Don’t bank on the banks

A reader asked me to cover the Canadian banks – a great idea considering their changing technical profile of late.  The big Canadian banks are looking precarious right now. Using the BMO “ZEB” ETF shares as our proxy, we can see that the sector is suffering. A double top formation on the daily chart was verified by a neckline break of $28. The ETF is now testing support around $27. If that level doesn’t hold, the Canadian banks could enter into a new world of pain. Volume on the topping formation is high, which suggests that this top may be the real deal.  The volume is unique to the ETF, but ZEB is owned by many investors who want exposure to the sector—so the higher volume is indicative of the changing viewpoint on the sector. Watch $27 carefully on this ETF – a break would be quite bearish.

A technical chart analysis of the Canadian Banks ETF ZEB - showing a double top formation with neckline break on volume

Something I found of interest on this chart is that virtually all of the momentum studies I follow– short (stochastics), mid-term (RSI) and longer termed (MACD) were diverging long before this top occurred. Despite the two peaks of the recent highs being about the same, there was an early warning negative divergence on the momentum oscillators—as shown by my pink trendline notations on the indicators. Note that all of the indicators are oversold right now, but are not yet hooking up. There is a good chance that the banks will stage an oversold rally at current $27 support. But I would be cautious as to the legitimacy of such a rally.

Should $27 hold – investors may want to hold their shares. But a break of that level for more than a few days could mean trouble. This is a sector I am avoiding for the time being.

 

Keith on BNN

Just a heads up—I’m on MarketCall on Monday April 3rd at 5:30pm. I’ll post another notice before the show.

5 Comments

  • Hi Keith,
    Thanks for this analysis on the Canadian banks. I’m interested in increasing my US bank exposure. I noted that the XLF has recently pulled back and the regional banks (KRE) have experienced a sharp drop. I’m inclined to wait longer, perhaps after a more significant market pullback, before buying. What do you think of the US banks? Would you favor the Canadian hedged ZUB or the US dollar ETF’s named above at this time?
    Thanks for your comments.
    Joe

    Reply
    • Joseph–I had this discussion with Craig Aucoin, resident CFA at ValueTrend today. He is 50/50 on the banks–not enough for me to jump on them. Having said that, if and when I do, it will be via the ZUB and perhaps a few select large caps in the sector

      Reply
  • It seems too easy that our banks bounced (ZEB 23.00 support). So many retail investors were calling it a no-brainer dip around me and on some social media sites. Usually, the market likes to inflict the most pain to as many people, so I think we go lower next week. I guess we’ll see!

    Keith, I would really like to know if you still like ZJO. It looked like it was about to break, but it held on. it has zero momentum, but trend line support does seem have proven itself. Thanks!

    Matt

    Reply
    • Matt–ZJO is testing a trendline–and oil has dropped below $48. I am giving them both a few more days but will not hesitate if they do not firm up quickly.
      And yes, I noted in the blog that momentum was oversold for ZEB and I fully expect a bounce–but the question is–will it last???

      Reply
  • Stockcharts tells me that if you had bought ZEB five years ago, you would have realized a profit of over 83%, an average of over 16% per year. Not the best (ZLB – which you recommended some time ago, has seen a rise of 109.6% over the same time period) but still not shabby.

    Reply

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