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

Source: StockCharts.com

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.

Source: StockCharts.com

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.

Source: StockCharts.com

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.

Source: StockCharts.com

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. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  2. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  3. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  4. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  7. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  8. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  10. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Indicator

    Indicators are statistics used to measure current conditions ...
  5. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. 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 >>
  2. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  3. 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 >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  6. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
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!