A Banking Breakout

12/15/06 11:04:19 AM

by Arthur Hill

The Banking Index broke to new highs this week to affirm the current uptrend and project further strength.

Security: $BKX
Position: Accumulate

The Banking Index ($BKX) is part of the finance sector, which is the biggest sector in the Standard & Poor's 500. As banking goes, so goes the finance sector. As the finance sector goes, so goes the S&P 500. Needless to say, the Banking Index is an important market gauge.

The BKX gapped up and broke resistance in December. The index surged in July, corrected in August, surged again in September, then corrected in October–November. The first correction formed a falling wedge and the breakout at 112 extended to 115. The second correction formed a falling price channel and the breakout at 114.5 signals a continuation of the September advance. See Figure 1.

FIGURE 1: BANKING INDEX. BKX gapped up and broke resistance in December.

Graphic provided by: MetaStock.

Broken resistance turned into support and this was the first test. BKX broke resistance at 112 in September and this level turned into support. There were two successful tests in November (green arrows, Figure 1). By extension, broken resistance around 114.5 turns into support and this is the first test for the bulls. There was a dip to 113.6 on December 8 and I am marking support here. A break below 113.6 would call for a reassessment of this bullish signal.

FIGURE 2: BANKING INDEX. As long as the breakout and support holds, the upside target is to around 120 early next year.

Graphic provided by: MetaStock.

As long as the breakout and support at 113.6 holds, the upside target is to around 120 early next year. To find this target, I first drew a linear regression (magenta trendlines) and then drew parallel upper and lower trendlines (Figure 2). I tried to fit the channel to the reaction highs and lows. There were overshoots in May, June, and July. I elected to draw through these overshoots and keep the trendline slope reasonable. The index has been channeling higher the last 12 months and the upper channel trendline extends to around 120 in early February.

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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