Bloomberg News
 
If the Federal Reserve’s decision not to raise short-term interest rates last week delivered a body blow to the stock market, it was a left hook to financial sector.
 
Financials had already been leading the market lower since early August, and they fell even harder after the last week’s Fed meeting. The drop was steep enough to spark technical breakdowns in sector gauges from the broad Select Sector SPDR Financial exchange-traded fundto narrower indexes individually covering insurance, banks and securities brokers.
 
This group may not appear weak, especially since it rebounded better than the Standard & Poor’s 500 did Monday. But it seems to be a case of worst-to-first. Prices were more depressed, creating an illusion of value after a weekend where nothing really got any worse in the economy or in other markets.
 
The chart of the SPDR S&P Bank ETF provides a good illustration. Since Aug. 25, the day after the 1,000-point intraday drop in the Dow Jones Industrial Average, the ETF formed a clear rising wedge formation (see Chart 1). The analysis ignores the out-of-whack low seen Aug. 24 itself when scores of ETFs were mispriced in the early moments of trading that day.

Chart 1

SPDR S&P Bank ETF
A rising wedge is a counter-trend move that usually serves as a pause or correction in a new falling trend. Top and bottom borders converge as volatility calms and volume usually diminishes until the day price action breaks out from the pattern.
 
The bank ETF displays this textbook action complete with a false rally on Fed day followed by a strong breakdown on heavy volume. The gap, or jump down the next day confirmed the bearish configuration while even Monday’s strong performance could not put much of a dent in what it lost last week.
 
It would not be a surprise to see this ETF drop back down to its 52-week lows, which are about 10% below Monday’s trading. And most banks in the group across the size spectrum have similar patterns.
 
Another sub-group with a technical breakdown and similarly bearish outlook is life insurance. The Dow Jones U.S. Life Insurance index sports a triangle pattern instead of a wedge but the meaning is the same (see Chart 2). The only difference is that the bulls could not press their case during the market’s rebound from last month’s lows, hence the falling, rather than rising upper border. One could argue that this makes for a slightly more bearish pattern, but let’s not split hairs.

Chart 2

DJ U.S. Life Insurance Index
The good news is that the damage has largely been done in life insurance stocks, as the sell-off last month was sharper than even the banks’ decline. Support is only about 3% below current trading so it might be too late to step out for stocks such as MetLife.
 
There is one stock, however, that sports a similar pattern but is still holding on above its major moving averages. Torchmark, which also operates in health insurance and annuities, has the broken triangle pattern but is trading in the middle of its 52-week range (see Chart 3). That gives it more downside potential if and when it gives us one more bearish signal. A move below its 200-day average would also make it clear that this stock was moving lower to catch the group.

Chart 3

Torchmark
Securities brokers are another area where the technicals look quite weak in the near-term. Charles Schwab , to take one example, took a beating after the Fed meeting as it broke down sharply from its late-August to early September recovery (see Chart 4).

Chart 4

Charles Schwab