Financial ETF nears substantial breakout, according to the charts

Published Wed, Jul 10 202412:33 PM EDT

The Financial Select SPDR fund (XLF) will be in the spotlight over the next two weeks, as some of its biggest holdings report second-quarter earnings numbers. The charts indicate the ETF could be nearing a substantial breakout attempt. In total, 26 XLF components will release numbers by next Friday. Banks represent 26% of the XLF, which is a lot. However, that means that three quarters of the index is comprised of financial institutions that are not banks. The ETF is comprised of five industries: financial services (33%), banks (26%) capital markets (21%), insurance (16%) and consumer finance (4%). The financial sector, in aggregate, is the second biggest sector in the S & P 500 with a 12% weighting. That pales in comparison to technology (33%), but if the financials aren't doing well, it typically isn't positive for the market or the economy. Over the last year, XLF has been doing well (+32% from the October '23 lows), but it's underperformed in 2024 so far: XLF +10.6% vs. S & P 500 +17%. All that being said, from a technical perspective, XLF is sporting bullish formations across three different time frames. Daily Bullish Pattern First, here's the daily chart. XLF was the best-performing sector ETF on Tuesday, July 9, which pulled it close to the neckline of this potential bullish inverse head & shoulders pattern. Just a few weeks ago, in early May, XLF broke out from a similar-looking formation. While the ETF saw immediate upside follow through for two weeks back then, it failed to achieve the upside objective. It has another chance now. If successful, it would create a fresh new all-time high. That's clearly bullish, but there's a lot more at stake… Weekly Bullish Pattern Despite the constructive price action described above, XLF is net flat since mid-March. While that's been frustrating to sit through for traders eager for higher prices, the sideways action has produced the right shoulder of this potential very large weekly inverse head & shoulders formation. An eventual breakout would target the $55-level. The pattern's left shoulder encompasses the back-and-forth movement from late 2021 through early 2022. This means that despite XLF's strong comeback from last fall's low, it still hasn't fully reclaimed those 2021 highs. This still doesn't tell the full story… Quarterly Bullish Pattern The Great Financial Crisis shook the global financial landscape to its core, and many of the most beaten-up stocks from that period still haven't fully recovered. The XLF, itself, peaked in May 2007 at a price of 38.15. It's trading around 41.50 now. That's a net percentage gain of +8.8% over 17 years. The S & P 500 is +275% over the same period. The SPX finally eclipsed its 2007 high in 2013; the XLF reclaimed its 2007 high in 2021, but that didn't hold. The ETF has done a better job recently, but it's still very close to that last peak. Putting it all together, a successful daily pattern breakout also would help the much bigger weekly pattern break out, which would finally create distance from the 2007 high and prompt a multi-decade breakout. This is why paying attention to multiple time frames is important, regardless of one's personal trading strategy. The very next step of this potential move would be seeing solid reactions. It all starts this Friday. -Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.