I wrote back in August about the financial sector and an impending correction in the Financial Sector SPDR (XLF). A breakdown through short-term support levels and the 50-day moving average had suggested further downside in the sector.

The XLF did indeed continue lower, eventually finding support at the 200-day moving average. This level also lined up with support from the ETF's June 2017 low. This was a key “line in the sand,” as many investors consider the 200-day moving average to be an important long-term trend gauge.

The XLF quickly rallied from this support level, breaking through a downtrend line using the August highs. This was the event that we identified as the signal that an uptrend had resumed. A moving average convergence divergence (MACD) buy signal also confirmed the positive trend.

Since then, the financial sector has rallied over 10% in the last month, quickly eclipsing the August peak to achieve a series of higher highs. The XLF is now at new all-time highs, having eclipsed its previous peak from May 2007.

Any time I see a major move in a sector, I like to break down the stocks within the sector to see if it is a widespread move or a trend limited to a small number of larger stocks. Top holdings of XLF include Berkshire Hathaway (BRK-B), J.P. Morgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C). The good news is this most recent rally hasn’t been limited to just the larger banks. We have also seen strong up moves in asset managers, exchanges and life insurance names.

What’s next for financials? When a market is at all-time highs, you have to go into trend-following mode. As long as we continue to see higher highs and higher lows above the 50-day moving average, the trend is up.

For more market insights, please visit marketmisbehavior.com.

Disclaimer: This story is for educational purposes only, and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

 

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