Regional Banks Are Breaking Down Hard

Regional banks are a space that I've been watching very closely for several months. The underperformance out of this sector has been atrocious, which is something that really stands out to me as the S&P500 has been hitting all-time highs as recently as last month. Back in August I was looking at the Regional Bank ETF KRE specifically, as it looked like a potential head and shoulders pattern was developing. It never confirmed by breaking the neckline so there really hasn't been anything to do here. But after some further consolidation, an even more bearish pattern has formed.

Here we are looking at a weekly candlestick chart of the regional banks KRE. Notice this symmetrical triangle formation that has been setting up since the rally that kicked off last summer and peaked this Spring. This type of pattern is normally a continuation pattern that should resolve itself in the direction of the underlying trend, which in this case is up. The problem is that it's breaking down:

When patterns that are supposed to do one thing, end up doing the complete opposite, the market is speaking. I think we should really listen here. If prices break the May lows, marked here by the dashed line in blue, an aggressive short position is probably best. I would only want to be short below this level because if we're above it, a more neutral outlook is most appropriate.

What I like most about this is the well-defined risk and the easy to calculate target. With base about 8 points high, it gives us a measured move target down just under 30. This level was also resistance back in 2012 and support in 2013, so there is a cluster of support here.

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Tags: $KRE