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XLF Retraces To Previous Support Level

10/07/09 03:00:44 PM
by Chaitali Mohile

The higher tops could not stop the Financial Select Sector SPDR from retracing back to the previous support level. The fresh bullish rally is likely to move with a depressed mood.

Security:   XLF
Position:   Buy

The Financial Select Sector SPDR (XLF) entered a robust uptrend in July 2009 and formed its first peak at $14.50. An overbought relative strength index (RSI) (14) restricted the rally, and as a result, XLF plunged a few points. The volatility in the sector increased due to the lower tops of RSI (14) and the higher highs formed by the price movement.

The second high was not as sharp as the first one. We can see in Figure 1 that XLF consolidated with the newly formed support of the previous high at $14.50. The moving average convergence/divergence (MACD) (12,26,9) also formed lower highs and lower lows. Thus, a negative divergence of the RSI (14) and MACD (12,26,9) pushed down the sector marginally below the support level (green line) from the third peak at $15.25. During the bearish move, the indicators established support in the bullish areas. In Figure 1, the RSI (14) turned upward with the support of 50 level and the MACD (12,26,9) sustained in positive territory.

FIGURE 1: XLF, DAILY. Although XLF formed the higher highs, the negative divergence of the RSI (14) and the MACD (12,26,9) proved to be a stronger bearish force that retraced the sector toward its earlier support area.
Graphic provided by:
This helped XLF regain its bullish force and surge above the resistance of $14.50. Since the RSI (14) has moved above 50 levels, the current price level would be the best place to trigger a long position. The target would be highly short term -- that is, the previous high at $15.25. The average directional movement index (ADX) (14) that indicated the strong uptrend for the past three months has turned weaker by moving below 25 levels. The tangled movements of the positive directional index (+DI) and the negative directional index (-DI) suggest a consolidated price action in the current uptrend. Therefore, though XLF has initiated the bullish rally and has converted the resistance to support (green line), the price movement is likely to remain range-bound between $15.25 and $14.50.

FIGURE 2: XLF, WEEKLY. The support-resistance line tool shows the exact range for the consolidation of the sector.
Graphic provided by:
The weekly chart in Figure 2 shows the strength of the two candlesticks. First is the bullish engulfing candlestick pattern at the bottom of the chart in March. XLF began a strong bullish rally after the candlestick pattern was confirmed by the reversal move of the highly bearish indicators. The RSI (14) surged from an oversold area, the ADX (14) declined from an overheated downtrend levels, and the moving average convergence/divergence (MACD) (12.26,9) underwent a bullish crossover in negative territory. Therefore, the bullish engulfing pattern initiated a robust bullish rally with the strong support of the bullish reversal indicators.

Since the rally was escorted by the positive momentum, XLF reached $13 without a single halt or consolidation. A big bullish candle formed in early May reflected the bullish force in the rally. XLF remained volatile for the next four months but sustained above the low of the bullish candlestick that is about $11 (see the marked rectangle in Figure 2). We can see that the sector established the support and surged above the high of the candle at $13.25 with a small gap up.

Thereafter, the vertical rally turned sideways. The support-resistance line tool used in Figure 2 shows a robust resistance at the level of $16. Therefore, the consolidation range is $14 and $16 (short term). The RSI (14) has moved vertically upward, highlighting the bullish strength existing in the consolidation. The uptrend is developing with an equal buying and selling pressure in Figure 2. In addition, the positive MACD (12,26,9) has slipped into positive territory. Thus, XLF would continue to move in the bullish consolidation range mentioned previously.

The trade recommended according to the daily time frame can be carefully carried further until the resistance of $16 is hit.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
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