Stock prices across the financial sector have bounced strongly higher along with much of the broad market since notching 52-week lows back in December. While there has been much to cheer about so far in 2019, the first real test of resistance seems to be causing active traders to pause and take a closer look. In this article, we'll take a closer look at three charts suggesting that the move could be coming to an end and that the financial sector could be gearing up for a move lower.
Financial Select Sector SPDR ETF (XLF)
When it comes to tracking the financial sector, most traders turn to exchange-traded products such as the Financial Select Sector SPDR ETF (XLF). With total net assets of nearly $24 billion, there are few funds more widely followed by the active trading community. Taking a look at the chart below, you can see that the $27 level has acted as a strong psychological level of support and resistance over the past year. The sharp rise from the December low has now sent the price toward the resistance of its 200-day moving average, which seems to be causing the bulls to pause and consider whether they have enough conviction to overcome both of these strong levels of resistance.
Followers of technical analysis may want to take note that the moving average convergence divergence (MACD) indicator has recently crossed below its signal line, which suggests that the momentum is starting to weaken, and this could be looked to as a leading indicator of a coming pullback. Bullish traders may want to remain on the sidelines for the next few trading sessions to see if the price is able to move above the combined resistance levels. A break above would likely be a catalyst for a move higher, but at this point, the odds look to be in favor of the bears.
Wells Fargo & Company (WFC)
With a market cap of $228.5 billion, Wells Fargo & Company (WFC) is one of the largest players in the financial sector and is often looked to as a barometer for how the sector is performing and set to perform in the future. Taking a look at the chart below, you can see that the 50-day moving average is below the 200-day moving average, which is one of the strongest indicators of a downtrend by those who follow technical analysis.
As shown in the example of XLF above, the price of Wells Fargo stock is also nearing the psychological resistance of a key trendline near a major price level, which in this case is $50. The sideways price action over the past couple of weeks suggests that the conviction in the move higher is waning and that the bears could be readying to make a move to push the price lower.
Citigroup Inc. (C)
Another interesting chart that is catching the eye of active trader belongs to Citigroup Inc. (C). As you can see below, the price of stock has recently tested the combined resistance of the 200-day moving average and two influential trendlines. The bearish crossover between the MACD indicator and its signal line combined with the prominence of nearby resistance seems to suggest that the bears are in the process of gaining control of the momentum and that prices could be set for a move lower over the coming weeks or months.
The Bottom Line
The financial sector has benefited nicely from the strong bounce from December lows. However, given the move toward the combined resistance of 200-day moving average and influential trendlines, it seems as though the bulls may want to tread with caution. Based on the patterns discussed above, it appears as though the bears could be gaining control of the direction of the trend.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.