A Look at the Annointed Leaders Financials and Housing (XLF)

Many investors, especially in the current environment, are watching the Financial and Housing sector specifically for advanced insights on the direction of the market.

The thinking is that Financials and Housing got us into this mess, and so what happens there will determine whether we get out of this mess or go deeper into it.

With that in mind, let's take a quick chart-look at the XLF popular Financials Sector ETF and the Philadelphia Housing Index.

First, the XLF Financial ETF:

The most recent swing has taken the price to a fresh new 2010 low (and thus 52-week low).  If we take off all the indicators and just note that, then it's a bearish signal.

Keep in mind that the S&P 500 remains above its July low of 1,010 (closing near the 1,045 level today) while the XLF - seen by many to be a potential leading indicator on the stock market - recently pushed to a new low.  That's not what bulls want to see - the XLF making fresh new lows when the S&P 500 is not.

For now, watch the $13.25 price level extremely closely - if we do not get a bounce off that key low, then it will be a tremendously bearish signal for the broader stock market.

Otherwise, we do see a positive momentum divergence building at the low, which argues that we're likely to see some sort of bounce off this level - perhaps back into the $14.00 area or even all the way to the top of the current trading range at $15.00. 

For now, those will be the key levels to watch for clues on the market.

We have an even tighter price level to watch on the Housing Index - $HGX.  Let's take a look at it:

While the Financial Sector - as seen via the XLF - remains in a rectangle trading range - similar to the S&P 500 - the Housing Index is actually trapped within a descending triangle price pattern with a declining overhead resistance trendline.

For now, that's bearish, but that line - and price - is compressing and running into a collision with the horizontal support line at 87.50.  One of those WILL have to break - and an upside break would be a very bullish development (‘hammering out' a double bottom pattern) while a downside break under 87.50 would be a very big bearish development - and would almost certainly correspond with a downside break to new lows in the XLF and a retest of 1,010 and potential breakdown under 1,000 in the S&P 500.

On the other hand, we still see a positive momentum divergence forming on the Housing Index, just as we see in the Financials, so the indicator is hinting at hidden potential bullish strength.

For now, keep these charts handy and watch as price reacts to these reference levels.

Corey Rosenbloom, CMT
http://blog.afraidtotrade.com