Financial sector on the edge of leading the equities markets lower

The financial sector hasn't been "leading the markets higher", as you can see from the charts of the XLF (financials ETF), below. On the monthly chart, it has retraced about one-third of its entire drop. That's less than the major indices have done. Aside from Goldman Sachs (GS) which retraced the majority of its own drop and still has a bullish wave count - but is still likely in a fourth wave correction - the overall sector as measured by XLF is faltering. Now it's stalled at resistance and the indicators show it's poised to drop lower. Measuring for a head-and-shoulders drop would target $11.75 which would also be a gap fill, and about the middle area of the previous consolidation. That would be under the 200-day moving average, but there's enough deterioration in the indicators that I'm guessing the 200-day MA may well provide only temporary support. There's also prior swing high price support at and just above $12, which is another reason to expect some temporary price support in that area.

Since GS actually has a bullish wave count still (though it's likely to test the $150's on a drop), I'm not prepared to say the the XLF will go to new lows. Obviously it will depend on how well the other companies in this sector will do. But it is reasonable to think that a drop in XLF will help the broader indices drop lower too. At this point - the XLF already did a pullback up about 62% back to its high of last month. So to negate this bearish outlook, the XLF would have to push yet higher. But dropping under $14, then $13.78, will put the XLF on track for the lower price objectives. It's possible that it may try to reflex up to $14.80-ish the next couple of days, so it's what happens after such a test up that will matter.

The default P&F chart for XLF at Stockcharts.com still shows $21.50 as an objective (which would position it for a 50% retrace of its entire drop), with price support as low as $10.00, maybe $9.50-9.75. So on a drop, if it goes lower than $11.75, then watch for support in the range $9.50 to $10.00. Because falling under that would re-open the door to even more bearish prospects for the financials - and undoubtedly for the broad markets too.

From an Elliott Wave perspective, the rise in XLF looks to me like a 3-wave rise, meaning corrective or incomplete ... Or possibly an initial zigzag in a pattern that can go higher but not necessarily more than a continued bear-market rally. Too soon to say. So for now, just watch for whether it starts lower sometime this upcoming week, and assuming so, what it does at the 200 DMA and eventually $11.75 (or if really weak, around that $9.50-10.00 range).

As for Goldman Sachs - it seems to have shaken off the bear, so that after a fourth wave correction it should move yet higher. And that's not all - it seems to be working out an even larger-scale third wave up that will carry it to new highs. In this case it wouldn't surprise me if GS were to split their stock price, just for public relations reasons if nothing else. But that's just my personal thought. The point is, don't try to fight the GS stock price rise, unless just for short-term swings when you're real sure its wave count is ready for that. For example, its own default P&F went positive again, pointing to a new rally high of $210. Conversely, if it tests and gets support around $150-ish (and even $140 where there's price support), we should be looking for indicators supporting its next buy point. If it instead powers higher from here and therefore on to $210, then we'll have to start looking for when and where it goes into a larger level fourth-wave correction which might just come back to the $180's or as low as the $160's. So don't expect GS to be part of an uber-bearish forecast - not unless something changes drastically. (Only applies to GS, I'm not saying that applies to other companies.)