Sunday, October 25, 2009

Potential Trade In The Regional Banking Index (KRE)

I'd like to share with all of you a market I'll be watching for a potential trade on the short side. Above is a daily chart of the ETF for the Regional Banking Index (KRE) and in the lower pane is the S&P500. Notice the symmetrical triangle that KRE has formed over the past 3 months. When I see this kind of formation I'm always looking to trade with the breakout.

One thing that I find very interesting is that if you compare KRE to the S&P, you will notice a rather large bearish divergence taking place. As the S&P makes higher highs at points 1,2 and 3, KRE is making LOWER highs. This in my opinion is a bearish sign that this market is under selling pressure as it cannot make a new high in the face of a rising stock market.

If KRE breaks down from the triangle formation, I will consider shorting this ETF with a profit objective of a retest of the July lows. If on the other hand KRE continues to move sideways and breaks out to the upside, I will do nothing.

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