Since I expected Financials to be one of the primary drivers of this bounce, what happens there is important, just as important as the market updates. I will say though that rotation in to another sector like Tech may very well occur before we are done with this move. So far Financials are blowing Tech out of the water.
Lets look at Financials and the leveraged long and short financial ETF's as this gives us a better sense of confirmation.
As far as technical concepts go, this bearish ascending wedge, according to decades of technical analysis books is supposed to break down as the wedge reaches its apex, we haven't seen this happen in years, yet technical traders still believe and follow their dusty TA textbooks. Instead, while the larger pattern is still valid, we almost always see a head fake move that runs counter to what technical analysis teaches, in this case instead of breaking down at the apex, we see a breakout. According to technical analysis, this means the bearish ascending wedge is a failed pattern and traders jump in long as they are taught to do on failed technical patterns.
a closer look shows a strong breakout day from the wedge, that removes any bearish bias and tells traders the pattern is failed. However, Financials didn't do much after that breakout and instead went largely lateral, the small red trendline is where the wedge fails and the rule of wedges is "they retrace their base". Note the bounce in financials came right at that important trendline. What I consider to be the larger part of a head fake top has the support line at the large red trend line, this is where I think Financials are headed (above the TL). XLF made it through gap resistance and the upper yellow trenline would be an ideal target.
Long term, the daily Money Stream chart shows Financials are in longer term trouble, QE1/2 masked that weakness by pumping liquidity in to risk assets, the divergence at Q1 2010 sent financials lower, the leading negative divergence through 2011 sent financials lower and now we have an even deeper leading negative divergence in 2012.
Daily 3C shows a similar situation.
The XLF 5 min chart remains in line with trade thus far.
The 1 min is already showing a negative divergence
And that has flowed to the 2 min. As the 2 min becomes weaker, it will flow to the 5 min.
This is a 2x leveraged inverse (short) ETF, SKF. The 5 min chart is still in line, but...
The 2 min chart above is FAZ, a 3x leveraged Inverse bear financials ETF, it is already showing signs of positive divergences. Remember that Wall Street's positions are MUCH larger then ours and thus they have to start accumulating earlier, they can't put in a 10 million share order right at a reversal without sending FAZ flying.
Note the 1 min chart is in 2x leveraged Financial short, SKF is stronger then the 2 min below, it is flowing in to the longer 2 min chart, also note when the divergence started, similar to when the negative divergence in the market started.
SKF 2 min
FAZ, (sorry for the charts not being in sync, they uploaded this way) 5 min is still in line like XLF, so the divergences are starting and they should continue to progress. A positive divergence in a bear financial ETF would confirm a negative divergence in XLF or a bull financial ETF.
Speaking of leveraged Bull financials ETFs, here's FAS 3x leveraged long, it, like XLF is showing a 1 min negative
The 2 min negative is just starting
The 5 min remains in line.
The bottom line, all the charts are confirming each other, we have the start of negative divergences in financials and positive divergences in bear financial ETFs. This also confirms the broad market averages' action.
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