The Dow Jones US Financial Index led the markets yesterday and that warrants looking at the sector. Why? Simply because this sector has been a laggard. The defined trading range goes back to July 2009. We have traded within the range in an orderly fashion without concern or reason to change. As you can see on the chart of IYF, DJ US Financial Index ETF the range is defined on the high side by $54.50 and on the low side by $49.
Since November the 50 day moving average has almost defined the midpoint line and we have traded either side of it several times. The move higher yesterday pushed the price above this level and potentially defined the next move to the high side of the range. It is also important to note the rise in price off the recent low has come of declining volume. Not the best of indicators for upside conviction. However, the broad markets haven’t done much better on the move.
This consolidation presents trading opportunities, but I don’t see any rationale for a longer term investment. Fundamentally the sector has more problems than we have space to write about. The threat of higher rates from the Fed will impact net earnings and the balance sheet issues are still looming heavily over the sector. For now I would be content to trade the range and take what the sector gives.
As with any investment the key is to define your strategy first. This is an example of trading in a channel or range. Define your entry, your stop and your target on every play and be disciplined in following your strategy. Trading doesn’t have to be complex to be successful.
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Disclosure: Trading opportunities with the consolidation short term