Until recently, the SPDR S&P Regional Banking ETF (KRE) was barely on anyone’s radar…
KRE had quietly fallen along with the rest of the market at the start of 2022. And, from June onwards had traded in a narrow sideways pattern.
However, that all changed dramatically just two months ago…
The collapses of Silicon Valley Bank and Signature Bank pulled the rug right out from under the sector…
Then, after fighting to build support, the sector fell sharply again earlier this month with the failure of First Republic Bank.
It became the second largest bank failure in U.S. history after it took the unfortunate title from Silicon Valley Bank.
Now, with KRE under even more pressure, I want to see how things might pan out from here…
The Fall Before News Broke
KRE transitioned from a downwards to sideways pattern around the middle of last year…
The 50-day Moving Average (MA, blue line) flattened out with the 10-day MA (red line) crossing it multiple times in both directions — a common sideways pattern.
Check it out in the chart below…
SPDR S&P Regional Banking ETF (KRE
Source: eSignal
KRE initially tried to rally last August. But a reversal pattern (left red circle) in the Relative Strength Index (RSI) saw it roll over and revert to its mean.
A similar pattern repeated in early February this year.
KRE topped out and reversed as the RSI (right red circle) made an inverse ‘V’ and fell from overbought territory (upper gray dashed line).
Even before news of Silicon Valley and Signature Banks’ collapses broke, KRE had already dropped 12% throughout February.
It then plummeted off the back of those collapses, losing another 27% in just three days.
You can see the severity of that fall in the steep angle of the 10-day MA as it crosses below the 50-day MA.
That huge fall put the RSI deep into oversold territory (lower gray dashed line).
KRE then began to build a short-term base (upper orange line) as the RSI reversed and gradually climbed higher (lower orange line).
But that all came undone as news of First Republic Bank’s failure hit the markets last week…
The steady uptrend in the RSI broke down. And with that, KRE also fell through short-term support.
So, with the RSI hovering again around oversold territory and KRE still looking extremely vulnerable… What am I looking for around here?
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Breaking a Level
The longer a support (or resistance) level holds, the stronger that level becomes…
And the bigger deal it is when that level is broken.
So, what happens around KRE’s recent support level is key to where it goes from here…
If KRE rallies up to that level (upper orange line) but fails to break through, that former support level will turn into resistance.
And that will make it harder for KRE to recover.
I’ll also be keeping a close eye on is the RSI…
For KRE to have any chance of bouncing back, the RSI needs to regain momentum and break through resistance into the upper half of its range.
But if the RSI remains stuck in a sideways pattern in its lower half, that will set KRE up for a potential extended leg down.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict