Pullback Looms for Big Bank ETF

The Financial Select Sector SPDR (XLF) , the largest financial services exchange traded fund by assets, ranks as the third-best of the nine SPDRs on a year-to-date basis. Only the consumer discretionary and health care equivalents have topped XLF.

The $15.5 billion XLF is also this year’s top asset-gathering sector ETF, but those superlatives may not be enough to keep the ETF from some negative price action in the near-term. [Heartache Awaits Financials ETF]

“The S&P 500’s weakness today has carried trading back beneath the upper trendline of the bearish wedge. Closing beneath that line, currently rising through 1744, would seal the blow-off. Then we would look for deterioration down towards lower channel support, around 1665. Breaking that point would activate the target of the wedge, down to the pattern’s foundation at 1550. That would ensure a thorough test of the 200-day exponential moving average, an average which is long overdue a visit,” said Tarquin Coe of Investors Intelligence.

That is important because financials are the second-largest sector weight in the S&P 500 at 16.4% behind technology at nearly 18%.

XLF currently trades 3.4% above its 50-day moving average and 9% above its 200-day line. Since April, the ETF has moved below its 50-day moving average on four occasions only to bounce back soon thereafter. [Traders See More Downside in Bank ETF]

XLF “is failing at the top of a four month price range. A drop is now expected down towards the bottom of the range, around $19.50, as marked out by the August and October lows,” said Coe. “The fund has underperformed the S&P 500 since July and that is continuing today. In a healthy bull market this area would be providing leadership and the fact that it has lagged is another reason not to trust the recent break to record highs by the general market.”

Coe also is not too enthusiastic regarding Goldman Sachs (GS), having recommended a short trade in the new Dow component today. Goldman is XLF’s ninth-largest holding with a weight of 2.6%.

Other top holdings in the ETF include Berkshire Hathaway (BRK-B), Wells Fargo (WFC), J.P. Morgan Chase (JPM) and Citigroup (NYSE: C).

Financial Select Sector SPDR