Friday, March 20, 2009

How far will XLF correct?

It's chart voo-doo time.  Let's look at the Fibonacci retracements that have occurred on the XLF since the March 9th low.  There have been 3 fairly classic 23.6% retracements and each time the sector index has recovered nicely to achieve a new high.  Now we are at the 4th successive 23.6% retracement, which of course is deeper than the others.  Will it hold, or are we due for a more precipitous drop?

First bounce off the March 9th low was solid although we heard all the calls of the "dead-cat" bounce.  Remember this was precipitated by Citigroup stating that they have been profitable for the first quarter.

Second retracement after a nice recovery from the first correction.

Third retracement is deeper, but not alarming and a classic bounce with a more sustained rally.

Now we are at the fourth retracement since March 9th and the XLF is at the 23.6% retracement.  We have done a lot of work to get this far with almost 50% appreciation of the sector.  Big news from Citi and a huge injection by the Fed this week helped the burst.  With Friday options expiry coming into the weekend, I would expect a pull back to 50% Fib, which would also coincide with the 50 dMA at 8.25.

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