The sector fell 0.5% last week and was the second worst performing sector after a 1.7% selloff.
Over the last month, the two sectors have maintained a similar relationship. Energy underperformed, rallying only 1.84%, while Financials posted a gain of 6.81%. In the same period of time, outperformed.
So there is a positive correlation between Finance and Energy and a negative correlation between those two sectors and the Communication Services sector.
Energy and Finance tend to excel when the economy is growing. Demand for energy is rising with a rise in travel and manufacturing and Finance is benefiting from rising interest rates as they boost bank profits. Communication Services is one of the strongest growth sectors as it outperforms most business cycles.
So does the recent underperformance of Energy and Financials indicate that economic growth has stalled?
The Energy Sector has been hit hard by the COVID lockdown in China. Bank stocks on the other hand should benefit from higher interest rates which have risen at the fastest rate since the 1980s. And Friday’s release, which was higher than forecast, could encourage the US Federal Reserve.
The Financial Sector stands on a knife edge. The ETF hovers above the deep drop as the price pushes against its new ceiling since topping out. If XLF closes above $37, it will show the bottom. The pinnacle reached its implied target.
The stock chart of Bank of America (NYSE: ) is a similar picture in the medium term. However, bulls can scratch the ground in front of another charge.
The stock has ranged in a downward bias in the form of a falling flag. This pattern is inherently bullish as bulls lock in profits after a surge of 31.7% in less than a month.
When the price closes below the flag, it closes above the 200-day moving average (DMA), which can be a more reliable measure of supply-demand pressure points at the bottom of the range. If the price breaks the topside of the range, it will indicate that the continuous demand is absorbing all the supply that is in congestion and is forced to find more. Statistically, when that happens, the balance of supply and demand is tilted in favor of demand, resulting in higher prices. If the flag ends, it can also create a double bottom.
Aggressive interpretation will measure the move from Oct 13, $29.31 low, to Nov 11, $38.60 high, a $9.29 move higher than the breakout point.
A conservative interpretation will measure the flag pole between Nov 3, $35.41 low to Nov 11, $38.60 high, a $3.19 move higher than the breakout point. However, the reverse breakout of our flag will also complete the double bottom, the height of which leads to a movement of $7.27 from the $36.95 neckline, targeting $44.22.
Trading Strategy – Long Position
conservative traders have to wait for the flag to complete with an inverse breakout that remains above the pattern for at least three days, close above the November 11 high, and then wait for a move back that will retest the flag’s support.
medium trader will be content with penetrating $ 38 and two days that the price remains above the flag, then wait for the dip for a better entry.
Aggressive traders can enter a long time now, provided they receive a high risk that is proportionate and potentially high gains to beat the market.
Trade Sample – Aggressive Long
- Entry: $36
- Stop-Loss: $35
- Risk: $1
- Target: $39
- Reward: $3
- Risk-reward ratio: 1:3
Disclaimer: At the time of this publication, the author has no position in the aforementioned securities.