Market weakness over the past couple of weeks has cut wide and deep. Manufacturing, technology, healthcare, transportation and everything in between have made a move lower on the heels of dramatic selling pressure. Generally during these times of heightened market volatility, investors turn to relatively stable sectors such as commodities and financials, but even that has not been the case. In the paragraphs below, we'll take a look at how the recent selling pressure has reversed the uptrend in financials and how prices could head much lower by the time 2018 is finished.
Active traders who look to gain exposure to financials or other major sectors generally turn to exchange-traded products. In the case of financials, the popular choice tends to the Financial Select Sector SPDR Fund. Taking a look at the chart below, you cans see that the price has recently fallen below a key ascending trendline. The recent sell-off has acted as a catalyst for the 50-day moving average to cross below the 200-day moving average, known as the death cross, which is a common long-term technical sell signal. Active traders will likely look to the recent signal as the beginning of a long-term downtrend, and many traders will likely set their target prices around the horizontal trendline near $22.50.
When it comes to the financial sector, JPMorgan Chase is often looked to as a leading indicator as to how others in the sector will likely perform. Taking a look at the chart, you can see that the price has recently fallen below the major support of the 200-day moving average. It is interesting to note how the price bounced off of this level earlier in the month and how the price recently closed below the swing low near $106. Recent weakness suggests that it's only a matter of days until the 50-day moving average closes below the 200-day moving average and officially marks the beginning of a long-term downtrend.
Another company that is often looked to as a gauge for the overall financial sector is Bank of America. Taking a look at the chart, you can see that the bears have managed to push the price below a key trendline. The move lower has also triggered a bearish crossover between the 50-day and 200-day moving averages, which suggests that the bears are in control of the long-term momentum. Traders will likely look to protect their short positions by placing stop-loss orders above $30.
The Bottom Line
Financials are often looked to as a safe haven during times of market volatility. Unfortunately for the bulls, recent weakness has triggered moves below key support levels and triggered major sell signals, as discussed above. The recent bearish crossover between long-term moving averages and failed moves to regain the 200-day moving average suggest that the bears will remain in control of the momentum for the remainder of 2018 and that prices in the financial sector could be gearing up for a longer-term move lower.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.