A fair case can be made that the bank stocks have been the strongest sector in the stock market. Leading financial stocks such as J.P. Morgan Chase & Co (JPM), Bank of America Corp (BAC), Goldman Sachs Group (GS) and most others have soared to new highs. Obviously, higher yields have helped the financial stocks surge over the past few months. It is fair to say that the steeper yield curve benefits the financial stocks in the near term. On the surface everything looks great for this industry group. The SPDR S&P Bank ETF (KBE) and SPDR S&P 500 Regional Banking ETF (KRE) have traded higher in a vertical pattern and continue to surge on a daily basis.
This strong move by the bank stocks has been extremely impressive. Unfortunately, when a sector trades straight up like this it will eventually stall out and stage a sharp pullback or even a big correction. You see, this industry group has moved up in a parabolic pattern on the weekly and monthly time-frames. When this happens it is telling us that the move is nearing a climactic top. This pattern is now overbought, extended and very stretched. In order to continue its winning ways the overbought condition must be worked off. This means that the sector needs to consolidate the recent gains before moving meaningfully higher. Unfortunately, when an equity trades parabolic on the charts it will rarely move into a consolidation pattern. It will usually just start to sell off sharply. Anyone that owns the financial stocks at this stage of the game should really start to protect the recent gains. This industry group could have a bit more upside from here, but the chart is now parabolic on many of the leading stocks in the sector. This pattern often ends the same way that it went up, down sharply and quickly. Keep an eye on the volume too, If you see massive volume and a new high that could signal exhaustion buying and a potential reversal.
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