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The charts, graphs and comments in my Trading Blog represent my technical analysis and observations of a variety of world markets...
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Monday, October 08, 2012

Financial ETFs vs. Major Indices in U.S, Europe & China

Depicted on the three Daily charts below are a ratio comparison of the Financials ETF to a Major Index in the U.S., European, and Chinese equity markets. They show how the ETF has advanced compared to the Index. In all three cases, the Financials have outperformed the Index.

The U.S. XLF:$SPX ratio chart shows that the Financials ETF is up against formidable resistance and the RSI is nearing overbought territory. The rising 50 sma is still holding just above the rising 200 sma. Any breakout above the last swing high would likely be met with more resistance until the RSI reverts back to, at least, the 50 level. We may, however, see another attempt to make a higher swing high first. Under such a scenario, I'd look for a negative RSI divergence to signal that a pullback may be around the corner, which could then send the RSI back to 50, or lower.


The European EUFN:$STOX50 ratio chart shows that the Financials ETF is nearing formidable resistance; however, the RSI is not yet overbought. Also, the 50 sma has just crossed above the now-rising 200 sma, forming a bullish "Golden Cross." We may see an attempt at a higher swing high. Under such a scenario, I'd look for a negative RSI divergence before considering that a pullback may be around the corner, which could then send the RSI back to 50, or lower.


The Chinese GXC:$SSEC ratio chart shows that the Financials ETF remains firmly in uptrend compared with the Shanghai Index. However, the ETF itself (bottom line chart) is nearing prior major resistance, while the Index (first line chart) remains in downtrend. Both the 50 and 200 smas are in uptrend and the distance between them is widening. The RSI has dipped from its overbought condition, along with a recent pullback in price, but it remains above the 50 level. We may also see an attempt at a higher swing high. Under such a scenario, I'd look for a negative RSI divergence before considering that a pullback may be around the corner, which could then send price down to, perhaps, its 50 sma, or lower, and the RSI below 50.

China is still the wild card of this group, and both their Financials ETF and Shanghai Index are important ones to watch for any signs of further weakening and a potential "falling off a cliff" on the Index. Such a scenario, if left to deteriorate further without a stabilizing influence of monetary and/or fiscal/economic intervention, may have a negative global impact on, particularly, the European and U.S. equity markets.

***UPDATE October 9th: China has injected RMB265 billion of liquidity into the banking system today through reverse repurchase operation. We'll see how much of an affect this has on the ETF and Index and how long it lasts.