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Tickers in this Article: XLF, BAC, JPM, COF
The financial stocks have been laying low for several months after being in the spotlight during one of the steepest declines on record. After stabilizing in early 2009 amid a sea of government intervention and programs, the financial sector began a rally that lasted well into the summer of 2009. The group has since been trading sideways lazily, as interest in the group has died down. Beginning in the summer, the tech group and then commodities took the spotlight as money rotated into their sectors. (For a quick refresher on this subject, see Sector Rotation: The Essentials.)

In looking more closely at the financials though, it appears that some are at critical areas, and they could come to the forefront again soon. The chart for the Financial Select Sector SPDR ETF (NYSE:XLF) summarizes what many of the bank stocks and financials look like. XLF has been in a consolidation since August, as it works off its prior rally. It has been trading in a very tight range recently, and the 20- and 50-day moving averages have practically turned sideways. The very narrow range over the past few weeks should be watched as a break to either direction would probably lead to a continuation move past the larger overall pattern.

Source: StockCharts.com

Bank of America Corporation (NYSE:BAC) looks very similar to the XLF chart with one exception: While XLF respected the lower bounds of its trading range, BAC actually broke under the range in late October. However, there was no follow-through, and BAC was able to climb back into the base. This often ends up turning into a bear trap, but BAC would have to first clear the narrow trading range highlighted in red before the bears get nervous. A move below the narrow range could lead to a full-fledged breakdown and a test of the 200-day moving average.

Source: StockCharts.com

JPMorgan Chase and Co. (NYSE:JPM) is another financial stock that may be in a critical area. JPM has been gradually rolling over, and has begun to set lower highs. However, it is important to note that JPM hasn't broken support either, and remains entrenched in its current base. While the pattern is beginning to resemble a head-and-shoulders topping pattern, the pattern will not be valid until JPM closes beneath the neckline (highlighted in blue). The whole area between $40.50 and $42 is the level that needs to hold for JPM on a pullback.

Source: StockCharts.com

Capital One Financial (NYSE:COF) is also sporting an interesting chart. COF is showing mild weakness, although it is still in its base. It attempted a breakout in late October, but the rally had no follow-through whatsoever. Since that time, it has begun building a base instead and is currently hugging the 50-day moving average. A move below the 50-day moving average would show weakness, and could threaten to lead a much deeper correction.

Source: StockCharts.com

Bottom Line
While the financials have been out of the spotlight for a few months, it might be time for the light to shine back on them. While they are showing some near-term weakness, the fact that the markets continue to be in an intermediate uptrend must be respected. Volatility has died down in the financials, and the next move in the group could be a large move to either direction. As such, they should be watched as a possible catalyst for the next move in the general markets. (For related reading, check out Sorting Out Cult Stocks and Top-Down Analysis: Finding The Right Stocks And Sectors.)

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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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