Don’t buy the US banks until they break out

 

I watch the BMO Equal Wt. U.S. Bank ETF (ZUB-TSX) as my benchmark for that sector. I’ve traded it successfully in the past – my last trade being a buy in October 2013, and a sell in March of this year. This ETF is TSX listed and hedged to the C$.

Right now, I am waiting for the US banks, represented by this ETF, to break out of the consolidation pattern that it has been stuck in since my sale.  I will not buy this ETF until it breaks through what appears to be very strong resistance at $21/share.

zub

Signs are questionable as to when this might happen. As you can see on today’s chart – moneyflow (top and bottom panes) is flat. MACD is diverging—that’s not good. Strength vs. the S&P 500 is flat to declining, and short termed stochastics timing indicator suggests that now is not the time to see this ETF break its $21 lid. I’d expect this ETF to fall back into the $19 area shortly.

Until ZUB breaks $21 with positive moneyflow and volume, I will be avoiding this trade. However, such consolidations can lead to tradable breakouts. Just don’t get caught on the wrong side of the trade if that breakout is below $19!

 

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Comment below to let me know what you are thinking

comment

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9 Comments

  • Hi Keith

    I thoroughly enjoy your posts and BNN appearances. One thing I would like to ask is your opinion on stopping out or simply getting out on an investment? Do you set a % loss, breaking a support level etc? I followed your earlier posts on China and India (ZCH and ZID BMO etfs as the are in $CDN Hedged).

    I do agree the US banks are a great opportunity, I have traded them and just recently sold them up at the resistance level and waiting to get back in. Your posting reassures me its worth repurchasing ZUB.

    Sorry, another question. IWM, seems to be range bound, what are your thoughts on the US small caps?

    Thanks in advance

    Daryn

    Reply
    • Thanks Daryn
      I use a 3-bar minimum rule when a stock breaks support to sell. So if a stock breaks support, I wait at the very least 3 days to see if its just a whipsaw. Case in point: the pipelines broke support last Friday, fell further below support on Monday, but then —BOOM!–back up Tuesday and Wednesday to above support. That was a spike if there ever was one!! This shows you how useless stop losses are –you would have been stopped out 10% below what the pipes got back to within 4 days!!! I actually wait closer to a week or sometimes longer before getting too antsy to sell. Please read my book Sideways for a better description of my sell system.
      I will cover IWM on a future blog–but in a nutshell, consolidating equities, just like todays comment on the US banks, must be waited out before trading. Buy on breakouts with conviction (again, wait 3 days + for confirmation), or just short-termed trade within a consolidation.

      Reply
  • Hi Keith,

    Looks like today, Dec 5th, ZUB broke above 21 with volume. So 2 more days and this might be a successful trade.

    Do you have any thoughts about ZEB, the Canadian banks. I believe you spoke about ZEB on your last BNN appearance, but since then there’s been some turbulance, which is rare for the Canadian banks.
    Thanks,Eric

    Reply
    • Hi Eric
      ZEB is looking lousy–may pick up by month end as money looks for something high quality that is oversold to move into from their lousy oil positons, but we are less optimistic about it

      Reply
  • Hi Keith,

    I’m sure you’ve noticed that the u.s. banks haven’t done so well to start the year. Do you believe this is short term and would $19 be considered support? Thanks
    Eric

    Reply
    • The BMO US bank ETF broke out and then – when the market fell, fell with it back into its sideways trading range–which has been in place since last March
      I’m placing less emphasis on the breakout failure, given that everything fell recently. Its not an isolated bank strength problem. Seasonally, markets can be rough into early Feb. before starting the next leg up–and US banks are usually good into the spring.

      Reply
  • Kieth, you mentioned the 3 bar minimum rule when a stock breaks support to sell. Just curious, is it always certain or its just another risky method to take?

    Reply
    • Ibrahim–the 3 bars are a minimum, you may choose to wait if the stock becomes overbought/oversold on a break. In that case, you might wait until a quicker moving momentum indicator like stochastics signals the overbought/sold condition has ended.

      Reply

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