XFJ Bounces Back

This is the index that suffered the most last year as the stocks were plunging to very low levels. The Financials index (ASX: XFJ) contains companies involved in banking, consumer and mortgage finance, investment banking, brokerage and funds management, corporate lending, insurance and real estate.

From the low of 2,524 points posted in last March, the index has bounced back to the current level of 4,100 points (62% higher). The first key event was the breakout of the descending resistance line occurred in late March (point D on the chart). This resistance line was capping the price action since November 2007 and the historical high point of 7,557 points (point A). Points B and C are lower highs.

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The second key event was the breakout of the horizontal resistance at 3,750 points. This level indeed corresponds to the first Fibonacci retracement ratio of the 16-month decline occurred between November 2007 and March 2009 (between points A and E). Three times the price action failed on this level (once in April and two times in June). But the spike triggered in July cleared this resistance and immediately confirmed it as a new support (see in blue rectangle).

The price action found some support on this Fibonacci level and immediately rebounded. It is probable now that the target on the upside is the next Fibonacci retracement level (38.2%) at 4,500 points. It’s less than 10% higher than the current level.

However a consolidation before reaching this level may occur. A lot of indicators are posting high values and the RSI just peaked an already started to curve downward within the overbought area. This means that a pause is likely before a potential attempt of the 4,500 points. The XFJ might slightly consolidate in a tight range above 4,000 points before an eventual further rise to the enxt resistance.

At 4,500 points, a strong correction is more than likely. On the downside the current support remains at 3,750 points.