Storms under the Capitol Dome have been sending flurries of hope and gloom over the world’s markets. Although we don’t know what sentiment tomorrow’s headlines will produce, our firm has described in recent articles the many ways that markets are near a tipping point on weekly and monthly charts.
Regardless of whether you believe stocks can go much higher, it pays to watch the industrial sector which has had one of the best records in foretelling market declines.
The KBW Bank Index
(INDEXCME:BKX) tracks 24 of the largest US-based banks and thrifts. Since 2007, it has shown a solid record of predicting stock market declines by showing negative divergence against equity indices. (The converse is not true; it doesn’t predict market rises with positive divergence.)
We will see in coming months whether the recent divergence will turn into something larger. At the moment, it is not as pronounced as what appeared prior to the 2008 market decline. For now, we are watching some overhead targets and areas of potential resistance. Failure to reach those targets would be a bearish sign for the specific index and for equities generally. On the other hand, reaching those targets could cause the index to pause, or possibly even reverse.
On the weekly chart below, the 50% retrace of the 2007-2009 decline is near another Fibonacci-related target, producing a target price band of 69.46 to 70.19. The top of the Schiff channel is another area that would provide resistance, but we do not expect banks to climb that far in the near future. An extended version of this article on our website
examines the relationship between the Nasdaq Bank Index
(INDEXNASDAQ:FINX) and the Nasdaq 100 Index
This article originally appeared on Trading on the Mark.
No positions in stocks mentioned.