Financial Funds

There are Bull and Bear ETFs along with double leveraged ETFs. FAZ and FAS are triple leveraged ETFs for the traders with the hungry appetite leveraged trading. The ETFs that track specifically the Financial Sector are FAS, FAZ, IYF, IYG, SKF, UYG, and XLF.

In this group are the ETFs that track the banks stocks or sector. This includes the ETFs KBE, KRE, and RKH. KIE is the ETF that tracks the Insurance Industry.

Below under “Comments, Analysis, and Recommendations”, I will write my comments for the Financial Funds giving you my chart analysis. I want to give you good evidence as to why I believe the Financial Funds are heading higher or lower. I base my analysis on several technical tools. I use Exponential Moving Averages, Elliott Wave Analysis, Fibonacci, Japanese Candlestick patterns, trend lines, and support/resistance lines.

My goal is to provide you with the information needed so you can make the best trading decisions. My goal is also to help you to become profitable and most of all to help keep you from loosing a ton of money. I will provide you the potential price targets to take profits and stop loss levels to help preserve your trading capital with these Financial Funds.

Click on the desired Financial Funds link below to view the chart.

Comments, Analysis, and Recommendations

XLF shows how the financial sector continues to lead prices lower. Is there any reason to be long XLF? I hope to give you good reasons below to convince you to stay out of this sector on the long side. You can either short it or stay away from it, as if it is the plague.

The price bounced off the 55 EMA 6/21/10 and has not looked back as it has closed down nine of the last ten days. The price is now below the 13 EMA again and the 13 EMA is below the 233 EMA. The 55 EMA is not far from breaking below the 233 EMA.

The 13 EMA has turned to the downside and is pointing strong down right now. The 55 EMA has been leading to the downside since the beginning of May. The 233 EMA is rolling over and is beginning to paint lower points from the day before, even though the slope is not steep, it still indicates the long-term trend is rolling over.

I want to point out these two significant facts with today’s price action. The price sliced below the 6/8/10 low intraday, which indicates selling pressure. The next is the fact that the price also sliced through the 2/5/10 low intraday. This break of the 2/5/10 low is momentous! This is a strong sign that the long-term trend is rolling over to the downside.

My first downside target is around the 12.70 level. The next target is around the 11 level after that. However, do realize that the price could potentially decline through those levels like a dull knife slicing through warm butter if the economic news continues to be negative.

XLF opened with a gap up today and traded higher while filling a gap created with the open on 6/4/10. However, the price proceeded to decline and closed near the lows of the day. The close was also within yesterday’s price action and thus created what is called a key reversal day. This is when you have a higher price that the previous day, but closes down (below the open of the previous day) for the day.

XLF has been weaker than the Major Index Funds has for a while now. This is not a strong signal for higher prices in the Financial Funds. The volume has also been declining as the price has been rising from the 6/8/10 low, another weak sign.

As I mentioned above, the price filled the gap created on 6/4/10 today. Another piece of the puzzle is that the price rose to the underside of the 233 EMA. I expect this combination to be strong resistance. It is no telling how high the price will go if the price has a considerable close above the 233 EMA. I do not foresee that happening with what I see right now.

XLF is in a very critical juncture right now. The corrective process that started with the 5/21/10 low ended with the 6/3/10 high. This is clearer using the 30-minute chart. The decline from the 6/3/10 high to the 6/8/10 low has been a clear Elliott Wave impulsive 5-wave pattern down. The move up the last three days is a double zig-zag. A decline in price breaking the 6/8/10 low should be coming soon.

There is an unfilled gap with the open on 6/4/10. The price could still try to fill that gap, although it is not necessary. The corrective pattern up so far could potentially be complete are nearly so. The next wave down should start soon, probably tomorrow. The decline should be quick and deep.

XLF actually traded below the 5/25/10 low today, confirming the trend down has resumed. My first downside target is the 12.75 area. This target is arrived by using the Fibonacci Price Extension. The 12.75 area is the 100% extension of the previous leg down. The next target is the 161.8% extension around the 11.30 level. The 11.30 level is also good horizontal support when you look to the left of the chart.

XLF potentially hit a temporary bottom today. If prices are heading for lower prices, then the price must stay below the 5/11/10 high. If the price breaks that level, then the price action over the last month is a correction and prices are heading to higher highs.

I expect the price to challenge the 233 EMA and even the TAZ of the 13 and 55 EMAs in the next couple of days. If the price takes out today’s low, then the next downside target is the 11.00 level. There is support around the 13.50 level, but I do not expect it to slow the next decline very much. The reason I say that is due to the potential Elliott Wave count. There is a potential 3rd of a 3rd wave coming, which indicates a sharp decline. And if that is the case, the 13.50 level will be cut through like hot butter.

The Financial Funds have gone straight up the last couple of weeks. I have said in the past that the Financial Funds were lagging the overall market. Well, they have caught up in a big way! However, the price of XLF has been range bound between 13.50 and 15.50 since August 2009.

One thing I want to point out is the price action on Friday. The price of XLF gapped up on the open, but fell the rest of the day to close near the lows of the day. It actually closed down for the day, which created a bearish outside day. The volume was relatively strong on the down day compared to the last couple of weeks.

The above price action and the intraday high were very close to the 10/14/09 high. Could this be a double top? We will have to wait and see. A decline below the 2/25/10 low will be a sign that the price is heading much lower. A clear five-wave decline will help confirm that a potential double top is in place.

Be a smart trader!

Craig Wells

The Financial Funds traded higher and made the 76.4% Fibonacci retracement level. The candlestick for XLF today was bearish even though it closed up. It traded higher into the retracement level, but traded near the lows for the session. This is a sign of weakness.

With the retracement level of 76.4% and the price action today, the price must decline soon if my Elliott Wave interpretation is correct. The 1/7/10 high is the critical resistance and the price cannot break that level if my count is correct.

Look for a five-wave decline before jumping in on the short side. Waiting on a five-wave pattern will help prevent those annoying small losses.

Be a smart trader!

Craig Wells

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