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Financial ETF Nears Substantial Breakout, Charts Show
The Financial Select SPDR Fund (XLF) will be in the spotlight over the next two weeks as some of its largest holdings report second-quarter earnings numbers. The charts indicate that the ETF may be nearing a substantial breakout attempt. In total, 26 XLF components will report earnings by next Friday. Banks make up 26% of XLF, which is a lot. However, that means that three-quarters of the index is made up of non-bank financial institutions. The ETF is comprised of five sectors: financial services (33%), banks (26%), capital markets (21%), insurance (16%) and consumer finance (4%). Financials, in aggregate, is the second-largest sector in the S&P 500 with a weighting of 12%. That pales in comparison to technology (33%), but if financials aren’t doing well, it’s typically not positive for the market or the economy. Over the past year, XLF has been performing well (+32% from its October 2023 lows), but it has underperformed in 2024 so far: XLF +10.6% vs. S&P 500 +17%. That said, from a technical perspective, XLF is exhibiting bullish formations on three different time frames. Daily Bullish Pattern First, here’s the daily chart. XLF was the best-performing sector ETF on Tuesday, July 9, which brought it close to the neckline of this potential bullish inverse head and shoulders pattern. Just a few weeks ago, in early May, XLF broke out of a similar-looking formation. While the ETF saw an immediate two-week bullish follow-through at that time, it failed to achieve its upside target. It has another shot now. If successful, it would create a new all-time high. That’s clearly bullish, but there’s a lot more at play… Weekly Bullish Pattern Despite the constructive price action outlined above, XLF has been flat since mid-March. While this was frustrating for traders eager for higher prices, the sideways action produced the right shoulder of this potentially very large weekly inverse head and shoulders formation. An eventual breakout would target the $55 level. The left shoulder of the pattern encompasses the back-and-forth movement from late 2021 through early 2022. This means that despite XLF’s strong bounce from last fall’s low, it has yet to fully reclaim its 2021 highs. That still doesn’t tell the full story… Quarterly Bullish Pattern The Great Financial Crisis shook the global financial landscape to its core, and many of the most battered stocks from that period have yet to fully recover. XLF itself peaked in May 2007 at a price of 38.15. It’s trading around 41.50 now. That’s a net percentage gain of +8.8% over 17 years. The S&P 500 is up +275% over the same period. The SPX finally eclipsed its 2007 high in 2013; the XLF reclaimed its 2007 high in 2021, but that hasn’t held. The ETF has done a better job recently, but it’s still very close to that last peak. Putting it all together, a successful daily pattern breakout would also help the much larger weekly pattern breakout, which would finally create distance from the 2007 high and lead to a multi-decade breakout. That’s why paying attention to multiple time frames is important, regardless of your personal trading strategy. The next step in this potential move would be to see solid reactions. It all starts this Friday. -Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: (None) All opinions expressed by CNBC Pro contributors are their own and do not reflect the views of CNBC, NBC UNIVERSAL, its parent company or affiliates, and may have been previously disseminated by them on television, radio, the internet or otherwise. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO PURCHASE ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT THE UNIQUE PERSONAL CIRCUMSTANCES OF ANY INDIVIDUAL. THE ABOVE CONTENT MAY NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISION, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for full disclaimer.