Tuesday, December 3, 2013

XLF Financials Weekly and Daily Charts Overbot Rising Wedges Negative Divergence

Financials are key nowadays since they will lead the way higher if equities do intend to move higher. Traders are tripping over each other to buy the banks all firmly convinced that financials will lead the bull parade. The Fed has the 2-year yield anchored at 0.29% due to their monetary policies so when the 10-year yield creeps higher, increasing the 2-10 spread, steepening the yield curve, traders salivate at profitable banks ahead. With everyone believing that the QE tapering announcement will create a catapult higher in yields, traders believe banks are a great investment due to a steepened yield curve moving forward. Keystone's prior articles highlight the 255 basis point 2-10 spread number as a signal for happy banks. With the 10-year at 2.80%, and 2-year at 0.30%, that is 250 basis points for the 2-10 spread, close but not yet a cigar to signal happy financials ahead. The jury remains out concerning the financials trade. Those buying banks over the last few weeks may regret the move.

The charts were posted a couple weeks ago and were open to some additional upside. A jog move was anticipated, up, down, up, down, on the weekly chart (short green lines), which has played out with a stronger up move rather than the jog, as traders become more and more bullish each day on banks and need to push all the Fed's easy money somewhere. The weekly chart is now negatively diverged across the multi-month and near-term time frames with the lone exception of the short-term money flow that has a tiny bit more of bull juice. Price is extended above the moving averages in both the daily and weekly time frames (pink dots) requiring a mean reversion (lower prices). On the daily chart, the MACD line and money flow had more bull juice to punch out the high yesterday but this appears played out with universal negative divergence now in place on the daily chart (red lines).

The 21 level was holding as a ceiling until a couple weeks ago so credit to the bulls to push financials higher. Traders are riding momo right now since everyone is telling each other how smart they are to be moving into financials. The charts forecast a roll over to the downside as time moves along. Projection is for lower prices for the days and weeks ahead. The move in XLF will key off of the 10-year Treasury yield. If the yield, now at 2.80%-ish, moves higher, the bull frenzy will increase since it will reinforce the long side argument about a steeper yield curve and happy banks. If yield moves flat or lower, however, and the 2-10 spread remains under 255 or lower, banks will have no advantage since the yield curve will not be steep enough, and instead the chart weakness will take over and send the XLF lower. The impact of lower financials on the broad market will be significant since the entire bull argument moving forward is based on happy bank and financial stocks leading the way. If there is no leader, equities will appear exhausted, and the much-awaited more significant market correction would be firmly on the table. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

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