Back On Dec 4, 2006 The Banking Sector Was Doing Fine.

When I wrote the article "Is Banking Tanking?" in early December last year, the banking sector was doing just fine. The only cloud on the horizon was that it had gone from a leading sector to a laggard sector since the June 2006 low.

In that article I predicted a top for the sector near the end of January 2007. It actually came in on February 20, 2007 - so I was out by about three weeks. And I guess folk who had read the article had dismissed it by then, or - more likely - completely forgotten it.

But take a look at an updated chart of the S&P Banking Sector Index (BIX): Banking Really Is Tanking!

There was no sign of banking tanking when I published the original article. That was then, but now? Yes banking really is tanking. In fact, it has recently gone into near-vertical free-fall.

By my calculations BIX could ultimately bottom out near 290 - that's another 20% below the recent close of 361. Now BIX could just persist with its near-vertical descent all the way to 290, but I don't think it will.

I think we should see a traditional A-B-C decline in a double zigzag form unfold.

The decline to point A of the zigzag should be very nearly complete. A bounce should follow next to point B (likely to be near 390), then the next plunge to point C of the zigzag, at under 300.

We're approaching 355, which has been support or resistance on 10 occasions since early 2004. I expect BIX to form a bottom within the next week in the 345 - 355 range, then bounce strongly in a zig-zag to near 390.

That bounce should take us through to roughly mid-October, although it could stagger on after an initial spurt, and extend through to the years end.

During the slide south that follows the rally I expect to see the near-vertical plunge nature emerge as a characteristic of the major US indexes.

But that may be 2008. Right now I'm anticipating what may be the last good rally in US markets for a long while. But what if the near-vertical plunge in BIX continues down past 345 without hesitation? That's certainly a possibility - and a frightening one at that: the word "crash" comes to mind. I don't believe the bullish fervor will dissipate quite that fast, but I may be wrong. The market environment is unique, so it's dangerous to assume the "usual patterns" will continue. Catch-phrase: keep on your toes!

Volatility is back! Yes, I predicted that as well - in my November 2006 article: "Outlook For 2007 And Beyond".

The full version of this article, including a chart of BIX and links to the other articles mentioned, is available at www.TrendSensor.com/MarketBrief/ DISCLOSURE: Murray Nickel holds no position in BIX.

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Murray Nickel is a mathematician, statistician, and professional trend trader. He offers a free trial of trading signals for market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend traders aiming to build consistent success at trading global markets.
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