A Textbook Setup
Like the broader market, financial stocks have been in a funk since mid-2015, consolidating sideways forming a couple of interesting bullish patterns during this time. While not illustrated, if you look closely there is both an inverse head and shoulders and/or cup and handle that formed between the 2 red horizontal boundaries. The US market was looking for a catalyst and the elections triggered the move out of the consolidation.
A student who was looking for a close to ideal set up got it with the financial sector ETF, XLF, as you can see in the chart below. Firstly, notice how, during the consolidation, RSI momentum never reached oversold conditions which kept the door open for a big move to the upside. The week of the election price broke decisively above the upper red horizontal resistance on huge volume. It created the biggest white (upside) candle over the past 5 years. In addition, the following week gapped higher, again on the 3rd largest volume day in 5 years. XLF rose more than 20% in 5 short weeks. Also it should be obvious that moved pushed the momentum into overbought territory which, when it occurs, eventually requires the stock to take a breather and unwind the overbought condition as you eventually run out of buyers.
This is what a bull market looks like. It also shows how, unless you were already invested in the position it was virtually impossible to participate in this move because those waiting for a pullback (and who didn’t want to chase) stayed on the sidelines as the opportunity never arrived. Well, at least not until (possibly) now. Notice how price has once again consolidated over the past 4 weeks, going nowhere, but has allowed the overbought RSI to start unwinding.
If you are a believer like the market apparently does that Trump = higher interest rates which is bullish for bank stocks then it’s possible this may just be the beginning of a much bigger move. What has formed since the Trump election is the possibility of a high and tight bull flag signaling this recent move was a midpoint to its end target. Investors looking to capitalize would be looking for continued sideways chop and then a price moving out of the upper boundary of the flag. Ideally, like the initial move, greater than average volume would go a long ways to confirm the setup.
Next Stop 108
With the FED raising interest rates yesterday and setting the expectation there will be 3 more in 2017, the dollar as projected ripped higher and confirmed November 21st breakout from the (blue) rectangle. The ongoing saga of whether the dollar has topped or just consolidating for its next move higher can finally now be put to bed after 95 arduous weeks.
Those that follow know rectangles are my favorite patterns to invest in as the lines for buying and selling are easily determinable, as are the targets. In this case the pattern break and confirmation projects to an upside target of ~$108. On a much longer term view, if this current breakout turns out to be a continuation from a very long term bull flag, that target is north of $120.
I have been talking about the possibility of the USD testing all-time highs since it broke out of long term consolidation in mid-2014. Not wanting to repeat myself but I do because the implications are huge. It is THE elephant in the investment room and should not be ignored. Understanding the intermarket relationships (correlations) between your investments and the dollar will be valuable knowledge and keep investors on the right side of the track going forward while king dollar pushes higher.