK). This relationship has been caught in a trading range since mid-2023 and is now at its upper range. Since both KSTs are in a bullish but not overstretched mode, it seems likely that a good faith attempt at an upside breakout will take place in the immediate future. That will clearly be bullish from an XLF perspective, but our final chart explains why the stakes are so much higher.
That's because the ratio has been in a secular downtrend favoring technology since 2007. It's possible that a breakout from the recent trading range will offer sufficient upside momentum to enable a break above the secular down trendline and (red) 48-month MA. If so, that is likely to be followed by an extension to the giant trading range that began in 2020 or an actual upside reversal. Either way technology would lose the upper hand in its relationship with financials.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
