Regional Banks Double Top

07/24/03 09:51:56 AM

by Arthur Hill

The Regional Bank HOLDRS (RKH) have performed exceptionally well over the last few months, but a potential double top with waning momentum and poor breadth could stymie further upside.

Security: RKH
Position: Sell

RKH advanced from 91.33 to 117.68 (almost 30%) in four months and met resistance near 117 in both June and July. In between these to peaks, RKH declined to 110 and established an important support level. A move below 110 would validate the double top and project further weakness to around 103 (117 - 110 = 7, 110 - 7 = 103).

The second peak features a possible exhaustion gap on July 14 (blue arrow) and a bearish engulfing pattern that formed on the 14th and 15th of July (red arrow). An exhaustion gap occurs near the end of a move as prices gap in the direction of the underlying trend, in this case up. However, the gap failed to hold and prices soon declined (advance) to fill the gap. Technically, the gap has already been filled, but further weakness below 113 would further validate this as an exhaustion gap and increase the odds of a major support break at 110.

Graphic provided by: MetaStock.

Waning momentum and money flow also increase the possibility of a valid double top. MACD advanced with the stock from mid-March to mid-June. The indicator took a tumble in June and failed to recover when the stock advanced in July. A bearish divergence has formed and further weakness below zero would be negative. Similarly, the 21-day Chaikin Money Flow peaked in May, formed a bearish divergence, and moved into negative territory in late June. Utilities and Home Builders were knocked with the recent rise in interest rates; perhaps the Regional Banks are next.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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DOUBLE TOPS

Regional Banks Double Top

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