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