I know I said I wouldn't get into the whole bank fray and then I went and commented on it the other day, noting that folks had picked sides. There was the "2008 camp" and the "bottom-fishing camp." At the time I noted that so few were in the wait-and-see-how-it develops camp. I still feel that way.
I know that the Bank Index bounced from where it should have, and is now right back into that range ($75-$80). But I want to delve a bit further into this, because I noticed something in the chart of Goldman Sachs (GS) .
First of all the top it broke down from measured to the $290-$300 area and it got to just over $300 last week. I am not even going to draw lines on this chart, but instead point out a pattern I have noticed that it has developed in the last year. The stock plunges, makes a low, bounces, and then comes back down again, forming a "W." It did it in June/June and again in the fall.
Isn't that why we should pay attention to how a stock like Goldman acts in the coming days? If it plunges much lower than $300 then we know the pattern has changed. If it hangs on then this pattern is still working.
We know everyone is focused on the banks and there the small caps, which are loaded with banks. So take a look at the chart of the Russell 2000 fund (IWM) , which looks as if it might break $170. Should it break $170 then we would have to look at the number of stocks making new lows, wouldn't we?
So far the peak reading for new lows on the New York Stock Exchange was 345 on March 13. As of today there are 102 new lows. If IWM breaks $170 and there are fewer than 345 new lows, wouldn't that be a positive divergence?
Let's do some math. In two days the S&P 500 was up 51 and down 66, that gives us a net for the two days of down 15 points. In those same two days we saw net breadth on the New York Stock Exchange on Tuesday positive by 1,715. Wednesday's net breadth was negative by 1,480. This surprised me. In any event that means net breadth over the two days is positive 235 while the S&P is down 15 points.
I realize this is only two days in the market, but that would be the first inkling that breadth is starting to stabilize and not lead us to the downside.
I will conclude with what I have said for a week now. The market is not in great shape. The charts look terrible. But I still believe we are oversold enough to rally.