Financial Stocks Set Up for a Bullish Pattern Not Seen in Nearly a Decade, According to Chart

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Financial stocks have been on fire so far this year.

The XLF financials ETF has risen more than 17% over that stretch, roughly double the gains by the S&P 500. A shockwave from the Archegos margin call news last week failed to deter the rally in the group.

Matt Maley, chief market strategist at Miller Tabak, said the stocks may succumb to some short-term weakness after that rally.

"They've become very, very overbought a couple of weeks ago," Maley told CNBC's "Trading Nation" on Tuesday. "You look at its RSI chart, relative strength index, on a weekly basis, it's still quite overbought. The last three times it got this overbought, it took a long time for it to really work off that condition and bounce back."

The XLF ETF trades at 72 on its RSI, an overbought condition it has not seen since January 2018. Any reading above 70 suggests an asset is overbought.

Still, Maley said the longer-term setup looks incredibly strong for the financials.

"The 50-week moving average is getting very close to the 200-week moving average. In other words, it's getting very close to a golden cross on a weekly basis. Golden crosses tend to be bullish on a daily basis on the charts, but when you get it on a weekly basis, it's even more so. In fact we haven't seen one of those crosses since 2012," said Maley.

"That time, we'd also seen a big rally, and when the golden cross took place, it extended to a much further rally over the next several years," Maley added.

A golden cross is formed when a 50-period moving average moves above the 200-period. It is a bullish formation that suggests an accelerating trend to the upside.

From June 2012 to a peak in August 2015, the XLF nearly doubled in price. Maley said he'd be looking to buy the group on weakness, while keeping an eye on whether a golden cross is seen in the charts.

Steve Chiavarone, portfolio manager at Federated Hermes, is also betting on long-term strength for financials. He said rising interest rates and a reopening economy should trigger even more gains.

"When you've got something that's as depressed as some of the cyclicals, and the financials were, you can get a big percentage move and still not be back where you were prior to that kind of crisis event and I think that's the scenario for financials here," Chiavarone said during the same interview.

After hitting a peak in February 2020, the XLF tumbled 44% to a trough in March.

"You've got a lot of stimulus coming through the system, more likely to come, and that puts an upward pressure on rates. We see the 10-year reaching a 2% level this year which we think gives a really nice further steeping of the yield curve … I think the backdrop fundamentally for financials continues to be really strong, we would use any weakness to increase our overweights in that area," said Chiavarone.


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