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Were There Technical Warnings Ahead of the Regional Banking Crash? Oh, Yeah!

With the recent crash of the Regional Banking ETF (KRE) some may wonder if there were adequate technical warnings ahead of the crash. Yes, there were. To clarify, we’re looking for reasons not to be long this ETF.

(1) To begin, last April the KRE 50EMA crossed down through the 200EMA (a Death Cross), giving an LT Trend Model SELL Signal. We view mechanical signals as information flags, not action commands, so this informed us that the long-term technical picture had turned negative. This never changed.

(2) The 20EMA crossed down through the 50EMA (Dark Cross) on March 7, two days before the crash. This was an IT Trend Model SELL Signal, the third since the Death Cross, so we would want to examine other indications to give it context.

(3) There was a PMO (Price Momentum Oscillator) crossover SELL Signal, which is when the PMO crosses down through its signal line (10EMA). Also, the PMO was falling about three weeks ahead of the crash, a condition during which we do not want to be long.

(4) Finally, for this chart, On-Balance Volume (OBV) was falling since August, showing volume moving out, while price moved sideways.

Next, our participation analysis below dumps more bearish evidence onto the pile.

(1) Our Silver Cross Index (SCI) shows the percentage of KRE component stocks with the 20EMA above the 50EMA (Silver Cross). We can see it declining and crossing down through its signal line weeks before the crash, and the reading was only 40% just before the crash.

(2) The Golden Cross Index (GCI) shows that only 51% of stocks had their 50EMA above their 200EMA (Golden Cross).

(3) The Percent Stocks Above 20/50/200EMA showed participation crashing well ahead of the final price crash, and their readings were in the basement the day before the bottom fell out.

Conclusion: Waiting until a few days before the crash, there was an abundance of technical evidence telling us that KRE was not a good candidate for a long position. To say the least! While we may not have forseen the final calamity, there was no justification for being long. At the time of this writing, on the top chart we can see a bearish reverse pennant formation, from which price has broken down, forecasting a continuing price decline.

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Technical Analysis is a windsock, not a crystal ball. –Carl Swenlin

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