Many retail investors are anticipating a market correction based on the sole reason that prices are trading near all-time highs. The common saying that lingers in the back of many people's minds probably sounds a lot like "what goes up must come down." While professional traders wouldn't disagree, the difficult part is getting a sense of when prices are likely to reverse and for what reason.
As the bull market nears its 11-year anniversary on March 9, 2020, many active traders will likely want to analyze the performance of the financial sector. Banks, insurance companies, and asset management companies are often collectively looked to as a barometer of economic strength. As you'll read about in this article, strong price action combined with well-defined levels of support continue to put the bias in favor of the bulls. Based on these charts, followers of technical analysis will most likely expect prices to continue a trek higher for much of 2020.
Financial Select Sector SPDR Fund (XLF)
Retail investors who want to gain exposure to a broad market segment such as financials often turn to exchange-traded products such as the Financial Select Sector SPDR Fund (XLF). Fundamentally, the fund comprises 66 holdings spanning diversified financial services, insurance, banks, capital markets, consumer finance, real estate investment trusts (REITs), and related mortgage finance industries.
Taking a look at the chart below, you can see that the price surpassed the resistance of an influential trendline in November 2019 and has retraced toward the newfound support level. Followers of technical analysis will use the recent bounce off of the trendline as a sign that the bulls are in control of the momentum. From a risk-management perspective, stop-loss orders will most likely be placed below $29.75 or the 200-day moving average at $28.26 in case of a sudden shift in fundamentals.
JPMorgan Chase & Co. (JPM)
When it comes to the U.S. financial sector, one of the undisputed leaders is JPMorgan Chase & Co. (JPM). As you can see from the chart, the stock has been on a tremendous run since summer of 2019, and the ascending trendline has acted as a strong guide for those looking for where to place buy and stop orders.
Based on the pattern above, we'd expect active traders to buy near current levels and place stops below $130 to protect against a sudden sell-off. Traders will also likely look to the bullish crossover between the moving average convergence divergence (MACD) and its signal line as confirmation of the move higher.
Citigroup Inc. (C)
Another U.S. financial company that will likely be of specific interest to technical traders is Citigroup Inc. (C). Taking a look at the chart above, you can see that the price has recently crossed above the breakout point of a well-defined ascending triangle pattern. Followers of technical analysis often use this as a consolidation pattern, and the breakout now suggests that the uptrend is ready to resume.
The recent pullback toward the dotted trendline will likely be looked to by many as an opportunity to open a position with a relatively lucrative risk-to-reward ratio. Depending on risk tolerance, stop-loss orders will most likely be placed below the swing low near $73.19 or the 200-day moving average, which is currently trading at $70.15.
The Bottom Line
The financial sector is often used as a barometer of economic strength, and while many are watching for a pullback based on strong gains over the past few years, the charts are suggesting that the momentum could continue for months to come.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.