Financials are an area where we want to see leadership. When banks are leading the way, markets are generally trending higher and signal that higher prices are coming for the major averages. Today we’re taking a look at Regional banks, which is something that concerns me. If you like this multi-variable, multi-timeframe sector analysis, REGISTER HERE for more information on the rest of the S&P sectors.
The first chart is shows daily bars for the S&P Regional Banking ETF dating back to the 2011 lows. This trendline has been very consistent in putting an end to short-term corrections. But not this time. Look at the break and subsequent retest and failure at the uptrend line:
Here is a closer look at the same chart but this time with candlesticks. You can see the breakdown in January and this week’s failure. Also notice momentum rolling over at recent highs. This bearish divergence came ahead of the breakdown and now the Relative Strength Index is hitting oversold conditions. That’s not a good thing as this now changes the dynamics of this chart. Oversold conditions are a characteristic of a bear market, not a bull market. Remember, in order get oversold readings, there needs to be an overwhelming amount of sellers. Again, generally a bearish characteristic.
So what does this mean? Well the correlation between regional banks and the overall market is pretty high at +0.95 over the last year and +0.80 over the past month and quarter. So as regional banks go, the S&P500 tends to follow.
In terms of regional banks specifically, this is an underperformer. That can’t be denied. This is a chart of the regional bank index relative to the S&P500. Look how the recent highs were not confirmed by momentum. And now more importantly, on sell-offs we’re seeing oversold readings. Once again, bearish characteristics, not bullish.
Based on all of the above charts I think for now, the path of least resistance in regional banks is still lower. As always we want to take note of what might change our stance. Personally, I would want to see prices hang on to those early February lows and consolidate through time, building a nice base to launch prices higher. Another positive development would be for prices to recover back above this broken trendline and 50-day moving average. In that case I would be much less inclined to be/stay short KRE.
We’re seeing bearish momentum divergences on the daily chart, we’re seeing bearish momentum divergences on the weekly chart, we’re seeing broken trendlines from 2011 lows as well as from the Spring 2013 lows. In terms of relative strength, again seeing bearish momentum divergences and false breakouts on multiple time frames – both the daily and weekly charts.
So do I want to be long regional banks here? Not a chance. I think for now you can still be selling any strength.
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Tags: $KRE $SPY