Depending on where you look, today either looks like a pause before continued downside or a potential reversal. The S&P500 & Dow Jones are under slight pressure and have pierced below their lows from last week while the NASDAQ is enjoying a nice move higher with QQQ currently trading above its high from Friday. SPX looks to be being dragged down by the banks (XLF) while QQQ has AAPL’s continued momentum, and GOOG’s bounce to thank for its advance. While QQQ is performing well, my focus is on the banks (XLF).
XLF has been a great leader for years and it is often said that as the banks go so too does the market. When looking at the charts, that statement is a hard one to disagree with. The banks of course were at the heart of the 2008 crisis and for 3 years in a row XLF’s year-to-date high has preceded a year-to-date high in SPX. XLF peaked in April 2010, 1 month before the flash crash rocked the markets. XLF then peaked in February of 2011, ahead of a ‘sell in May and go away’ 2nd-3rd quarter transition played out. In 2012, XLF’s March & September peaks preceded April and November pullbacks for SPX.
Most recently, XLF failed to make new year-to-date highs with the S&P500 in the month of August. During the 2nd week of August, XLF broke below its late July lows while SPX was holding support in the 1,680′s… we know how that ended up. July 10th provides the reference point as that was the day SPX closed above 1,650 off of its June 24th bottom and both XLF/SPX rallied the next day on their way to new year-to-date highs. XLF is currently testing its July 10th lows while SPX hasn’t yet gotten to its 1,647 low from that day.
XLF needs to not only hold right here, it needs to bounce solidly back above $20 in order for a meaningful bounce to occur in SPX. Moreover, a break above $20.20 is required to start believing that SPX may have formed a bottom with $20.50 being ‘confirmation resistance.’ Meaning that until $20.50 is reclaimed by XLF then the market may have potentially seen its highs for the year. A hard break below $19.85-$19.90 and I think the market pullback that started last week gets significantly worse.
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