Can Financials Lead the Market Higher?

12/22/2010 9:30 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

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Chart Analysis: Since November, I have been looking for the participation of the financial sector not only to push the major averages like the S&P 500 higher, but I also felt it was required for a healthier market. When the Financial Select Spyder (XLF) broke out to the upside on November 4, it looked encouraging, but XLF quickly reversed back into the support zone. Finally, XLF rallied impressively in early December and the 50- and 200-day moving averages (MAs) just crossed on Tuesday (see circle). This suggests that XLF could rally to the $16.50-$17.12 area and the April highs. The chart of the SPDR Bank Index (KBE) also looks quite positive as the relative strength (RS) analysis finally turned positive in early December after being negative since May. Upside targets for KBE are at $29.22 and then $30.72. There is short-term swing support at $24.40.

What It Means: Even though the market rally has lasted longer than many expected and the bullish sentiment is uncomfortably high, the participation of the financial stocks could push the major averages higher as we see rotation out of other sectors into the financials.

How to Profit: The mid-cap financials bottomed first as noted on December 3 and the large-cap financial stocks have recently joined the party. The best bang for your buck is probably in some of the regional banks, but aggressive traders who are underweighted in the financials could go long KBE today only (Dec. 22) at $25.36 or better with a tight stop at $24.33. If filled, move the stop to breakeven when KBE moves above $27.

Tom Aspray, professional trader and analyst, serves as senior editor for The views expressed here are his own.

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