Banking Sector: Short Term Overbought

As a result of yesterday’s look at the massive option activity and call buying on the three US banks, Citigroup (C), JP Morgan (JPM) and Bank of America (BAC), I decided to take a more indepth look at this sector.

Out of all the individual issues, Citigroup (C) stood out because the amount of option activity for tihs one issue made up a significant portion of the total ISE activity. It is difficult to estimate just how much because the data isn’t broken down that way but my guess would be that for some days, of all the ISE options traded, between 20-25% would be Citigroup options and between 75%-85% of those options would purchases of calls.

A long term chart of Citigroup (C) shows just how broken this stock is:

The technical chart formation is an ascending triangle which is usually a bullish, continuation pattern. Above the resistance line, there overhead resistance as far as the eye can see. Basically every single move higher will be met by heavy resistance from previous buyers who will be more than happy for the chance to get out even.

Since these three stocks – Citigroup (C), JP Morgan (JPM) and Bank of America (BAC) – represent 23% of the KBW Banking index (BKX) I also looked at that sector index:

The long term chart of the KBW Banking Index (BKX) is reminiscent of the chart for Citigroup (C). But during the most recent rally encompassing late last year and all of this year, we can see a head and shoulder formation about to complete.

While a head and shoulder formation is usually interpreted to be a topping pattern, this is only true when it occurs after a prolonged rally. Otherwise, it can actually be a continuation pattern.

Looking at the more recent few years we see that the large downtrend line from the 2007 top has been broken to the upside:

And yet the index is still mired in a sideways trading range with the next area of resistance very close at hand.

The breadth for the sector is over-extended on all time periods. Looking at the components of the Financial Select Sector SPDR ETF (XLF) 91% are trading above their 200 day moving average, 90% above their 50 day moving average and 85% above their 10 day moving average.

The bullish percent index for the S&P Financial Sector is at 60% which is surprisingly low. In September 2009 it was as high as 91%.

Rydex traders have glommed onto the sector but have yet to really ramp up the money flow. The total assets of the Rydex Financial Services fund is growing rapidly but it isn’t yet at a level that would indicate a bullish extreme.

Considering all of the above, the sector looks a little over-extended to the upside but I’m surprised at the signs of strength. Frankly I wasn’t expecting to see that. So it could very well continue to rally in the intermediate to long term.

I’m still not sure what the crazy options activity means, if anything. But in any case, in the short term, this sector will be susceptible to the general market risk which is high right now. Especially considering how lopsided sentiment has gotten recently. More on that in tomorrow’s weekly sentiment overview.

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One Response to Banking Sector: Short Term Overbought

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