Heightened market volatility over the past several weeks has triggered a flight to sectors that are commonly known for stability and income. Financials represent one group that has looked vulnerable to market pressure but has since started to show signs of strength. As you'll read about in the paragraphs below, major levels of nearby support across the sector are providing followers of technical analysis with an interesting opportunity to enter with clearly defined risk/reward setups.
Financial Select Sector SPDR (XLF)
One of the most popular exchange-traded products that is utilized by active traders for the purpose of gaining exposure to the diverse landscape of U.S. financials is the Financial Select Sector SPDR (XLF). Fundamentally, the fund comprises 68 holdings and carries a gross expense ratio of 0.13%.
Taking a look at the chart below, it is interesting to note how the price has recently fallen toward the support of the 200-day moving average (as shown by the red line). The recent bounce from the support level suggests that the bulls are still in control of the trend and that prices could be headed higher from here. Active traders will also likely look to the bullish crossover between the moving average convergence divergence (MACD) and its signal line as confirmation of a move higher. Short-term target prices will most likely be placed near the July high of $28.72.
JPMorgan Chase & Co. (JPM)
When it comes to U.S. financials, one of the dominant leaders is JPMorgan Chase & Co. (JPM). With a market capitalization of $341.5 billion, there are few companies with the same breadth of operations or level of management expertise.
Taking a look at the chart, you can see that the price of the stock has recently fallen toward the long-term support of its 200-day moving average, which has propped up the price after a market pullback in the past. This chart is an interesting example of how a long-term moving average can reverse its role from resistance to support, as shown by the arrows. The nearby support combined with the bullish crossover between the MACD and its signal line suggests that the momentum is still in the favor of the bulls.
The Goldman Sachs Group, Inc. (GS)
Another market leader when it comes to the financial sector is The Goldman Sachs Group, Inc. (GS). As discussed on the chart of JPMorgan above, long-term moving averages are often looked to by active traders for determining the direction of the long-term trend, and these averages can often reverse roles from resistance to support.
As you can see from the chart pattern below, for much of 2019, the price was trading below the resistance of the 200-day moving average. However, bullish price action during the summer was enough to send the price above the resistance, and the pattern now suggests that the bulls are back in control of the long-term direction. Based on this chart, active traders will likely hold a bullish outlook on the stock and set a relatively tight stop-loss order below $194 in case of a sudden shift in market sentiment.
The Bottom Line
U.S. financials were under pressure with much of the broad market over the past several weeks. However, recent price action suggests that the bulls are back in control and that prices could be gearing up for a move higher. As we discussed above, for those who follow technical analysis, nearby levels of long-term resistance clearly lay out levels for buy and stop orders, and the current risk-to-reward scenario shows clear bias to the upside.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.