In the wake of broader market weakness, the Financial Select Sector SPDR (XLF) sold off violently Tuesday, falling out of a bear flag formation. It also snapped its November 2012 uptrend line, similar to the S&P 500, and it is now trading below its 100-day simple moving average for the first time since November 2012.
On the chart, the break of these important support zones is evident. Given the importance of the financial sector, Tuesday's developments also likely mean more weakness ahead for the broader market in the coming weeks.
As for individual financial stocks, PNC Financial Services Group (PNC) also gapped down and out of a bear flag formation, and it now looks to be accelerating lower.
On the weekly chart looking back to 2006, we see PNC completed a major breakout past a multi-year diagonal resistance line in late April. Supported by the broader market, the stock kept rising, staging another important breakout in July and peaking above the early 2007 highs. (While PNC made a higher high in September 2008, given how quickly it reversed lower, I am using the 2007 high as the better reference point for the time being.)
The July breakout ultimately failed, however, with PNC reversing below the breakout point. Now, a retest of the April breakout point in the mid-$60s is not unthinkable, and in fact, could be healthy through a longer-term lens.
The daily chart below is where we can see the juicy short-side trade setup. Note the three simple moving averages: 50-day (top), 100-day (current support) and 200-day (well below the current price).
With the rally off the November 2012 lows, the stock has some healthy separation between these three lines, allowing swing traders to use them as better reference points. If you compare the current separation in the moving averages to how tightly they were trading in late 2012 and early this year, you can see what I mean.
Since topping in early August, PNC has worked lower in stair-step fashion. Last week, the stock formed a beauty of a bear flag right at its 50-day simple moving average, which it fell out of on Tuesday and landed right on the 100-day moving average.
From here, while the stock could well consolidate for a few days, a break below the 100-day moving average increases the odds of a move toward the mid-$60s, which marks the April breakout point, as well as the 200-day moving average.
Recommended Trade Setup:
-- Short PNC on a daily close below $72
-- Set stop-loss at $73.40
-- Set initial price target at $66 for a potential 8% gain in 3-6 weeks
- PNC Financial Services Group