Rising levels of uncertainty have led to an increase in volatility over the past couple of months in the financial markets. While geopolitical factors such as tensions around trade and rising levels of protectionism have dominated the headlines, many active traders are looking to the financial sector to gain insight as to what could lie ahead for the markets, since this sector is often a barometer for economic growth. In this article, we'll take a look at three charts from across the financial sector and try to determine how traders will position themselves over the weeks or months ahead.
iShares Global Financials ETF (IXG)
As mentioned, the financial sector is often looked to as a gauge for determining the health of the financial markets. The first stop for traders who want to do their own research ought to be exchange-traded products with a global focus such as the iShares Global Financials ETF (IXG). Fundamentally, this fund comprises 192 holdings and has total net assets of nearly $370 million. Since this fund represents diverse exposure to companies that provide financial services – including banks, investment funds and insurance – the analysis is telling as to what could lie ahead for the broader markets.
Taking a look at the chart, notice how the bears have dominated the momentum since the price broke below the support of its 200-day moving average back in May 2018. This chart is of specific interest to traders because the price has responded in a predictable manner on each test of the resistance provided by the dotted trendlines. The recent pullback near the descending trendline suggests that the bears are in control of the short-term momentum and that target prices could be in the area of the lows below $55.
UBS Group AG (UBS)
The first couple days of this week have been dominated by the news that UBS Group AG (UBS) is warning of economic headwinds on the heels of news that its clients pulled $13 billion in assets during the last few months of 2018. Taking a look at the chart, you can see that the bears are in clear control of the momentum, and the recent drop suggests that the short sellers will be setting their stop-losses above the nearby trendline at $13.75. Target prices will likely be set near the 2018 low of $11.60.
Financials Select SPDR Fund (XLF)
Investors who want to focus their attention only on the high-quality financials within the U.S. may want to consider analyzing the chart of the Financials Select SPDR Fund (XLF). As you can see below, the chart looks nearly identical to the IXG chart shown above. The close proximity to the resistance of a short-term trendline and its long-term 200-day moving average suggests that the bulls will have their work cut out for them if they'd like to see prices head significantly higher from here. Based on technical analysis, this pattern suggests that the bears are in control and that stop-loss orders will be placed above $26.75, while targets will be placed at the December low of $22.05.
The Bottom Line
The financial sector is often looked to as the gauge for the future performance of the financial markets. The charts discussed above, with nearby resistance levels and recent weakness sparked by the UBS announcement, suggest that prices are readying to make a move lower.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.