XLF Financials Weekly Chart

Keystone has preferred the short side on banks, to his detriment, over the last few months, although a move back down to the 20-week MA occurs again to begin 2014. The XLF has not been able to drop significantly down through the 20-week MA for about 20 months. Price must show more respect. The tops last summer were easy enough to call with the negative divergence but the down moves did not have staying power due to the BOJ. The easy money policies out of Japan caused the strong US stock market rally last year especially early in 2013, and then in the Fall. The BOJ yells Banzai! and beats the yen lower with a baseball bat causing the year-end stock market rallies in the US and Japan.

Long traders remain optimistic, enthusiastic and complacent continuing to profess to buy the dips and saying the SPX will reach the 1900, 2000 and even perhaps 2100 targets this year. For the stock market to reach these goals, the financials must lead the way. Thus, is the dog wagging the tail or the tail wagging the dog? Are traders moving into financials because the fundamentals are great and the banks will truly lead higher, or, are traders buying financials simply because they hope the stock markets will move higher and if this is the case the banks should lead the way? It is probably more due to the latter so this sets up potential trouble for banks moving forward when the realization hits that banks will not lead the markets higher in 2014.

Keystone has discussed the 2-10 spread, now at 237 (the 10-year yield is 2.67% and 2-year 0.30%) far below the 255 and higher spread needed for the banks to make profits on the steep yield curve. Traders were uber positive on banks as the 10-year yield moved above 3% but that wind has come out of the sales. The chart indicators are weak and bleak so after any positive move in price, further weakness would be anticipated with price perhaps finally testing the 50-week MA at 19.96 to show respect.

The stochastics are now sub 50 in bear territory. See if the RSI follows. The volume participation is not impressive. Traders are likely remaining in the financials hoping for the leadership to arrive but they may be waiting for Godot. As long as traders continue to have confidence that financials will lead the SPX to 1900 and 2000+ this year, XLF remains elevated. Keystone's trading algo, Keybot the Quant, identifies XLF 21.38 as the key bull-bear line in the sand, and you can follow this number all this week, give or take a few pennies. Thus, price has to make a major decision, perhaps today.

If the XLF moves above 21.38 and higher, the SPX will be rallying far above 1800. If XLF remains under 21.38 and leaks lower, the equity markets are cooked. The projection is for lower numbers moving forward for the weeks ahead, however, if the BOJ yells Banzai and stabs the yen lower (dollar/yen higher), then financials will move higher. The central bankers control the markets so they always remain the wild card and driving force behind equities. This information is or 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.

Note Added 4:19 PM:  XLF closes at the high today at 21.34; how do you like that?  Traders are likely waiting for Chair Yellen to speak publicly for the first time tomorrow. Yellen should not cause any disruption but you never know. XLF 21.36-21.37 will tell you the market answer tomorrow (use this level instead of 21.38 but it is all basically the same). Bulls win big above XLF 21.36-21.38 sending the SPX far above 1800. Bears win big below XLF 21.36-21.38 since the main driver of equity markets, the financials, will have stalled out. Watch the XLF since it will tell you the broad market direction after the opening bell.