Saturday, October 16, 2010

Waiting For Direction In The XLF

With the market action in the broader indexes confusing so many traders, it may prove helpful to take a look at the financials. The XLF sports a clear 5 wave advance from the March 2009 low. I originally was looking for a double zigzag upward correction, but when the July low undercut the February low, it eliminated that view.

Now, we can see that the XLF is in a 3 wave correction that has probably just completed wave B up and is beginning wave C down. Once wave C down is complete, wave (C) up will follow. Of course, wave (B) could morph into a more complex correction, but either way, it supports the view that another powerful leg up in stocks will be seen next year, if it is not underway already.

At the moment, there are a couple of alternates to be aware of. First, wave B up may not be complete. The rally in the broader indexes could pull the financials up with a retest of the August 25 low to follow before wave (C) up begins. Or second, wave (B) could already be complete as wave C down could have bottomed on August 25 and wave (C) up is underway now. Neither of these alternates seem to fit the recent action in individual stocks. BAC has already broken down below the summer lows, JPM and WFC appear ready to break their lows next week. And we have an unresolved issue with the foreclosure moratorium.

The decline from April to July was 2-1/2 months. If the XLF topped on 10/13, then it would bottom near the end of the year if wave C = wave A in time. This should coincide with a low in the broader markets and an opportunity to catch the next big move, but if the XLF breaks out to the upside next week, the bulls will be in complete control and a deeper correction in the broader markets will be much less likely.

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