DJIA may drop further as correction set in among banking stocks

Over the past few days, the US equity market enjoyed a good rally, driven by strong gain in the financial or banking sector. From Chart 1 below, we can see that the Philadelphia Banking Index ('BKX') has rebounded to test its medium-term downtrend line resistance at the 30 point level. It has failed to surpass that downtrend line and is likely to drift lower to the support levels of 22-25 point. I think it is not likely re-test its recent low of 18 point, which happened when commentators & pundits were screaming for banks' nationalization.


Chart 1: BKX's daily chart as at March 19, 2009 (Source: Stockcharts.com)

A sharp pullback for BKX will probably lead to further correction in DJIA. Since September last year, DJIA has been in a downtrend, with the troughs supported by the purple line (S) & the peaks blocked by the blue line (R). The current rally is quite similar to the oversold rally in October-November last year (both rallies are marked out in the pink boxes). I think the current rally is nearing the end & correction will follow shortly. The next concern for the US market is the recent sharp depreciation in the US dollar (see next story).


Chart 2: DJIA's daily chart as at March 19, 2009 (Source: Stockcharts.com)