The Technical Case for XLF Ahead of Bank Earnings

October is historically a rewarding month for the banking ETF

Oct 10, 2017 at 1:21 PM
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Big banks have been some of the main beneficiaries of the "Trump rally," with investors pricing in expectations for less strict regulations on Wall Street. Further, the Financial Select Sector SPDR Fund (XLF) has moved higher in tandem with expectations for a third rate hike in 2017, with the CME Group's FedWatch tool now predicting an 86.7% chance that the U.S. central bank will lift its benchmark rate by 25 basis points at the December meeting. It is with this in mind, as well as the round of bank earnings that will begin trickling in next week, that I will outline a number of logical "levels of interest" for XLF.

XLF just wrapped up its fourth consecutive weekly gain -- which represents the fund's longest such streak since late January/early February -- and on Friday touched its highest point since the financial crisis, peaking at $26.46. And while XLF has been barreling higher -- and racking up some of the biggest monthly inflows, per -- option buyers have been clamoring for calls at the fastest pace in more than a year.

The ETF's 10-day call/put volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) indicates speculators have purchased to open more than nine XLF calls for every put in the past two weeks. Call open interest is now higher than 71% of all other readings from the past 12 months, with about 2.2 million contracts outstanding. On the other side of the coin, put open interest of just over 2 million is in the tepid 18th percentile of its annual range, according to Trade-Alert.

Yet, it's worth noting that XLF is trading above notable call open interest in the October, November, and December series, as well as several other key price points. And, historically, the month of October has been kind to the ETF, which has averaged a monthly gain of 2.1%, representing its third-best month of the year, according to our Quantitative Analysis department. However, does this mean the ETF is "in the clear"?

Below are what I consider to be XLF's "level of interest" to the downside, some of which could act as support on pullbacks:

  • $23.25 - year-to-date (YTD) breakeven
  • $23.79 – 50% return from February 2016 low
  • $23.85 – 5x March 2009 low
  • $24.10 – February 2008 high
  • $24.50 - home to XLF's 10-month moving average, which "championed" a steady three-year rally from 2012 to 2015
  • $24.80 - area of resistance until 2005, and about 20% below XLF's 2007 peak
  • $25 - notable call OI in October, November, and December series
  • $25.58 - 10% YTD gain
  • $26 - home to peak call OI in October

I've pointed out on many occasions the importance of tracking YTD percentage changes for market indices, sectors and individual stocks, as various levels of round-number gains on a YTD basis have proven their value time and again as markers for support and resistance. Although XLF is trading above the 10% YTD level, as noted above, the overhead $27.90 level would represent a 20% gain for 2017. Also on our radar "to the north" of XLF:

  • $27.90 - 20% YTD gain
  • $30 - about 2x XLF's August 2015 lows
  • $30.97 - XLF's 2007 ATH

As alluded to earlier, bank earnings will begin to roll in this week, and will undoubtedly determine XLF's price action in the short term. While this chart does not represent a price forecast for the bank ETF, it stands out that with XLF closing Friday at $26.35, there are multiple layers of potential support to the downside, while there appears to be a possible "clearing" overhead.

XLF chart COW Oct 6

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, October 8.

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