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Banking On A Recovery?

10/11/01 03:53:26 PM
by Austin Passamonte

An old market adage purports no rally can sustain without leadership of financial and cyclical sectors. During market turns from a bottom and continuation ahead, these leadership sectors must perform or especially outperform the general "market".

Security:   BKX, C
Position:   N/A

Should that be the truth, doesn't it make sense for us to watch these indexes for signs of the next upturn? With interest rates falling and money supply flowing like water, common reasoning suggests banking industry should be strong. On the other hand risk of recession, bad debt and economic contraction of loan demand could be detrimental to financials. If the market really thinks this economy will improve in the foreseeable future, financials will trend up. Failure to see such an economic reversal could leave bank stocks languishing for some time.

What can we expect from here?

Figure 1: Daily chart for the Philadelpia Banking Index [BKX]
Graphic provided by:
Graphic provided by: QCharts.
The Philadelphia Banking Index (BKX) posted a first initial recovery from September 17th and led major indexes forward. As the leading sector in S&P 500 index (Healthcare is second) we can use this sector as a directional proxy as one trading filter.

At the time of this writing the BKX broke above 50% Fibonacci retracement from recent highs to lows and subsequently fell below to rest, near 25% retracement for support. A look at stochastic values shows them still in steep descent but nearing an oversold extreme which could slow the decline. The next area of resistance to the upside is the 776 area while 719 offers further support.

Figure 2: Daily chart for Citigroup.

One of the major components in BKX sector index is Citigroup, which has held up considerably better than its overall sector. Current price action holds firm on the 38% Fibonacci retracement as price action coils into a wedge. Stochastic values are still bearish and volume waned at the recent peak and spiked when price action pulled back from there.

Volume and price direction now remain the key. If C is to advance and hold subsequent gains it will only do so after breaking above the near-term wedge on rising volume in the process. A break lower on rising volume or break higher on falling volume warns of further downside ahead.

We cannot say that the overall financial index as measured by this sector is strong or even poised for sustained upside right now, but we can say that Citigroup is a strong horse in this group, relatively speaking. Which way it decides to go and likewise the sector it trades within could be one key for mid-term market direction ahead.

Austin Passamonte

Austin is a private trader who trades emini stock index futures intraday. He currently trades various futures markets from home in addition to managing a trader's educational forum

Title: Individual Trader
Address: PO Box 633
Naples, NY 14512
E-mail address:

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Date: 10/30/01Rank: 5Comment: 

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