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Tickers in this Article: XLF, GS, KEY, SAN
The financials suffered through a sharp correction when the markets stalled in mid April, which also coincided with Goldman Sachs Group, Inc. (NYSE:GS) being sued by the SEC. Since that decline, the financials have been trading sideways and after a false breakdown in July, they are back to the top of their trading range. After yesterday's strength in the markets, it looks like some of the financials are beginning to emerge from their bases.

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The overall action in this sector can be easily seen in the Financial Select Sector SPDR (NYSE:XLF), which attempts to track the Financial Select Sector Index. Notice that after the sharp decline in late spring, the ETF has been trying to carve out a base that resembles an inverse head and shoulders pattern. This type of pattern often acts as a bottom after a decline, and a solid move above $15 would confirm the pattern. At this point, a drop below $13.80 would jeopardize the pattern, with a drop below $13.40 would likely signal a resumption of the downtrend.

Goldman Sachs Group, Inc. (NYSE:GS) is one of the stocks helping to push XLF higher. GS recently broke out of a small channel it was following as it attempted to consolidate its breakdown from its April highs. After clearing the channel, GS started to trade in a small bull pennant and recently cleared this pattern as well. This breakout is suggesting a move towards the $160-$165 area which also coincides with its 200-day moving average. If GS can rally higher, it will likely carry XLF along with it.

Another financial stock that is starting to emerge from a base is KeyCorp Common Stock (NYSE:KEY). KEY showed some relative strength recently as it transitioned to a sideways trading range after its April high, rather than falling into a deeper correction. It tested the low $7.00 range on a few occasions, consistently finding support. It recently cleared a trendline that was marking the past few rally attempts and also set a higher high in the process. This would imply a test of the April high in the upcoming weeks, and only a drop below $7.00-$7.50 would negate this pattern.

Banco Santander - Chile ADS (NYSE:SAN) is a financial stock that has somehow disregarded the general market action. While SAN is an ADR for a foreign bank, it is clearly outperforming other foreign banks as well. SAN emerged from a solid base in late June, and after a quick retest of support SAN has been trending steadily higher. This is a prime example of how a healthy base can provide the fuel for a clean trending move.

The Bottom Line
While many financial stocks still have a ways to go before their charts are healthy, the recent action in XLF is promising. If XLF can clear this pattern, it would show underlying improvement in the sector. This ETF, along with GS remain the two key tickers to watch in this group. A strong move in either of these would likely be mirrored by the rest of the stocks in the sector. Another reason to watch XLF is that a breakout from its current pattern would also help to validate the idea that the correction in the general markets is nearing an end.

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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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