The SPDR Financial Sector ETF ($XLF) recently showed a clear three-swing correction after hitting its all-time highs. Based on Elliott Wave Theory, this correction followed a recognizable 5-wave impulse cycle, marked as Blue (I), and led to an ABC correction. Buyers are expected to re-enter the market near the blue box area, which ranges from $55.15 to $54.46. This zone is viewed as a potential starting point for the next bullish cycle. $XLF is currently well-supported by its lows from November 2025 and January 2026. Traders who bought shares in the blue box area are focusing on the 50% retracement level as a key target. The market may not move in a straight line; short-term pullbacks could provide additional buying opportunities. It’s important for traders to monitor price behavior and use effective risk management strategies.

Elliott Wave Analysis Highlights

The Elliott Wave analysis points to a continuing bullish trend for $XLF. This analysis helps traders predict market structure, identify continuation zones, and plan trades with more confidence. Understanding how impulse and correction phases interact is crucial for managing risk in volatile markets. Traders must remain flexible and disciplined as the market evolves. The recent pullback of the XLF into the $55.15 to $54.46 range creates a clear opportunity for a bounce. For derivative traders, this suggests a good moment to explore strategies that benefit from rising prices. Selling cash-secured puts with strike prices near the lower end of this support zone could be a smart way to earn premium income or potentially buy into the sector at a lower price. This technical outlook is further supported by the current economic climate. Inflation has eased, with December 2025 CPI data showing a rate of 2.8%, reducing the pressure on the Federal Reserve to maintain last year’s aggressive rate hikes. This stability, along with a strong job market that added 195,000 jobs in December, creates a favorable environment for financial institutions.

Economic Environment and Earnings Season

As we enter the fourth quarter of 2025 earnings season, there could be a near-term boost. Major banks are expected to perform steadily, with analysts predicting stable net interest margins and approximately 5% year-over-year earnings growth. Strong earnings reports from leading banks would likely validate the solid technical structure we see. In mid-2023, the market experienced a similar situation where a consolidation phase led to a strong rally after concerns about Federal Reserve policy eased. Traders may consider using bull call spreads to benefit from a potential upward movement while managing their risks. This strategy allows participation in gains but limits potential losses if support unexpectedly fails. As the expected upward trend takes shape, any minor pullbacks should be viewed as opportunities instead of threats. These dips can raise implied volatility, making short-put premiums even more appealing. Managing risk is essential, but the current market structure suggests that buying during brief weaknesses is the right strategy for the coming weeks. Create your live VT Markets account and start trading now.

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