The banking index has hit the resistance zone of 12,500 to 12,775 as predicted by this column a few weeks back, which makes it time to exit long positions in this sector and establish some short positions.

In our column published on August 9, we had predicted the possibility of the banking index touching resistance given the relative strength in the sector compared to the broad market. The index touched resistance and stayed in the zone for about a week and then fell a few days back.

The fall indicates that the resistance is valid with sellers left in the area. The prices have rallied back to the resistance zone again, which presents another opportunity to short the index or banking sector stocks. As indicated in the previous column, traders should short weaker stocks for a greater bang for the buck. Some of the relatively weak stocks in the banking sector are ICICI Bank, IDBI Bank, IDFC, Axis bank, and Kotak Bank. The relatively strong banks are Bank of Baroda, SBI, HDFC Bank, Punjab National Bank and Union Bank. Relative strength and weakness is measured against the banking index.

Before we get into the analysis of the banking sector, we would like to sound another note of caution. The banking sector was one of the leaders that pulled the market up, but the index hitting resistance is bearish for the broad market.
Let us look at the chart nearby to analyze the banking sector. Note that the index hit the resistance zone marked by the blue horizontal line and then fell.  It found support at the accelerated trend line and rallied back to resistance. This gives traders the second opportunity to exit long positions and go short, with a stop a few points above the resistance zone.

Given the fact that the index is at resistance and has not rallied strongly from the accelerated trend line increases the bearish bias. A break of the accelerated trend line can take the index much lower probably all the way down to the normal trend line. The support areas on the way down are in the areas of 11775, 11250 and 10700.

The Commodity Channel Index (CCI) is also showing weakness, with negative divergence before the fall from resistance. The negative divergence was about 17 points. A negative divergence is when the CCI makes a lower high, when price makes a higher high. Additionally, even though index rallied back to resistance the CCI has failed to show equal strength, which is bearish.

Caveat-If the index closes about 2% above the resistance zone we would switch from a bearish to a bullish bias. We would however wait for a pull back to support before buying.

(The writer based in Chicago is editor of www.capturetrends.com)