More Upside Still Likely For the Financial Sector

By Jim Donnelly, Olson Global Markets

The financial sector, including money center banks, investment bankers, insurance companies and brokers, has experienced a solid and well received turn-around to the upside since the depths of this past year’s devastating selloff.

And while Friday’s last hour pullback (particularly in bank stocks) may portend near-term weakness in the days just ahead, more upside price activity is likely to be achieved over the intermediate term.

From a technical perspective, the Financial Select Sector SPDR Fund, whose ticker symbol is XLF, has already formed of a bullish reverse Head & Shoulders pattern that targets an eventual move up to the $20 area. Friday’s $14.35 close, which sits solidly above former “neckline” resistance at $13, nevertheless caused daily technical studies to move into an overbought condition.

Although these technical conditions raise the possibility for a pullback over the near-term, to “retest” neckline support at $13, such an event would likely present another attractive buying opportunity for financial stocks. Bullish technical divergences continue to support expectations for further gains over the intermediate-term with momentum buying clearly present.

Unless the fundamental picture of the financial sector begins to sour once again, a pullback toward the $13 area on the XLF would look like a “buying” opportunity from this vantage point.

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