With an extremely oversold financial sector, a bounce of some sort is possible at any time.
The SPDR Gold Trust (NYSE: GLD, Stock Forum) moved quietly higher on July 14 as the SPDR Financial Select Sector ETF (AMEX: XLF, Stock Forum) moved to a not-so-quiet new low. The combination of events suggests that the U.S. Treasury and the Federal Reserve convinced no one that Fannie Mae (NYSE: FNM, Stock Forum) and Freddie Mac (NYSE: FRE, Stock Forum) are likely to survive in their current forms.
Still, even as we never fight the trend, it’s important to keep an open mind. And with an extremely oversold financial sector, a bounce of some sort is possible at any time. Let’s have a look:
XLF has taken the brunt of the misery in the financial markets over the last twelve months. The ETF has lost over 50% of its value since October 2007.
So if there is a bounce at some point, it could be a bounce that lasts a while and goes a long way. The problem is that it could fade just as fast, as sellers would likely take the rally as an opportunity to get back some of their losses, if they happened to get caught in the decline.
But, humor us for a moment. If there is a bounce, a first move back could take the ETF back to the 24 area, which could be a 33% improvement from the July 11 close. Yet, that’s likely a place where whole lot of selling pressure may be unleashed.
The question for traders is whether they play this bounce or leave it alone. To be sure, the ETF should open at a fairly high premium to its Friday close, given the way the market is reacting to the Fannie Mae news.
So the best thing to do for now may be just to watch and see what happens and stay patient with XLF, as you ride the trend higher with GLD.
