The SPDR Financial Select Sector ETF (XLF) rose nearly 2% during Wednesday's session after Bank of America Corporation (BAC) and The Goldman Sachs Group, Inc. (GS) reported better-than-expected fourth quarter financial results. While trade tensions and a possible economic downturn remain a concern, most banking executives believe that the underlying economic data is still healthy and that trading remains robust.
Investors have been worried about the financial sector following Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Wells Fargo & Company's (WFC) mixed results earlier this week. The favorable earnings from Bank of America and Goldman Sachs helped alleviate some of these concerns, but there are still many potential problems ahead. The government shutdown, for example, could affect customers and initial public offerings.
The Brexit uncertainty could also have an impact on many banking stocks. London has always been used as a gateway to the rest of Europe, with "financial passporting" enabling banks to easily do business across member nations without a large physical presence. A "hard Brexit" could fully break the bloc from the EU's single market and disrupt these capabilities.
From a technical standpoint, the fund broke down from a double top pattern late last year to 52-week lows on Dec. 26. The ETF rebounded from those levels to test key trendline resistance levels from the bottom of the double top pattern. The relative strength index (RSI) is approaching oversold levels with a reading of 61.8, but the moving average convergence divergence (MACD) remains in a bullish uptrend following its crossover in late December. These indicators suggest that the fund could see some consolidation above key support levels before moving higher.
Traders should watch for some consolidation above trendline support and the 50-day moving average at $25.17 over the coming sessions. After the RSI moderates, the fund could break out toward R1 resistance and the 200-day moving average at around $26.77. If the fund breaks down from key support levels at around $25.00, traders could see a move lower to retest the pivot point at $24.39 or prior lows at around $22.00 – although that scenario appears less likely.
The author holds no position in the stock(s) mentioned except through passively managed index funds.