Tuesday, March 04, 2008

Deconstructing the XLF - Part 2

This is an update of my previous posts last week on the XLF, XLB and QQQQ. What's dramatic about the XLF is the jump in short interest for last week's chart. While such extreme readings are typically regarded as bullish, there is some evidence that the bottom in selling in the financials has yet to be seen.
The upper chart and the lower two are my 3 linear regression studies (30,11,3) of the daily, weekly and monthly bars. The indicators in the lower chart panes are described in the blog side panel to the right. The charts are TC2007 format.
The weekly chart shows a steady deterioration of price since mid-2007 with the LR30 lower channel band providing a mean for the XLF for the past 4 months. Also note the increase in volume that began back in July 2007 and the subsequent volume spikes at each of the intermediate low surges. The lower indicators are negative and until the XLF is able to stabilize at the mean of the LR30 channel (about $ 28), the trend can be expected to slope down.

The monthly 3 LRs study shows how far the XLF has fallen, as it now sits at mid-2003 levels. The monthly bars also dramatically reveal how fast the XLF has fallen, with no precedent for the wide range bars seen in 2008. As with the weekly, all the technicals are headed down. Extreme caution is advised for near term trading of the financials. Although the XLF's are down 33% from their 2007 highs, $21 looks like the next support level if things really get ugly and that's only 15% below current prices.

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