We Are In A Zone Of Purgatory: XLF Is Key

“Until one commits, there is hesitancy, the chance to draw back, always ineffectiveness.” So it is with the market.

These introductory lines were penned by Scottish explorer and author William Hutchison Murray (1913-1996), whose famous paean to boldness, drawn from his own gnarly personality and rugged adventures, remains a universal inspiration.

There’s nothing bold about this market, however. We are in a zone of purgatory, with heaven above and hell below. The accompanying chart of the financial ETF (XLF) holds the key to our collective future.

I say that because it’s hard to conceive of a continuation of this party without the participation of the banks. And it’s the dire sell-off in leading European banks (Deutsche Bank and Credit Suisse) that has everyone worried.

Although the financial sector as whole has not fully recovered from the 2008 debacle, it should be credited with igniting the mega-bull in 2009 and has been playing its part. The main ETF that tracks the financials (XLF), however, has stalled at the 62% retracement (circled on the chart), the well-watched Fibonacci barrier that currently marks the upper boundary of our semi-bullish price channel.

If you watch just one thing, watch the nature of the bounce in the financials over the next few weeks or months. If the ETF shows some animal spirits, that bodes well for a general rally.

If it can break above $26, hallelujah, it should then reach $30. Other key sectors, such as biotech, are also poised to bounce and support such a move. Therefore, barring any exogenous intervention, odds favor a month or two of upside. That’s the good news.

However, a drop below $20 in XLF means institutions are starting to price-in a recession in the U.S., and that would open the other door.





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