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Regional Banks Consolidate but the Pause Could Refresh

David Becker
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www.iforex.com

Regional banks generally benefit from increasing interest rates and a curve steepening environment. The beginning of 2014 started in this nature, but rates quickly reversed moving lower putting pressure on regional banks. The Regional Bank SPDR (KRE) is currently holding support near the 39.5 area after surging above 39 in early June. Overall, the trend on the weekly chart is up because the ETF hit a new high in March and held support near the February low. Moreover, the wedge breakout at 39 is holding and the bulls have the edge as long as this level holds.

A break below support would raise the possibility of a head-and-shoulders top. Notice that left shoulder forming with the December-January high and the head forming with the March peak. A break below 39 would form another peak that could mark the right shoulder high. Neckline support would then be set in the 37 area and a break below this level would confirm the pattern.

Regions Financial (NYSE:RF) is creating a consolidative flag pattern. Flags are continuation patterns that form after a sharp move. The pattern bias depends on the direction of the prior move. A flag after a sharp advance is a bullish continuation pattern that represents a rest within the trend. A break above flag resistance confirms the pattern and signals a continuation of the advance. Flags are said to fly at half-mast, which means the length of the prior move can be added to flag support for an upside target.

Regions surged 11.4% from mid May to early June and broke above resistance. Broken resistance turned into support as the flag took shape. A move above 10.85 would break flag resistance and signal a continuation higher. Based on the prior move, an 11.4% advance from flag support would extend to the 11.70 area. A decisive break below flag support would negate the pattern and call for a reassessment.

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