|The Finance Sector, as represented by the Financial SPDR (XLF), declined sharply from early March to early May. XLF broke below the Sep-03 trendline and its March low with a 10% decline (red arrow). The recovery over the last few weeks has been sharp, but it looks like a rising flag is closing in on a reversal zone. Why a reversal zone? Because the advance has retraced 62% of the prior decline and is nearing the trendline extending down from March.|
|Figure 1: Daily chart of SPDR - XLF.|
|Graphic provided by: MetaStock.|
|Even though AIG held above its March low and held up relatively well over the last few months, the current pattern could evolve into a head and shoulders reversal. The left shoulder formed in February/March, the head in April, and the right shoulder in June. Notice that volume on the right shoulder advance was relatively low (blue arrow). The advance was low on fuel and this increases the odds of a failure at or below the prior highs.|
Figure 2: Chart of AIG.
Keep in mind that this head and shoulders pattern is a "potential" bearish reversal until confirmed. Neckline support is set at 68.70 and is confirmed by the trendline extending up from March 2003. A move below 68.7 would confirm the head and shoulders and project further weakness to around 60 (gray arrow).
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