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Tuesday, May 24, 2011

The Turd in the Cocoa Puffs

Long term, financials have a dim future (XLF will be the sector wearing a name tag when it grows up.)

Back on May 3, I noticed XLF was running into heavy resistance at 16.40 and started looking for a drop to the mid-15s.  XLF fell to 15.67 by the 17th, a decent 4 1/2% return for 2 weeks.

XLF did a little pirouette, then sold off even more with the rest of the market.  It hit 15.39 this morning.  Which is great...right?

The only turd in the bears' cocoa puffs is it's now fallen enough to have formed a nice big harmonic pattern: a bullish Bat.  A valid Point D could be at the current .618 retrace (15.44) or the .786  retrace (14.96).

Best seen on the daily chart, it could potentially take prices back above 17.  Of course, harmonic patterns sometimes fail.  The sell off might continue and XLF could be flipping burgers by next Friday.

Long-term investors probably need not worry, but traders might consider taking profits or, at the very least, placing tight stops until the near-term picture is clearer.

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