Sponsored Link:
How To Play The Financial Sector
Sector Watch: Earnings Season Volatility Creates Profit Opportunities In Financials And Gold
by Jim Stanton, Technical & Quantitative Analyst
It happens four times a year - and I can’t emphasize enough just how much you need to have your wits about you each time it does. More so than any other time of year.
Since I last wrote to you on April 7 with some solid investment opportunities, we’ve seen a slew of quarterly earnings reports from America’s big dogs. And whether you like it or not, many companies have the power to move the entire market with just one news release.
Take General Electric (NYSE: GE), for example. On April 11, the firm announced earnings that were well below expectations. Result? The hyper-sensitive Dow Industrials threw a hissy fit and the index dived more than 250 points. At that point, it looked like the indexes were headed back down to test their January lows.
But the market is a fickle beast…
The Stock Market’s Standout Performer
Then last week, high-profile companies Intel (Nasdaq: INTC) and Google (Nasdaq: GOOG) stepped up to the plate and delivered better than expected earnings. Result? The Dow Industrials and Nasdaq 100 vaulted to new three-month highs.
This kind of volatile behavior can throw many investors for a loop - whether they think it’s fair or not. But rather than bemoan it, it’s much better to harness it - because it can also present some excellent opportunities to profit, especially if you look at the technical side of the market like I do.
For example, having endured a pretty savage beating for most of 2008, the bulls are now back in control - at least over the short-term. That’s because while some of the indexes haven’t quite taken out their February highs yet, all of them are now trading above the 50-day moving averages.
The standout performer of the bunch? The Dow Transportation Index, which is currently sitting at an eight-month high. The S&P 400 (Mid Cap) index has also traded at new recovery highs.
Watch For This Critical Resistance Level To Gauge The Market’s Next Move
Since January, the stock market has had all the characteristics of a bearish consolidation pattern.
However, with the strength in the Transports, the odds of that being the case have dropped (although it’s still a possibility).
Here are the levels you need to watch for next:
S&P 500: 1,411
Nasdaq 100: 1,928
These levels represent critical resistance areas and if the indexes can close, and then stay above, these levels, the bulls will remain in charge. If the indexes struggle once they reach these resistance areas, a reversal back down becomes possible.
The question is: How do we drill down a bit deeper and profit from this trend?
The Financial Sector Started The Mess And Is Now A Whisker From Critical Resistance
Since the massive financial sector was the catalyst for the market correction that began late in 2007, let’s check out the ETF that represents the sector - the Financial Select Sector SPDR (AMEX: XLF). Let’s turn to the weekly chart…
Having hit a high of $38.15 in May 2007, XLF has traded steadily lower, culminating in price action below $22.50 on March 17 - the day the Federal Reserve and JP Morgan (NYSE: JPM) bailed out Bear Stearns (NYSE: BSC).
Since then, however, it’s traded above that level and is now closing in on a critical resistance level around $27.40.
The highest the stock has come to that level since reaching its March lows is $27.37 on March 24. But the more bullish action hasn’t yet been enough for it to break out of its downtrend regression channel, drawn off the May 2007 highs.
But it’s really close! With the upper channel parked at $27.40, a weekly close above that level should be bullish.
So how about one of the market’s another mega movers?
The Commodities Correction Means An Opportunity In The Metal Market
The U.S. dollar remains mired in a morass of negativity.
However, although it’s still trading relatively close to its lows, it may catch a break because a number of commodities have corrected.
That includes the precious metals, so let’s take a look at the ETF that tracks the price performance of gold - the streetTRACKS Gold Shares (NYSE: GLD).
There’s one dominant color on St. Patrick’s Day: Green. But in the financial market, there was plenty of cheer for all things gold, too.
As the XLF made its lows on March 17, GLD set an all-time high above $100 a share. This isn’t too surprising, given that gold is a great hedge against economic turmoil (and March 17 was full of that!)
But as gold has since lost some of its shine, GLD traded below $87 in April. Yes, it’s rebounded a little since then, but the correction may have further to go. Take a look at the weekly chart of GLD:
GLD has spent the last couple of weeks in consolidating, but is currently trading below its 50-day moving average. This means there may still be some downside left.
Having hit an April low of $86.05, my analysis (using the ESP Profit System) suggests that a move below this level should see GLD decline to at least the $83.20 area. This area also represents a 38% Fibonacci retracement off the June 2006 lows.
Bottom line: If the U.S. Dollar continues to struggle, or if traders decide to liquidate their gold positions for other reasons, the $83 area would be a good level to start accumulating GLD shares.
The Longer-Term Outlook
Longer-term, critical support for GLD comes in around the $73 level. As you can see on the chart, this area not only represents the long-term uptrend line, but also the May 2006 high (this was previous resistance that has turned into support).
There are a number of reasons that could cause GLD to drop to this $73 area. Among them: Some kind of evet that leads to a mass sell off in the gold market… strength for the U.S. dollar… or just a normal correction.
That’s all for this time. Talk to you again in two weeks.
Jim Stanton
Sphere: Related Content
