Financials: UYG and SKF

(Click On Charts To Enlarge)

The UYG mirrors the price action in the financials. The SKF is an UltraShort ETF.

The Bullish Case For Financials:

1. In Chart #1, we can see that the UYG formed a channel coming off the March 17 low. After the first four data points of the channel were established, the UYG went higher in an attempt to break out of the channel, but it failed right at the top of the pattern, at Green #5. That's called Validation of Resistance. That means that The Market is telling us, "Yep, that trendline connecting the highs at #1 and #3 IS VALID. That's resistance!" When a validated trendline gets taken out, that usually has "some" significance, and we'll see in a moment that it did.

2. The pullback from validated resistance was shallow. Rather than going all-ll the way back for another test of the bottom of the channel, there was a surcease in selling, and the UYG subsequently broke out.

3. The breakout was weak, but notice that on Wednesday of this week, the UYG held above the top of the channel. The was a very minor violation intraday, but it held on a closing basis, re-validating that trendline, but this time, validating it as support. Confirmation of that was the strong white candle on Thursday.

4. Chart #2 is the Ultrashort SKF. On Thursday, it failed at the top of a "possible" Bullish Falling Wedge (pattern in green), then broke down below its channel (pattern in blue) on a closing basis, confirming the bullishness in the UYG.

So, as the charts stand at Friday's close, the financials are BULLISH.

The Bearish Case For Financials:

1. Where the Bullish case would fall apart is if we've got a False Breakout in the UYG and a False Breakdown in the SKF.

Chart #2 shows the possibility of Bullish Wolfe Wave in the SKF, which would be bearish for financials since it is an ultrashort fund.

2. On Friday, the UYG had a "Gap To Crap" opening and slid back to close with a minor gain on a black candle. The SKF gapped down, but reversed and closed just below the channel/"possible" Wolfe Wave breakdown. Those need to be watched for any further signs of a reversal, specifically, the UYG closing back below its breakout in Chart #1, and the SKF moving back inside its channel in Chart #2.

3. Chart #3 shows a "possible" pattern "morph," or change, in the UYG from the apparent bullish Channel breakout that we have in Chart #1, to a Bearish Rising Wedge. What tends to militate against the Bearish Rising Wedge possibility is the fact that the UYG finally has turned it around and is trading above The Cloud (vertical lines) after failing at Cloud resistance quite a few times since last October. No guarantees, of course, but that a plus for the bulls.

4. Chart #4 is the MACD of the SKF (ultrashort). It's showing TWO bullish divergences in the histogram, not confirming the last two lows in the SKF. If the MACD: (a) ticks higher; (b) crosses above its signal line; and, (c) goes up through zero, I believe that triggers Dr. Alexander Elder's (author of Trading For A Living)"Hound Of The Baskervilles" signal. In the novel, the dog DIDN'T bark, so the murderer had to be someone that the dog knew. I'm not sure about why Dr. Elder chose that name for the signal, or even if I've got it right, but at any rate, it would be bullish for the UYG if confirmed by price, and bearish for the financials.

5. We've got a "possible" Bearish Wolfe Wave in the UYG in the Hourly chart posted below (on Friday), so watch to see if it comes back inside the pattern and heads toward the target line at #6.

The target line (#6) in chart #2 is very severe to the upside, so it doesn't seem likely that it ever would be achieved unless there's another shoe to drop in the financials ala CFC and BSC. Still, there could be some kind of upside in the SKF if it reverses higher back into the Wolfe Wave, and particularly if it breaks out to the upside, above the entire patterns.

So, just some things to watch for, in case we had a false breakout in the financials. Unless/until we would see some kind of reversal, they're bullish.