The Financials Select Sector SPDR Fund (XLF) has been among the sector leaders during the market’s epic market snapback from the April lows. Since the intraday low on April 7, it has gained a cool 15%. While it has lagged the biggest leaders, XLF got to within 1% of its Feb. 28 all-time closing high earlier this week. Very few have done that so far, especially ETFs based in the US. The two big questions now for XLF – and for many others are: “Has it come too far, too fast?” Such strong gains in six weeks don’t happen a lot, and the pace never lasts. So, yes, we expect the velocity to slow again soon, as well. But if/when that does happen, question number two will be, “Can XLF avoid a total roll over?” That answer is yes, as well. We’re addressing both of these in greater detail today. Stretched indicators Here’s XLF with its MACD and 14-Day RSI indicators. The XLF’s 14-Day RSI hit a high of 68 as of Monday’s close, just barely missing being “officially” overbought. That said, it was the highest reading since Jan. 25. XLF zigged and zagged for another few weeks, ultimately not making much headway before rolling over. The red lines highlight the RSI peaks going back to last April, which typically have happened slightly before the MACD sell signals triggered. This is because a sell signal in the MACD (a momentum gauge based on the difference between the 12-day and 26-day EMAs) always occurs AFTER a security begins to weaken. The same thing could be taking place again soon. Bullish patterns Indeed, most of the pictured sell-offs above were relatively harmless. And as the next chart shows, the XLF proved that it could regroup many times prior, form bullish patterns and continue higher. As XLF began to stall lately, we highlighted this big, potential bullish pattern. And while it’s MUCH larger than the shorter-term versions from 2024, this reminds us how well the ETF leveraged bullish setups during the long uptrend the last two years. We noted at the time that it could stand to digest the massive run a bit now. That clearly remains the case now. If it can do so constructively, then a real right shoulder can begin to take shape. That’s the blueprint of which XLF can follow again now. European financials – even more extended While the XLF appears extended, it’s nothing compared to the EUFN European Financials ETF , which somehow keeps getting even stronger. It’s now up over 30% from the April low and sporting a 14-DAY RSI of 77, which is very high. Like the XLF chart above, here’s both the RSI and MACD indicators, with the red line showing the RSI peaks. There’s no way to know when the indicator will peak this time, but when it does, it could trigger another MACD sell signal, as well. The MACD now has reached levels we last saw in March. While the ensuing decline was market related back then, it’s clear that the very strong pop had run out of steam. We should be mindful of momentum slowing again soon. The bottom line is that strength in financial stocks both domestically and abroad is a bullish sign for the stock market and for the global economy. But even the boring bank stocks can get overheated at times. Thus, buying the dip is the recommended strategy. 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.
