From an Elliott Wave perspective, we should consider that the banks put in a major, wave V type of peak from which the devastating plunge occurred. When I did my best to analyze that Elliott Wave pattern on the weekly chart a few months ago, I projected that the BKX needed to drop lower to a Fibonacci extension level at about 26.64. After a few weeks, that's exactly what the index did. It rebounded from that level, with some traders playing it as a quick trade on the bounce. But then I pointed out that the diagonal pattern often results in yet another poke down, and posted a few more reminders that one or more pokes down might well occur. And they did. Then the downwave, which I viewed as a C-wave, put it what could be argued as a 5-wave pattern - and that new low turned around to propel this week's sharp rally. As you can see on the weekly chart below, the rally moved back upward to the level of a down-trending channel line that the index broke under on the plunge to new lows:
The fact that the rally came back to that trendline shows that price will have to content with resistance there. There's hope that after some consolidation or pullback from that resistance, it can resume upward past it. But not a guarantee of course. The indicators on the weekly chart do show that the banking index is ripe to come out of its downtrend, but do not yet show that the downtrend has reversed - there's not even much deceleration showing up in those indicators. What about on the daily chart? The RSI on the daily chart, below, does show bullish divergence so that's helpful. You can see where Friday's price poked that nearby down-trending line, and the other indicators are more positive too. However, there are price resistance levels just above, which I've marked onto the chart. Some of these are based on overhead supply resistance, and then of course there's the 50-day moving average just above too. That and the 200-day moving average are both still declining. A good buy setup can occur if the BKX pulls back - either from the current level, or after going up to test its 50-day moving average - with an orderly, light-volume drop; and then begins to move upward again. If so, then it will be very important for the BKX to get past 33 in order to rule out one of the primary bearish Elliott Wave alternatives (that of a leading diagonal or A-wave pointing toward yet another wave down). With that discplined setup of waiting for a pullback and then buying a resumed move up, we could then see if the BKX can get above 33 and then move toward its 200-day moving average. Getting to the 200-day moving average would have the banking index almost doubling, based on the daily chart below:
We should look at an ETF for this sector, such as the KBE chart below, to get volume information to help us see what the indicators are trying to measure for us. On the daily chart of KBE, below, we can see that the buying volumes did noticeably improve on the rally this week. In fact, the on-balance volume (OBV) actually moved above its 30-day moving average, helping to confirm what the volume bars show - that buying volumes actually did improve. Also, the DMI-ADX indicator which measures price-volume data shows that KBE is coming out of its downtrend (not confiming that it's uptrending yet - but coming out of its downtrend is a start!).
But I must caution - none of the indicators, and nothing in the chart patterns, confirms that the banking sector is ready to go into uptrending mode. Nor is there any guarantee that the banking index will have the strength to surmount the price resistance levels, or to move upward to where its 200-day moving average. There's another way for a stock or index to meet its 200-day moving average - and that is for the moving average to keep on declining to meet a sideways-moving price. It isn't likely that the banks will be market leaders going forward - but probably all the market needs from the banks right now is to avoid implosion. It's possible that all the banks stocks may be able to muster will be a consolidation pattern that will look rather sideways for a while.
Sideways would be a real improvement for Citi! The Citigroup chart looks weaker than the KBE chart, which is not reassuring for this bellwether. From an Elliott Wave or socionomic perspective, in which the theory includes the idea that the last investors to come in are investors from outside the home country as well as the government, we've seen both for Citi so that might be concerning. Then the more recent news, Abu Dhabi reviewing Citigroup investment: sources: Thomson Reuters ..., that came out earlier this month could be interpreted the other way, as possibly supportive. The details are very sobering though. And by the way, the U.S. government's plan to would convert up to $25 billion of its $45 billion worth of preferred stock into common equity includes doing so at $3.25 per share. But let's look at more tangible evidence in the chart itself. It's hard to see bullish divergence in the RSI; the volume did pop this past week, but the OBV and other indicators are not as positive as those accompanying the sector ETF:
That $3.25 price incorporated in the government's plan might have been calculated to help boost the stock price but still hasn't been able to get it up testing its resistance levels comparable to those on the BKX and KBE charts. Interestingly for Citigroup, if it's able to move past its resistance levels, such as $3 and $4 (which in Citi's case would require approximately doubling from current levels!) to get to its 200-day moving average, look where that 200-day MA is now. First, it would mean Citi's price becoming approximately nine times the value it has right now. Second, at this moment that 200-day MA is just above the $10.99 level that was absolutely critical for us as a long-term Fibonacci point from which Citi needed to recovered. Citi's failure to do that was a major factor in our throwing in the towel on this stock, and for that matter in identifying the lower levels that the banking index was likely to plumb.
Frankly, for a trader or investor who's not already stuck with this stock and is considering a buying decision, it seems that a prudent approach would be to use an exchange-traded fund or other basket approach to avoid the single-company risk. Or perhaps to consider another sector that may offer a higher probability reward for the risk. In any event, to wait for confirmation that includes, at a minimum, the light-volume pullback followed by a resumption upward (and then a stop-loss at a sensible level) that may come - but just hasn't happened yet.
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