The financials have been really struggling lately and are in serious danger of breaking down under an important support level. The group, as tracked by the Financial Select Sector SPDR (NYSE:XLF) ETF, has respected the $13.50 level as support since August of 2009 after the sharp rally that occurred earlier that year. While this level has held in the past, XLF is currently pushing the envelope, as it probed down to $13.29 last week. While it found some buyers, the ETF is looking very vulnerable, much of which can attributed to the recent action in the banks.

IN PICTURES: 7 Tools Of The Trade


Bank of America Corporation (NYSE:BAC) for instance, has been in a persistent downtrend since rallying to a new recovery high in mid April. While it's typically not normal for a stock to transition from a breakout attempt to a full fledged downtrend, this is a pattern that has been occurring more frequently lately. BAC has been following a clear channel as it trades lower and could be ready for a bounce attempt from the bottom of the channel. However, traders should note that the path of least resistance is clearly down right now and any bounce attempt is more likely a shorting opportunity.


JP Morgan Chase & Co. (NYSE:JPM) is another bank stock that could be in trouble. The chart resembles XLF in that JPM is testing an important level while acting very weak. JPM has bounced on prior tests of the $37 level but the rally attempts have been getting progressively weaker. JPM actually slipped under this level in early July, but quickly found buyers. The bounce ended up taking the form of a rising wedge, which is a bearish pattern. JPM broke down from this pattern and is now under the important $37 level. JPM could easily head much lower if it can't climb back into its base soon.


The chart for Wells Fargo & Company (NYSE:WFC) is showing even more weakness than JPM. WFC had respected the high $26s as support through the past several months, and more importantly, the $25 level over the past year. WFC broke through the first level in late June on an increase in volume and ultimately sliced through the $25 level a month later. The price action has been definitively bearish and continued weakness will surely help drag down XLF.


Bottom Line
The banking stocks have been steadily deteriorating over the past several weeks and have played a large part in the recent correction in the general markets. This group is weighing down the other financials and due to their heavy weight in XLF, they are likely to push the ETF lower unless they halt their declines. XLF is in a very vulnerable position right now, and a breakdown will likely weigh on the general markets as well. However, traders should note that many of these banking stocks are quite oversold and may be due for a short-term rebound. The key to watch moving forward is whether they bounce meekly into resistance, which is likely to present some solid shorting opportunities, or if we see some aggressive buying at these levels.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  2. Chart Advisor

    ChartAdvisor for October 9 2015

    Weekly technical summary of the major U.S. indexes.
  3. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  4. Investing Basics

    Top Tips for Diversifying with Exotic Currencies

    Is there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
  5. Mutual Funds & ETFs

    The 3 Biggest Mutual Fund Companies in the US

    Compare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
  6. Chart Advisor

    These Oil & Gas Stocks Have Reversed

    It's been a long downtrend for oil stock owners, but there's hope. These four oil and gas stocks have reversed and may keep trending to the upside.
  7. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  8. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  9. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  10. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  4. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!