Blockbuster or a Flop?

Blockbuster or a Flop?

May 22, 2017 Off By Chuck

US bank stocks went on a tear after the Trump election. The promise of a pro-growth agenda combined with higher rates the FED was proclaiming set up an ideal environment for them to prosper and roll in the dough. Unfortunately, the promises and proclamations ran into political reality and as such that ideal environment is becoming a distant memory.  As you can see in my chart of the US bank sector ETF, XLF, below, banks ripped higher, topped and are close to breaking down out of a very symmetrical and almost ideal head and shoulders (topping) pattern. A breakdown below the blue horizontal neckline and hold, points to a downside target at, T1.  Since there is little support at that level, it is likely if T1 is hit, they continue lower down to the T2 zone as that is a level of major support.

On the flip side, some European banks which, many were on the precipice of default and setting up the potential for another 2008 banking-type crisis, look exactly like the US banks.  Except upside down.  A good example of this is represented in the chart of Deutsche Bank, DB, below. Like their US brothers, they have not broken out of their almost symmetrically ideal (inverse) head and shoulders (bottoming) pattern. A break and hold above the blue horizontal neckline points to an upside target at T1, some 40% higher. If it really has some legs and slices right through T1, the T2 zone represents a level of major resistance where it will likely struggle as supply is likely plentiful. I find this situation unique and interesting as investors are potentially setting their sights on Europe.  If so, this would be a major fundamental shift.

Patterns in development are nothing but a potential setup for a future investment.  Until either one of these confirms they should be viewed only as you would a trailer to an upcoming movie. Something to grab your interest but sometimes turn out to be the highlights of a studio flop.