Keep an Eye on Regional Banks

04/24/2014 7:00 am EST

Focus: ETFs

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Regional banks were one of last year's stellar performers, but have since hit a rough patch. Technician Greg Harmon of Dragonfly Capital makes the case for why you should keep this group on your radar.

Regional banks have been beat up over the last month. The short-term nature of the pundit world would have you believe that their best days are over as the Regional Bank ETF, (KRE) pulled back over 8.5%. But if you back away from the noise there are some good reasons to put this sector back on your radar. Take a look.

The chart below goes back 18 months. What first jumps out is that it is certainly not the end of the world. This ETF has had a strong uptrend over this period. Did it get extended from the trend? Perhaps, but the last month may have taken care of that.

Click to Enlarge

The price action has stalled on previous pullbacks at levels further from the rising trend support than the current level. That alone does not make it a buy but with that trend nearby it does give a good point of reference for a trade in the future or a stop level.

But there is more that makes this interesting.

The price action has also traced out a bearish crab harmonic, and then retraced 61.8% of that pattern. That is the target retracement and is nearly exactly where it reversed back higher. Translation, it is a good place to run higher. Also the momentum indicators have reversed. The RSI is moving higher off of a bottom in the 30's, and the MACD is improving. Regional banks may continue to head lower, but the current set up gives many reasons to keep a closer eye on them even if you do not want to put on a starter position.

By Greg Harmon of Dragonfly Capital

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