A Lesser-Known Way To Profit From An Oversold Bounce In This Huge Sector
Monday, February 23, 2009
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Have we seen a climactic bottom in the banking sector?
In my last “Sector Watch” column, I alerted you to the KBW Banking Index (^BKX) as a gauge of the banking sector’s performance.
Specifically, I pointed to a potential reversal in the sector, given the way the chart was set up. The index initially did reverse upward in early February, but it proved to be short-lived, as it was unable to trade above its 50-day moving average.
Since then, the banking sector continues to give America nightmares. A huge chunk of stimulus money has already disappeared down a black hole, with seemingly no effect at all. America’s banks are gasping for air. And Europe’s debt-ridden, leveraged-to-the-hilt banking sector might be in even worse shape.
So after the briefest of rallies, it was no surprise to see the selloff quickly resume. In fact, ^BKX closed at its lowest level in more than 16 years last Friday.
And while this headline was obviously the main news, there was, however, a ray of hope…
In trading as low as $19.58, a late-day bank led rally helped ^BKX close more than 10% above its lows. In addition, the volume was very heavy, which may signal a climactic bottom in the sector, at least over the short-term. Only time will tell, but because ^BKX is a leading indictor, it’s worth watching closely.
“Dow Theory” Has Spoken… We’re Heading Lower
As for the overall, longer-term stock market trend, both the Dow Industrials and Dow Transports have now traded below their November lows.
According to “Dow Theory,” this means these indexes should eventually move lower until one of them makes lower lows while the other does not.
On the bright side, however, none of the other indexes have traded below their November lows yet, which may validate my call that they’re tracing out an intermediate-term bearish consolidation pattern.
By the numbers…
~ The November 2008 low for the S&P 500 was 741. Last Friday, it tested that low by getting to within 13 points of it before the afternoon rally got underway.
~ The NYSE Composite put in a similar test by trading down to 4,710, which is just about 100-points above its November lows.
Based on this action, if the stock indexes are stuck in a consolidation pattern, it opens the door to a rally at any time. This is important because rallies within a bear market consolidation can be sharp and substantial.
However, remember that none of the indexes have triggered any buy signals yet and the intermediate-term trend is still down.
So turning back to the banking sector… given that it’s led the market lower for months, if last Friday’s action is any indication, a reversal is becoming more likely. If the banks begin moving higher on good volume this week, a 2-3 week rally may be getting underway.
On to this week’s sector…
If You Want To Play A Brief Bank Rally, Play It This Way
Whether it’s setting up a bank to buy all the bad loans… nationalizing some of them… or a plan that would see a partnership between the government and private capital, there are so many conflicting comments about the banking rescue package that I don’t think anyone can be confident about buying bank stocks.
One thing is sure, though: The banks are extremely oversold and are due for at least a rebound. But until we see more clarity on how the government will handle the situation, I’d rather play a relatively stronger sector in the financial arena that would benefit if the banks stage a rebound.
Below is a daily chart of the AMEX Securities Broker/Dealer Index (^XBD) and as you can see, not only has it stayed above its November lows, it has also stayed above its swing low from January 20.
If the bank stocks stabilize and begin moving higher, ^XBD should go along for the ride. Here’s what you need to know…
There is some resistance around 72 and then around 74. A close above 74 should take it up near the top of the trading range between 81 and 85.
Digging a bit deeper, one stock in this sector that saw unusual price action on very high volume last Friday was TD Ameritrade (Nasdaq: AMTD). The stock had a bullish “outside day” (lower low, higher high and higher close than the previous day). As long as it stays above Friday’s low, which was $11.86, it should move higher as long as stock indexes can stabilize.
That’s all for this time.
Jim
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