Back in February, the Financial Select Sector SPDR Fund (XLF) was trading about 10% below its all-time high.

Yet the high-profile collapses of Silicon Valley Bank and Signature Bank put XLF under enormous pressure…

In less than a month, XLF dropped 18%.

We checked in on XLF late last month (red arrow in the chart below). And we saw XLF had formed a base and begun to rally. But that rally had recently stalled.

Now, a month later, XLF is still fighting to gain momentum. So today I want to discuss what could happen from here…

Early Stages of a Move

On the chart below, you can see where XLF’s downtrend bottomed out in July last year.

XLF transitioned into a sideways pattern. The long-term 50-day Moving Average (MA, blue line) flattened out:

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

During this sideways pattern, the 10-day MA (red line) crossed the 50-day MA multiple times in both directions.

Most notably, in March, the 10-day MA crossed down through the 50-day MA at nearly a right angle as fears grew that other banks might also be in trouble.

The other thing you’ll notice on the chart is the action of the Relative Strength Index (RSI)…

When the RSI rose out of oversold territory (lower grey dashed line) – as shown by the red lines marked ‘1,’ ‘2,’ and ‘3’ – that coincided with XLF rallying off long-term support (orange line)…

XLF’s rally then developed further when the RSI broke up through resistance (green line) and into the upper half of its range.

However, this pattern broke down with the most recent rally from ‘3’…

Take another look:

Financial Select Sector SPDR Fund (XLF)

Source: eSignal

This time, the RSI initially broke up through resistance… but then the move petered out. It was on the verge of dropping when we looked at XLF on April 27.

From there, XLF drifted lower with the RSI stuck in the bottom half of its range.

Yet just recently, two emerging bullish signals appeared…

1. The RSI has just broken back into its upper band (red circle).

2. After falling this month, the 10-day MA has recently crossed above the 50-day MA.

But while these signals may look promising, it is still very early days for these moves.

So what am I looking for around here?

Sustainable Rally

For XLF to resume its March rally, the RSI needs to gain traction in the upper half of its band. Without positive buying momentum (RSI), it is impossible to sustain any long-term rally.

The next test will be for XLF to break back above its short-term high at ‘A.’

I’ll also be keeping a close watch on our two MAs…

As I mentioned, the 10-day MA only recently broke above the 50-day MA. We’ll need to see the 10-day begin to accelerate above the 50-day MA, with both then tracking higher. That will be confirmation of any longer-term up move.

Yet as I said, it’s still early days with XLF’s move…

If the RSI fell back into its lower range (along with the 10-day MA rolling over), then any emerging rally will be over for now.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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