ETFs
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 biggest names report their second-quarter results. Charts indicate that the ETF could be poised for a substantial breakout. In total, 26 XLF components will report their numbers by next Friday. Banks make up 26% of the XLF, which is a lot. However, that means that three-quarters of the index is comprised of financial institutions that are not banks. The ETF is comprised of five sectors: financial services (33%), banks (26%), capital markets (21%), insurance (16%), and consumer finance (4%). The financial sector, as a whole, is the second-largest sector in the S&P 500 with a weighting of 12%. This pales in comparison to tech (33%), but if financials aren’t doing well, it’s generally not a good sign for the market or the economy. XLF has performed well over the past year (+32% from the Oct 23 lows), but it has underperformed in 2024 so far: XLF +10.6% vs. S&P 500 +17%. That said, from a technical perspective, XLF has 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 formation. While the ETF saw an immediate two-week rally at the time, it failed to reach the upside target. It has another chance now. If it succeeds, it would create a new all-time high. This is clearly bullish, but there is much more at stake… Weekly Bullish Pattern Despite the constructive price action described above, XLF has been net flat since mid-March. While this has been frustrating for traders hungry for higher prices, the sideways action has produced the right shoulder of this potentially very important weekly inverse head and shoulders formation. A potential breakout would target the $55 level. The left shoulder of the pattern encompasses the back-and-forth movement from late 2021 to early 2022. This means that despite XLF’s strong comeback from last fall’s low, it has yet to fully recover from those 2021 highs. That still doesn’t tell the whole story… Quarterly Bullish Pattern The Great Financial Crisis shook the global financial landscape to its core, and many of the hardest-hit stocks of 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 surpassed its 2007 high in 2013; The XLF reclaimed its 2007 high in 2021, but it hasn’t held. The ETF has done a better job recently, but it’s still very close to that last high. Putting it all together, a successful breakout of the daily pattern would also help the much larger breakout of the weekly pattern, which would finally create some distance from the 2007 high and trigger a multi-decade breakout. This is why it’s important to pay attention to multiple time frames, regardless of one’s personal trading strategy. The very next step in this potential move would be to see some 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 opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, the internet or in another medium. 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 ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MAY NOT BE TAILORED TO YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISION, YOU SHOULD STRONGLY CONSIDER SEEK ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here to read the full disclaimer.