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Banks start to recover on relative strength

October 22, 2012

22 October

Banks have underperformed since 2007 and against some sectors, for even longer but now, they are starting turn around, at least relative to some other sectors.

With my moving average crossover method, I look for prices or pairs without a moving average crossover for four years. I also look for divergence on the MACD and supporting evidence from other methods. These exist for the banks.

Philadelphia Banks Index (BKX) vs. S&P Railroads Index

Bkxgs56railmacd_221012

  • The 30 and 40 week moving averages last crossed in September 2004!
  • The low in November 2011 was formed with a MACD divergence against the 2008 and 2009 lows
  • Notice that MACD and RSI divergences were formed at the February 2009 low and an RSI divergence formed at the November 2011 low
  • The moving averages have just crossed again, giving the long term rotation signal

A similar moving average cross has occurred against the S&P Industrial Machinery Index and crosses appear imminent against consumer discretionary sector indices.

In terms of entering a trade, the sector is setting up according to my Bollinger Band breakout criteria against a number of ETFs, in particular, country ETFs or broad emerging market ETFs. One pair that I will revisit on another night is:

Market Vectors Regional Banks (RKH) vs. iShares Pacific ex Japan (EPP)

 

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