​Trading Lesson: Market Better Today but Banks May Become a Problem

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Image via Jason Baker/Flickr CC

Traders came back from the Memorial Day holiday to deal with new technical issues. Over these past months we’ve been concerned with a lagging Dow while the Russell continues to set new highs, writes Jeff Greenblatt May 30.

From time to time the Dow Transports has been a trouble spot.

Since early April, nearly two months the KBW Nasdaq Bank Index has not been a problem, until Tuesday. Yes, the banks somewhat recovered on Wednesday, but did you notice the BKX broke its 200-day moving average for the first time since the stock market starting peaking in January?

This is nothing new to the people in Australia who observed their banking sector peak on May 1, 2017.

The culprit is said to be the domestic situation in Italy, where new Prime Minister Guiseppe Conte wanted to name a Eurosceptic named Paolo Savona the economy minister. When President Sergio Mattarella refused by veto, the prime minister resigned, and the markets got very nervous.

What happened was the Italian president was concerned the markets wouldn’t like it if someone who has made statements about Italy leaving the euro with their heavy debt became the Italian economic minister.

Apparently, it was too late, they already did.Perhaps the stock market was looking for an excuse to drop.

In case you noticed, on Tuesday the bond market was up big, confirming an interesting square out vibration at the recent low. For the market to drop on a day interest rates retreated, it’s the same type of wasted effort as the Mets losing when their ace Jacob DeGrom pitches a masterpiece.

Don’t you agree that if the market will drop on days the bond market gets hit hard, in the very least it should not drop when interest rates retreat? That is the problem. If the financials are going to continue to lead to the downside, it’s only going to be a bigger problem.

Let’s see why Wednesday’s reprieve might only be a short-term phenomenon. The BKX is lining up for trouble. From the top, the range is 14.37 with a 102.77 bottom. The recent high from a week ago is 37 days off the bottom and 79 days off the high.

Prices hovered near the high until the Italian news broke. This is the third time since April 2 the BKX has come down to the 200-dma. How many more times do traders go to the well before they fall in? They are holding the 200 for today, but if it breaks again, it could be for keeps.

Give the bulls credit, they defended the low and do not give up. The bigger question is whether they are stubborn or wise?

The political situation in Italy is far from solved as protests are planned for next week as well as another round of elections in September.

At the current time, we are two weeks away from the next Fed meeting, three weeks away from the seasonal change point and six weeks from the next major time window. Markets responded to the 610-day top for the Dow from its August 2015 low. They get another chance as the middle of July is 610 days from the February 2016 bottom.

Where does that leave us now? We have a divergent market that refuses to quit but is up against any number of domestic or geopolitical issues which can cause indigestion on any given day.

The best thing traders can do at this point is keep a shorter-term perspective, become very familiar with a small set of stocks. Work with them either higher or lower as the situation dictates and be sure to protect profits.

You may be in and out of your position several times until the market provides more clarity which may come with the July time window.

Jeff Greenblatt is editor of Lucas Wave International.

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