Trade of the Day: Regional Banks KRE ETF Running out of Rally Steam

Banking stocks while bouncing in recent days are still displaying a lot of relative weakness. Particularly regional banking stocks, as represented by the SPDR S&P Regional Banking ETF (NYSEARCA:KRE), look vulnerable for another leg lower soon.

kre etf
Source: Shutterstock

When the Federal Reserve and the Treasury came out in full force in March to stop (or at least temporarily halt) the plumbing of the economy from blowing up, risk assets quickly found a bid that in the aggregate remains firm to this date. Despite the daily horrendous economic headlines, investors and/or algorithms seem to be attempting to look through to the other side of this economic recession.

In my experience of trading and investing through past recessions, it is only a matter of time until a second wave of fear and volatility hits the financial markets, and a retracement of the initial hope-filled bounce gets kicked off. Bear market rallies can be ferocious and are also the reason why most bears don’t even make money in bear markets.

From a timing perspective, it is most likely that bad headlines around corporate defaults, job layoffs, and sluggish re-opening of the economy are only just beginning. This, I fear, will lead us to see another round of selling in equities. It could also hit the financial institutions such as the regional banks again.

KRE ETF Stock Charts

kre etf
Source: TradingView

On the multi-year weekly chart we see that in March, the KRE ETF broke below its multi-year diagonal support line as well as horizontal support in the mid $30s. Since then the ETF bounced sharply along with the broader market, but so far this has only taken it back to previous technical support, which could now begin to act as resistance.

kre etf vs spy
Click to Enlarge
Source: TradingView

If we look at the KRE ETF in relative terms versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) we see that it has displayed notable weakness year-to-date. This ratio is also now bumping up against its yellow 50-day simple moving average as well as the upper end of a consolidation pattern. In other words, the recent rally in KRE may soon fade again in relative terms.

Source: TradingView

Moving over to the daily chart of the KRE ETF, we see a remarkably similar picture. Note that the ETF is still trading within the limits of a ‘bear flag’ pattern as marked by the yellow parallels. The upper end of this pattern currently also coincides with the 50-day simple moving average.

While a little more upside cannot be ruled out for KRE in the immediate term, the odds now favor a mean-reversion lower.

Trading the KRE ETF

Active investors and traders could look to sell or short KRE in the $37.50 – $39 area with a next downside target at $35 and a stop loss at $42.

I am hosting a special ‘bear market trend-following’ webinar today, April 29. Register here.

How to trend-follow a bear market. Join Serge’s webinar on April 29th. Register here.

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