The once-hot financials sector has taken a turn for the worse this year, but one technician says the charts are pointing to a turnaround.
"If you look at weakness since January, it's all occurred above the sector's rising 200-day moving average," Ari Wald, head of technical analysis at Oppenheimer, told CNBC's "Trading Nation" on Tuesday. "So, we're still making the case that this is a pullback in an ongoing uptrend and that the uptrend should ultimately continue higher."
The XLF financial select sector ETF has largely held above its 200-day moving average since mid-2016, only briefly dipping below that trend line in September of last year, early April and early May. The ETF closed below that trend line late last week, but quickly rebounded to trade 1.6 percent higher.
"The key level on the downside here is $26.60," Wald said. "These were the lows that had been put in place over the last month. We think a double bottom is forming here. Now the SPDR still has to get through $28.35 resistance."
The XLF has not closed below $26.60 since late November. However, it has not broken above its resistance level on an intraday basis since March 22.
"Again, given the rising trend, we think that's the trade," said Wald. "We think you get the breakout to the upside."
The financial sector saw a massive run-up following President Donald Trump's election in November 2016, said Stacey Gilbert, market strategist at Susquehanna.
"This was the fan favorite once Trump won the election. You assumed that there'd be great deregulation, you assumed the yield curve was going to be steepening, you thought the economy was going to be growing, there'd be a ton of loan growth, all very positives for financials and financials responded," said Gilbert. "They've outperformed the S&P by more than 10 percent."
Since the 2016 presidential election, the XLF has soared more than 35 percent and hit its highest levels since 2007 earlier this year. Over that same period, the increased 25 percent.
"Interestingly, on the ETF side of financials, you've seen AUM in U.S. financials sector-specific ETFs ... grow by 50 percent to have about $63 billion of assets under management at this point," said Gilbert. "This was definitely a much-loved sector."
While the XLF has hit a rough patch over the past several months, Gilbert sees signs it could soon become a sector favorite once more.
"We continue to see bullish sentiment in the options, in the individual stocks," said Gilbert. "Investors are taking this as an opportunity to position for further upside so reading the tea leaves through the options market, they do agree with the charts here that we are probably going to see more upside."
The financials sector was the second-best performer in the S&P 500 on Wednesday and in the week to date. It remains 0.5 percent lower for the year compared with a slight rise by the S&P 500.
