Financial stocks have been consolidating for approximately five months following a sharp rally in the first half of 2009. Recently, volatility in the financial sector has been dying down as money and interest rotate to other sectors such as commodities. However, 2010 has started off with a bang, and the financial stocks may be finally clearing their consolidation ranges.

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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. However, the beginning of the year has started with a move above the declining trendline that was framing the upper part of the consolidation. While XLF has yet to set new highs, the recent move is a positive development and could be the beginning of a new rally in the group. (For more, see Track Stock Prices With Trendlines.)

Source: StockCharts.com

Goldman Sachs Group (NYSE:GS) is generally considered the leader in this sector. It recently cleared a descending trendline that was acting as resistance. The recent trading range in GS could be termed a falling wedge, which is simply a consolidation. The move out of this range on increasing volume hints at a change in character, and with GS reclaiming its 50-day moving average, it could be signaling a resumption of the uptrend. GS has some resistance near $181 that could slow the company down, but it appears that in the grand scheme of things, GS has turned bullish again.

Source: StockCharts.com

JP Morgan Chase and Co. (NYSE:JPM) is another financial stock that is starting to move higher on increasing volume. JPM has also been in a lengthy consolidation and may have trapped some bears with a false breakdown in mid December. Often when a stock falls out of a base and then reverses to get back in, it traps some early shorts. These shorts are then forced to cover as the stock continues higher. JPM is also back above its 50-day moving average and above the most recent descending trendline. This action is also bullish and the level to watch on the downside is the $40-41 area. JPM appears to be headed for a retest of the highs near $48 as long as it holds the recent low on any weakness.

Source: StockCharts.com

Capital One Financial Corp. (NYSE:COF) is a financial firm that is already close to its recovery highs. While COF remains in its base, it has held up better than most of the other financials. Drilling down into this sector a bit more, the credit card companies have been performing well, and COF could emerge from this base if it can clear $41. This would set a higher high and possibly pave the way for a full-fledged breakout.

Source: StockCharts.com

Bottom Line
The financials remain a very important group to watch, and while many have been predicting an end to the current rally, these companies appear to be just getting started again. If the financials can continue to build strength, it could lead the way to even higher moves in the near term. Of course, there is always the possibility of a false breakout, which is why it is important to keep an eye on the charts. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

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