Several large money-center banks have rallied up to longer-term resistance, and the weakness in their volume analysis makes them vulnerable to a further decline, writes MoneyShow's Tom Aspray.
Wednesday's market rally fizzled into the close, and the market internals closed clearly negative. This was disappointing, and while stock futures are again higher in early trading, another push to the downside cannot be ruled out.
The McClellan oscillator, a short term Advance/Decline indicator, is at -145, which is only moderately oversold. The number of NYSE stocks above their 50-day MAs is now down to 40.7%, after peaking above 80% in early September. In early June this reading was just above 10%.
The NYSE Composite has dropped below the last two lows, but the NYSE Advance/Decline line is still holding above its lows.
The best-performing sector so far in 2012 has been the Select Sector SPDR Financial (XLF). And while the intermediate-term outlook suggests it is likely to outperform the Spyder Trust (SPY), there are some short-term warning signs.
Several of the big US and Canadian money-center banks are showing signs of short-term weakness, so those long any of these banks should have a plan in place to be prepared for a correction.
Chart Analysis: Bank of America (BAC) shows daily trend line resistance (line a) in the $9.60 to $9.80 area. BAC topped in March in the $9.85 to $10.10 area.
- The daily uptrend (line b) is now being tested, and a close below $9.05 will complete a short-term top.
- The 38.2% Fibonacci retracement support is at $8.68, which is about 6.8% below current levels. The more important 50% support stands at $8.34, which is a key level for long-term investors.
- The relative performance is still holding above its rising WMA, and made new highs this week. The RS line has further support at line d.
- The on-balance volume (OBV) violated its uptrend on September 26, and has since stayed below its declining WMA, which is a sign of weakness.
- The weekly OBV (not shown) is above its WMA, and is looking more positive.
JPMorgan Chase (JPM) has formed higher highs since mid-September (line g). JPM was higher Wednesday, and there is more important resistance in the $44 to $44.30 area (line f).
- The relative performance or RS analysis is still rising, and indicates JPM is outperforming the S&P 500.
- The RS line has bounced from its WMA, with more important support at line i.
- The OBV has formed lower highs (line j), and this negative divergence is a sign of weakness.
- Another failure of the OBV to move above its WMA would add further weight to the bearish divergence.
- The weekly RS and OBV analysis (not shown) are both positive.
- There is minor support now at $41.10 to $40.60.
- The 38.2% Fibonacci retracement support is at $38.64, with the key 50% support at $37.13.
Toronto-Dominion Bank (TD) is a $76.4 billion money-center bank that provides banking services in Canada and the US. It has a current yield of 3.8%.
- The daily uptrend (line a) was broken on Tuesday, as the rally appears to have stalled below the resistance in the $86.60 to $85.20 area.
- The next meaningful support is at $80.24, which is the 38.2% Fibonacci retracement level and the early September low.
- The 50% support at $78.78 should hold on a further correction.
- The RS analysis is locked in a trading range (lines c and d). This is not consistent with a market-leading stock.
- The weekly RS analysis (not shown) also does not show a completed bottom formation.
- The daily OBV violated its uptrend (line e) in early October, and has since stayed below its declining WMA.
The Bank of Nova Scotia (BNS), better known as ScotiaBank, is a $61.7 billion Canadian money center that also has international interests. BNS has a current yield of 4.3%.
- BNS also broke its uptrend (line g) on Tuesday, but is not far above the 38.2% Fibonacci support at $53.19. This is just 1.3% below current levels.
- The more important 50% retracement support is at $52.29.
- The relative performance is locked in a trading range (lines h and i), which is not a sign of strength.
- The RS line needs to move above the resistance (line h) to signal it is a market leader.
- The OBV has dropped below support, but its WMA is still above the uptrend (line j).
- The weekly OBV (not shown) is acting much stronger than prices, and is well above its rising WMA.
- There is initial resistance at $54.70 to $55.60.
What it Means: The technical action of these four banks indicates they are likely to correct further over the near term, and a test of their 38.2% and 50% support levels does look likely. If the market does rally, these banks could rally back toward their recent highs.
So what action should an investor take? Of course, it does depend on the entry level, but if you have nice profits in one of these stocks, you could consider selling an out-of-the-money call option against your existing long stock position. This would cushion you against a further correction, but also limit your upside.
Those who purchased these stocks more recently should have a clear plan and stop in place.
The positive intermediate-term outlook does suggest that a daily correction will present a good buying opportunity.
How to Profit: No new recommendation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.