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This Could be a Dangerous Pattern

Sometimes, people forget the link between banks and the economy. Many potential borrowers are complaining about "the hundred hoops" banks are making them jump through in applying for a loan ... only to be turned down in the end.

I've heard enough stories to thing that banks are being tight fisted and holding back due to concern about risk. That's the link between banks and the economy ... holding back, so money is not going back into the economy.

Usage expansion of credit cards is of short term benefit unless longer term loans are also in an expansion scheme. The Fed is concerned about making cheap money available to banks while seeing little action that puts the money back to work in the economy.

In spite of the progress the Banking Index has made since this Summer, it could run into trouble now, and today's chart show's why.

This Banking Index chart as of 10 AM on October 8th. ...

Today's chart study explore's the action of a 30 day Relative Strength setting versus the action of the Banking Index itself.

At the bottom left of the chart below (early 2011), you will see how there was a Negative Divergence on the C-RSI. To create this, the Banking Index went up, but the Relative Strength went down. This occurred while the C-RSI was in a triangular pattern ... and when the C-RSI dropped below the triangle's support after having a Negative Divergence, the Banking Index then fell until September.

Why are we mentioning this pattern now?

Because if you look at the right hand side of the chart, we could be facing the same kind of possibility now.

Note that the C-RSI is showing a definite Negative Divergence and a triangular pattern just like it did over a year and a half ago. The only difference right now, is the action of the Banking Index.

Previously, the Index went up (higher) to form a stronger Negative Divergence, and this time the index went essentially sideways. So, we have a lot of the conditions that existed before, but not quite to the same degree yet.

In any case, it is a pattern that should be watched, and will be concerning until it is resolved by an upside breakout on the C-RSI, or a failure to the downside. Please also see the second chart which is a close up clearly showing the current triangular pattern and Negative Divergence.

Banking Index ($BKX)

The close up chart of the Banking Index ...

Banking Index ($BKX) Day Chart

 

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