KRE: Regional banks correcting

The exchange-traded fund that tracks the regional banking sector, KRE, has joined the broad markets in a massive uptrend since early October 2011. In KRE's case, the rise began Oct. 3 from $18.31.

It has the potential to rise further, but only after correcting part of the 125% gain of the past two years plus a bit.

KRE broke above its 20-day price channel at $39.28 on Thursday, sending a bull signal that was confirmed in Friday's trading.

However, the magnitude of the anticipated correction that began Jan. 22 from $41.24 is so great that I see no reason to trade this fund now.

The Chart

KRE kicked off an uptrend from its Great Recession low from $14.42 on March 6, 2009 and in January completed wave 3 {+1}, the middle wave of five under the Elliott rules.

Wave 4 {+1} to the downside has begun and so far consists of the little hook at the end of the chart. Wave 1 {+1} lasted more than a year, as did the ensuing wave 2 {+1} correction. Wave 3 {+1} lasted more than two years.

Click on chart to enlarge.

KRE 5 years weekly bars

At the present degree, then, I would expect wave 4 {+1} to carry into 2015. No guarantees, of course. Elliott says little about time spans, but the duration of waves within a degree tend to be roughly proportional.

If $41.24 on Jan. 22 is indeed the peak of wave 3 {+1}, then the ensuing correction will reach a low somewhere above $18.31, the start of the third wave.

It's impossible in Elliott to say how far above that point wave 4 {+1} will terminate, but often corrections will end around one of the three major Fibonacci retracement levels,

38.2%	$32.48
50.0%	$29.78
61.8%	$27.07

That's a lot of potential downside, and I want to get a better sense of what the internal count of wave 4 {+1} looks like. At this point, I can't even estimate the degree of the two waves on the chart so far.

My count will be invalidated if KRE moves back above $41.24. That would mean that wave 5 of 3 {+1} has not ended but is instead extending to greater heights.

Decision for My Account

Having decided not to trade KRE, I'm ending my analysis at this point. I'm cognizant of the irony in the fact that just a day before rejecting a trade in the regional banking fund, I opened a position on a regional bank, TCBI.

The charts are quite different, though. KRE has completed its fifth wave up, and TCBI is still in a fifth wave rise. See Thursday's analysis, "TCBI: On the rise, with ambiguity".

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.