Should We Fade Regional Banks Up Here?

If you're looking to short these guys, this seems like a pretty logical place to do it. The risk/reward is certainly advantageous. And the fibonacci extension targets are clustering up here on multiple time frames. We like that.

Here is a weekly bar chart of $KRE - the S&P Regional Banking ETF. They've been dancing around all week with the 161.8% Fibonacci Extension target from the big base that they built over the last couple of years.

This next chart is on a daily timeframe, and we're using candles, not bars. For you Japanese candlestick aficionados, Thursday seems to have confirmed Wednesday's doji. This is normally a bearish formation which fits in nicely with these Fibonacci extension targets clustering up here. This level represents the 161.8% Fib extension from the recent consolidation earlier this month. Momentum has also diverged negatively on these new highs. So with fresh highs in prices this week, the relative strength index made a lower high.

The Fibonacci target in the short-term was achieved, check. Target on the long-term achieved, check. Therefore, this seems to me like a nice entry point if you're looking to get short. And you can also point to the relative weakness that we saw throughout the trading day on Thursday. I think a good confirmation would be new lows below 37. And from a risk management perspective, you're basically shorting this against the highs. All bets are off if we take out this week's topping pattern, of course.

You see, the beauty of technical analysis is not that there's this holy grail indicator that tells you when to buy and sell and is never wrong. What makes the study of the markets powerful is when multiple indicators and targets line up to give you a nice entry point as well as a clear exit if you're wrong. That's what this is all about folks. If a well-defined risk/reward is there, and the indicators tell you that probability is on your side, what more can you really ask for?

We'll see if we get follow through Friday to the downside. The fact that Thursday failed to close at the lows is a feather on the hat of the bulls. But overall, the risk/reward definitely leans towards the bears. Volume on Thursday was off the charts, more than twice the average. Someone was trying to get out of this thing....

Tags: $KRE $XLF