The banking sector index continues to show strength but is nearing a key area of resistance in the 12,500 area.

The sector is relatively stronger than the broad market as it continues to rally even though the Sensex and Nifty slowdown.Additional strength in the broad market can take the banking index to its area of resistance.

The strength in the sector can be seen not only by the rising prices, but other factors as well. For instance, the index is above the 50-day simple moving average show in green. Additionally the uptrend shown by the black up sloping line is intact without a single violation. A close below the trend line would be a violation of the trend.
 
  Finally the commodity channel index (CCI) is showing higher highs and higher lows which confirm the uptrend in price. 
 
However, prices usually reverse trend at areas of major supply. The 12500 area marked by two horizontal lines on the chart was a turning point in late 2007 and excepted to at least lead to a correction or possibly a reversal in the uptrend.
 
This would be the time for longs to begin booking profits on some of their positions and establish short positions at the resistance zones. Ideally, 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.
 
Broad Market Outlook
 
The broad market continues to hover around resistance without a breakout or breakdown, making trading difficult. However, given the strong rally and the fact that the indexes are near resistance, we’d maintain a bearish bias. As mentioned last week, unless the NIFTY closes above 5570 and Sensex above 18,900, the bear is in strong play.
 
Another very important factor to keep in mind is that the US Dollar index is at support in the 79.50 to 80.50 area. This is bearish for risky assets such as stocks and commodities. When the dollar rises, as it can now from support, risk aversion increases resulting in a sell off in the stock markets.
 
Additionally, it makes sense for foreign investors to dump stocks which are at resistance and move into the dollar which is at support. The bet would be for the dollar to rise and the stocks to fall. Smart investors could then reverse the rotation when the dollar hits resistance and stocks support.
 
(The author is the editor of www.capturetrends.com)