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Finance SPDR Stalling And Overbought

07/07/05 02:41:39 PM
by Arthur Hill

After a big run since late April, the Finance SPDR (XLF) has become overbought and at resistance. Time to tread carefully.

Security:   XLF
Position:   Hold

On the price chart, the advance over the last two and a half months formed a rising wedge and retraced 62% of the prior decline (Jan-Apr). The stock surpassed 29 the first day of June, but soon stalled and this level has become resistance. Also notice that this resistance level stems from broken support. Even though the support lows do not exactly match the resistance, there is clearly a zone of resistance around 20.

Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
The relative momentum index (RMI) became overbought last week and confirms that XLF may be nearing the end of its advance. Developed by Robert Altman, RMI is a variation of RSI that incorporates momentum. Notice that a negative divergence preceded the February peak and a positive divergence preceded the April low. A negative divergence has yet to form, but the recent overbought reading makes longs a risky proposition.

Despite the overbought reading and resistance, the stock has yet to break down. XLF is clearly having trouble around 29 and warrants a close watch. A move below the lower wedge trendline and late May low (29) would be enough to turn bearish. This would signal a continuation of the prior decline and the first target would be 27.5 (the April low). Finance is the biggest sector in the S&P 500 and should be watched carefully for clues about the broader market.

Arthur Hill

Arthur Hill is currently editor of, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for and the main contributor to the ChartSchool.

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Date: 07/07/05Rank: 4Comment: 

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