Popular ETF Poised for Major Move

06/10/2011 8:00 am EST

Focus: ETFS

The market’s potentially most-out-of-favor ETF is dropping into a major support zone, and one trader is eagerly watching in anticipation of a move higher.

During the past four months, we have seen the financial sector (banks) under selling pressure. With real estate prices continuing to fall and foreclosures picking up speed again, investors have not been overly interested in holding bank stocks, and as we all know, without the financial sector moving higher, we cannot expect the broad market to make any significant moves higher, either.

If you take a look at the financial sector ETF, the Select Sector SPDR - Financial (XLF), you will notice that it’s now trading near a major support level (fair value) where most shares changed hands in the past.

With this sector sliding 13% from the highs in February, and given the fact that it’s making a parabolic drop into a support zone, I can’t help but think a bounce is very likely to form soon.

Here’s a daily chart of XLF:

chart
Click to Enlarge

With the financial sector nearing major support and the S&P 500 staring to show signs of a bottom, I will admit that my heart is starting to pound in excitement for an entry point.

I am really hoping that this week, we see another sharp drop in stocks, which should spike the Volatility Index (VIX) up to 21 or higher. If we can see this take place, then I will be taking a long position to catch a two- to 15-day bounce in the broad market.

The chart of the past ten trading sessions below shows a price and volume pattern which typically leads market bottoms. I’m keeping a close on things these days.

chart
Click to Enlarge

NEXT: Silver and Gold in Focus

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Silver and Gold in Focus

Silver got a big haircut last month, falling from $50 down to $33 per ounce. Ever since then, it has been trying to form a base, which would act as the next launch pad for higher prices.

So far, it is looking good, but there is a key resistance level to break through before the fireworks can start. Keep your eye on the silver bullet!

chart
Click to Enlarge

Gold is back trading up near its high, but it is starting to struggle with resistance (sellers). We could easily see gold pull back to the $1520 area before taking another run at resistance.

chart
Click to Enlarge

In short, investors are getting very nervous because of the six-week selloff in stocks. There have been some technical support levels broken on the S&P 500 and other indexes, and it’s these broken levels which have investors running for the exits.

The thing is that this type of selling happens every year, generally two to three times. During a bull market, I like to see fear in the eyes of investors. Until we are proven wrong about buying extreme oversold dips, they continue to be my focus.

Also, if the financial sector can find a bottom and start to rally, then we will see higher stock prices across the board in the coming weeks.

I am currently neutral on metals, oil, and the dollar, but I’m getting bullish on financials and the S&P 500 as they move lower.

By Chris Vermeulen of TheGoldAndOilGuy.com

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