Prophetic Words From Dec 4, 2006: Is Banking Tanking?

Back in early December last year when I penned the article "Is Banking Tanking?", the banking sector was chugging northwards like all other sectors, and the only hint of trouble was that it had gone from a leading sector to a laggard sector since the June 2006 low point.

It was February 20, 2007 when the Banking Sector (symbol = BIX, S&P Banking Sector Index) finally topped out. My guess is that most folk who had read my article had completely forgotten about it by then.

But fast-forward to today and banking is down almost 14% from that February high.

In fact, BIX has recently gone into a near-vertical plummet southwards.

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.

In my view a traditional A-B-C decline in a double zigzag form is likely to unfold, and the progress of the slide to-date supports this view.

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.

This impending rally could last to anywhere from mid-October to the years end.

Expect to see more fireworks after the bounce ends, including a spreading of the near-vertical drop characteristics to 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!

Expect the unexpected: yes volatility is back - just like I said it would be back in my November 2006 "Outlook For 2007 And Beyond" article.

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 global market indexes and index ETFs, spot Forex, and spot Gold. He also mentors trend traders aiming to succeed at trading global markets.