XLF Financials ETF Daily Chart; W-Pattern Bottom; Potential Island Reversal

That XLF chart has an abstract flavor and essence. Jackson Pollock got nothing on Keystone. That blue W-pattern bottom is interesting. It is a very nice bottom worthy of a whistle. W's are one of the most powerful bullish patterns in trading. If you are a novice trader, you can spend time looking through daily charts looking for W's. Keystone knew an options trader that only did that for many years. When the W forms below the 50 or 200-day MA, it is even more powerful and when the W forms completely below both moving averages, it is typically a rocket ship ready to explode higher. 

The blue W in the XLF daily chart above has the 50 and 200 slicing through it but you can get the vibe that better than one-half the pattern is below the moving averages. Therefore, you know price has potential to rally strongly. Plus, the banks were receiving negative press at the time and not in good favor (analysts are always wrong at the turns). The green lines show the indicators sloping higher, positively sloped, but it is not possie d because the XLF price did not make a lower low at Halloween.

Keystone went trick or treating as himself on Halloween and the neighbor said take your mask off, then the other neighbor said you're too old to be Halloweenin'; he went home and all that was in the pillow case was a lump of coal. If XLF would have made a lower low in price that would have set up positive divergence and then you knew a rocket ride was coming but with all indicators sloping up, and price almost making a lower low, you knew something positive was cooking.

The bottom of the W is 23.0 and top is 25.5 so the difference is 2.5 so the upside target is 28 if price breaks above 25.5. Whoosh. A huge gap-up occurs on happy bank talk and 28 is easily attained. The gap-up places price on an island shown in the sandy orange color. XLF is laying on the beach all day hoping people buy. There is a coconut tree on the island to keep XLF company. If price begins dropping and falls to 26.5, XLF may immediately collapse to 25.5 and then drop lower (falling back down through the gap). This would be called an island reversal pattern.

XLF may like it on the island. It may come down to test the shoreline (top of gap) and then decide it wants to stay there and enjoy the coconut tree longer. The other outcome is that price would fail at 26.5 and simply move lower down through the gap filling the gap. The island reversals are more likely if price makes several touches of the shore line before falling through so watch to see if that happens going forward. The above is a cheesy island pattern but it highlights the importance of that gap. Price will visit that gap again as per the above scenarios.

The red rising wedge, overbot conditions, and universal neggie d across all indicators creates the spankdown off the top. Bring up the XLF 2-hour chart and you can get a better look at that top. On the 2-hour you can see the smack down, the downward-sloping channel, and then the falling wedge and possie d starting to form over the last couple days. The 2-hour chart hints at one more move lower to test the low from 2 days ago and XLF is negative in the pre-market with S&P futures off -30.

The indicators are weak and bleak wanting lower lows in price on a daily basis, however, the stochastics are oversold and the histo is possie d so they will conspire with the buoyancy on the 2-hour to probably create a little lift for a few hours, or day, but then price will likely roll over again.

The Keybot the Quant algorithm is short and tracking XLF 29.11 as a critical bull/bear line in the sand. Lo and behold, the 50-day MA is 19.10 and price bounced from there during the hump day selloff. Obviously, XLF 29.10-29.11 is for all the marbles.

As stocks sell off this morning, watch XLF. If it drops below 29.10, the stock market is in trouble and the selling will continue going forward. If the market sells off but the XLF 29.10 support holds and XLF becomes buoyant, you will see the broad stock market rally as well. It is all on the banks shoulders although XLF is also a mix of insurance companies and other thieves like that.

XLF probably tests the 29.10 support and likely finds buoyancy for a few hours perhaps into the weekend. However, this will probably not last long and the XLF will roll over again due to the weak and bleak chart indicators above on the daily basis. The XLF weekly chart topped out with neggie d as well which is a bad sign going forward. Ditto the monthly chart. XLF does not look good going forward on any timing basis except for the hourly chart today. If a little bit of buoyancy does show up and you are in XLF long that would be a good time to exit stage right. Keystone does not hold any position in XLF long or short and is not playing in the bank arena currently.

This chart is important because that XLF 29.10-29.11 tells you which way the stock market is headed. In the pre-market, XLF is down -0.6% to 29.35. Bears need another 25 cents to create market carnage. Bulls are puffing-out their chests laughing at bears saying they don't have enough strength to push XLF lower. Who will win today? 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.

Note Added 9:40 AM EST: XLF slips to 29.23 the LOD. Bulls are singing Hang On Sloopy, Sloopy Hang On. SPX 3744 down -1.2%. VIX 33.55. This is for all the marbles. Watch XLF 29.08-29.11. This tells you who wins going forward.

Note Added 9:49 AM EST: XLF is at 29.31 with LOD at 29.22. Bears need to jab down through 29.22 so they can set their sights on that 29.10-ish failure level. XLF should make a second pulse lower now and this will likely tell you how the whole day goes. SPX 3758.

Note Added 10:43 AM EST: XLF is at 29.34 with LOD at 29.22. Bulls push higher to 29.55 but price slumps over. SPX 3764. VIX 30.22. The cat and mouse game continues. Stocks will ride a Highway to Hell if XLF falls through 29.22 then 29.10-ish. Bears bring it down to 29.29 but that does not cut the mustard. The longer the bears fail at pushing financials lower, the higher likelihood that stocks will become buoyant.

Note Added 10:53 AM EST: SPX 3765. VIX 30.56. XLF 29.37. It looks like the bears don't want it. Do you want it or don't you, bears? It's  there on a silver platter. All you have to do is go down through XLF 29.10.

Note Added 12:15 PM EST: XLF 29.09. Goodnight Irene, Irene goodnight.

Note Added 2:27 PM EST: SPX 3717. VIX 33.90. XLF 29.04. Check that out. Do you see the back kiss? XLF comes back up to 29.10 testing resistance, that was support this morning, and price is spanked back down, hovering at 29.04 now. A backkiss failure like that is typically extremely bad news. Willie usually shows up to tell you to turn out the lights, the party is over. Look at that. XLF 29.03.... 29.02 ....... 29.00  ..... high drama....