It’s About Financials -- Again

Wednesday started out on a firm note (the follow-through we allowed for in Tuesday’s blog), but peaked at noon and faded from there. In the end, the S&P 500 fell 0.8%; 18 of the industry groups were lower for the day.

Over the past four days, the S&P has been up twice and down twice. On each of those occasions, the Financials sector was the leader; it was the strongest sector on the up days and the weakest sector on the down days. Given the fact that the sector is only the fifth biggest among the 10 sectors, its influence may now be more psychology than actual size.

The Financial sector’s rally from its March low is clearly corrective, and on Wednesday it breached its post-March trend line, if only briefly. So, in the sense that we have made the case that the S&P is most likely engaged in a bear market rally, the same can be said for Financials. Thus, if the S&P breaks to new lows in coming weeks and months, it seems unlikely that the Financial sector index will provide a positive divergence.

As for the S&P itself, our near term focus remains on the idea that the sharp decline into Monday’s low was probably not a two-day wonder; we still anticipate lower reaction lows. However, we also still believe that the larger degree intermediate uptrend from the March low has some unfinished business. Thus, the decline earlier this week – as well as any follow-through – should prove to be an interruption to an unfinished bear market rally pattern.

Nearby chart and Fibonacci support is in the 796-771 range. However, from a P&F perspective, important intervening chart and trend support exists at 828-825. First resistance is 851-857, then 861 and above.