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Financials’ Trade Defensively; JPM on the Ropes

David Becker
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The Finance SPDR came under pressure on Monday after JP Morgan (NYSE:JPM) , its third biggest holding, fell over 2%. JPM warned the trading revenue in the second quarter would be down around 20%. This warning comes on the heels of negative news out of Bank of America (NYSE:BAC) last week. JP Morgan gapping down and testing support in the 54.5 area. This is the second gap down in four weeks. Even though support is at hand, a move above 56.5 is needed to fill this gap and suggest a successful support test.

JPM will likely test support today and a close below $54, would likely generate a test of the December lows near $51. Momentum has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread. The index moved from positive to negative territory confirming the sell signal. The RSI (relative strength index) is moving lower with price action, reflecting accelerating negative momentum, while printing near 32, which is on the low end of the neutral range and just above the oversold trigger level of 30.

Despite down gaps in key components, the Finance SPDR (XLF) remains in an uptrend overall and the AD Line for XLF hit a new high on Friday. The XLF hitting a new high in mid-March after falling back towards the June trend line in mid-April. The ETF got a bounce off this trend line Monday, but the three-week advance is looking like a rising wedge, which is potentially bearish. A break below wedge support would signal a continuation of the April decline and project a trend line break.

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