Financials

Just from looking at a sector rotation chart, Wednesday I expected Financials to start to rotate in, yesterday afternoon as I was doing the Risk Asset update it happened literally while I had the chart pulled up, the relative momentum in Financials just surged way ahead of the SPX and then the entire market moved.

Beyond rotation there are some interesting parallels in Financials also seen in the market averages.

 The first thing I want to show you is the head fake concept on a larger scale, several months ago we were flooded with bullish descending wedges and bearish ascending wedges. Technical Analysis books will tell you that one price reaches the apex of a wedge, it should reverse. In this case of XLF, price according to technical analysis gurus, should have dropped. This was another trend we saw so often that we just knew better; while traders expected price to act like the TA books have taught for nearly a century, Wall Street adjusted to the predictability of technical traders' responses and while the overall pattern was still good, they were head faked EVERY time, I can't remember one that broke as TA would suggest. In XLF's case, it broke out to the upside rather than falling (the head fake move is in yellow). Since XLF's head fake (remember the large pattern is there for a reason, it is real, it's how the expectations are dealt with in the shorter term that have changed. Traders would have been going short the wedge as it reached the apex, when XLF broke out to the upside (and here's the kicker), Technical Analysis teaches that you should reverse your position on a failed pattern; that means technical traders who shorted XLF because of the rising wedge were stopped out on the breakout, they then saw the pattern as "Failed" and went long, only to be stopped out again as XLF fell. The major price patterns are still good, they are still formed by market action, it's just the shorter term action is manipulated so we have to consider that when looking at the market's current bear flag/ bear pennant.

 Here's the break below support which conveniently is at the ascending wedge's apex. The two concepts here are 1) the volatility shakeout of price when it breaks major support (this is why we short in to strength and don't chase these initial downside breaks, they almost always get shaken out with a volatility ramp up. Second we have a bear pennant that formed in May. Technical traders see this bearish consolidation/continuation pattern and expect it to break down from the flag/pennant area to make a new leg lower that is approximately a big as the first leg that led to the consolidation (from about $15.50 to $13.80=$1.70 drop from the pennant). So we have 2 major shakeout patterns in place in XLF/Financials.

 On the 15 min chart you can see an accumulation area around$14.50-$15.00, as I have mentioned, Wall Street doesn't want to give away their plans so they accumulate in smaller chunks as to not alert anyone. However, the bulk of the positive divergence is at lower prices and at the bear pennant, it' a strong leading positive divergence. If you think about it, this is no different than our own "Phasing in" concept in which we may enter a full position in 3 parts, the first 1/3 or so at the first strong positive divergence so we have coverage, but we leave room to enter at better prices should we get them, if better entries present themselves, we add to the position. THIS IS NOT the same as the losing strategy of "dollar cost averaging" which is a reaction to a failed position, we plan in advance to phase in to the trade and it is part of our risk plan before the first trade is even made, that is much different than averaging down a losing trade in hopes of making it out at break even. If this accumulation that is broken up seems strange, let me just remind you of CHK posted last night, take a look at their 15 min chart below.

 Accumulation at higher prices and stronger accumulation at lower prices, with these large institutional positions it takes time to put them together, therefore they have to average their position, By the way, CHK is up about 3% today, but that's an entirely different subject with its own complexities.

 We see the same positive divergences all the way out to a 30 min chart in XLF as well as the May 1 negative divergence at the recent top.

 Here's the strong positive divergence yesterday that sent Financials in to rotation yesterday afternoon and a current negative divergence on  3 min chart. It appears as if XLF is being held back from breaking out or perhaps they want another shot to pick up more shares at better prices.

 BAC rotated in yesterday with a 2.72% move higher and even more off the lows of the day, today the candle looks tentative with a upper wick showing higher prices today have been rejected, this makes sense with the 3 min chart above.

 Take a look at BAC's 30 min chart, that' a strong leading positive divergence in BAC.

Intraday BAC 3 min negative divergence suggesting they are either not ready to let this and the market break out yet-maybe because of the Euro, maybe because of low participation i the market today on the holiday weekend, maybe because of a 3 day weekend's event risk, maybe because they don't want momentum chopped up by a 3 day weekend or maybe they want to accumulate more or even run a quick downside head fake move.

In any case, the major themes in the market averages, XLF and BAC are all very similar.