Financial ETF Near Crucial Juncture

By Bryan McCormick

The Financials SPDR (XLF) exchange-traded fund is nearing a critical technical juncture.

As the sector is the second-largest by weight in the S&P 500 -- over 16 percent versus the Technology SPDR (XLK), which comes in at 21 percent -- what happens to the financial area is going to have a significant impact on the broader index. It isn't too surprising that the S&P 500 itself is nearing a similar juncture, given that the financials are that much closer to that test area.

And of course, were we to dig down an additional layer to the stocks within these ETFs, we'd find similar technical conditions in many of those names. For example, we know that a very large number of stocks in the various S&P indexes have made "bearish crossings" of their 10- and 50-day moving averages. We know also that in many technical trading systems, this is a confirmed sell signal.

As we can see on the one-year chart of the financials ETF, that same technical condition is evident. (The 10-day moving average is in pink, the 50-day in yellow.)

(Click to enlarge)

It is, however, the 200-day moving average that we need to pay attention to where the XLF is concerned. The purple line shows the 200-day average, which was last at $14.94. As we can see, that line was tested during the panic of May 6, on May 7, yesterday, and potentially again today.

This moving average is acting as an attractor for price, pulling the sector back down despite several attempts to move away from it. Note too how the 10-day moving average has acted as downtrend resistance, keeping any attempt to advance in check. If price keeps following that line, the trend is distinctly down.

And here is something that veteran technicians will tell you: The more frequently an area is touched on a chart, especially after a failed attempt to move away from it, the more likely that area is to be broken. That works by the way in an up or down tape.

There is a very real risk that this moving average will be broken at some point if it keeps testing down the way it has. If that does take place, it would mark the first break since the rally began last summer.

For the broader tape, given the weight of the sector, any attempt to rally would then be extremely difficult.

Disclosure: No positions