Relief rally, or stealth bull horns under the tent, in the banking index?

With the terrible day on Wall Street today, who's talking about the banking index being up 4.83% today, and up 21.98% for the week so far? (Even more than oil! which I'm happy to see rising out of what looks like a fifth-wave low from that triangle target I described last week). Here are my daily and weekly charts of the banking index (BKX):

As I marked on the daily chart, seeing the banking index as measured by the BKX clear 34 would clearly help establish a rally. Whether it's only a relief rally, or something more bullish, will be indicated depending on whether we can see a classic trend reversal pattern develop. In Elliott Wave, that means a five-wave movement up, followed by a three-wave pullback, and then a resumed movement in the direction of the presumptive new trend (in this case, upward of course). There are other trading patterns such as the 1-2-3 trend reversal or the trap door, which share the same basic characteristics - a strong movement upward on good volumes, followed by an orderly pullback on light volume, then a trigger movement upward again when an up day moves above the high of the preceding day.

None of those classic trading pattern setups has occurred yet - and I couldn't guarantee that there isn't one new low remaining ahead, because in my opinion the Elliott Wave pattern can be interpreted in more than one way. That's a great reason why it's best to look for a classic confirmation pattern buy setup before taking a long position in this sector. But the good news is that, looking at the KBE exchange-traded fund, there was decent (although not great) buying volume over the last several days, and positive RSI divergence (as you can also see in the BKX chart); and the other indicators are starting to turn less bearish or more positive. (Including the OBV - on-balance volume - which has moved above its 30-day moving average). So, let's see if we get an orderly pullback, and let's see if we get a classic trend reversal pattern setup, and many may also wait to see if the banking index can move above key downtrend-channel trendlines.

But at least the banking index is giving more positive signs than we have seen for a long time! Below is the KBE chart:

And here's a description of the most out-performing and under-performing sectors today - see that banking was right up there (measured by the Amex RKH holders ETF, up 5.79 percent!):

To close off - I cannot resist poking fun at the health care sector being down, because lately all I've been hearing everywhere is that health care should be the great sector to be invested in. Seemed a little too universal for my taste (although I confess I haven't attempted an Elliott Wave assessment for that sector).

And - as always - be careful out there, and happy trading!