[Chart Of The Week] Why This Leading Sector Is About To Get Crushed

JC Parets
April 29, 2016

Contrary to popular belief, we're not here to be right. We're only here to make money. As market participants, we're not journalists or economists or side analysts. It's their job to be "right". So when they're wrong, they like to call it a "revision". But when we're wrong, it's called "a loss". See the difference? So since we actually put money to work and take real risk, we need to be responsible with how much risk we take. Therefore, we need to make sure that the potential reward far exceeds the amount of risk being taken at a given time.

Today we're looking at a good example of this favorable risk/reward scenario in a sector that I think gets crushed going forward:

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Regional Banks are one of the most important sectors in America. There's no doubt about it. This has been one of our biggest winners in recent months and we couldn't be happier to see this rally. But our $41 target in $KRE was hit a couple of weeks ago. Since then, there has been no reason to be long and all profits should have been taken.

Here is a daily chart of the Regional Bank Index ETF running into former support from the 4th quarter and 61.8% Fibonacci retracement of the entire November-February decline:

Notice how on the recent high this week, momentum put in a bearish divergence. Look at the new high in price and lower high in momentum. The well-defined risk vs reward suggests that a short position is now best. We want to be short regional banks ($KRE) only if we're below this week's highs. We want to be adding to short positions if prices are below both the uptrend line from the February lows and dashed line representing August lows and March highs.

I think this one gets back down to the February lows where we want to be covering shorts.

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Tags: $KRE

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