Join Jim Cramer, Doug Kass, Helene Meisler and other RealMoney pros at TheStreet.com Investment Conference on "Best Ideas to Make Real Money." Save the date: Saturday, May 2! More details here.

We're seeing a strong bid in the financial stocks, after the sector's worst performance since last November. While only a lunatic would sound the all-clear signal right now, these issues are massively oversold and could drift higher for several weeks, or longer. So it makes perfect sense to identify price levels where short-sellers might return in force.

In the meantime, a stronger financial group should translate into better demand for the rest of the equity universe. In particular, commodity and cyclical issues should continue to perk up and work off their oversold technicals though a long-overdue bounce. That uptick will mark a pleasant change of pace after the misery of the last few weeks.

But this is no time to listen to the bottom-callers or to throw money at the market, because endless resistance levels will challenge any strong bounce. And sooner or later, short-sellers will return to the fray in force and reload positions for an inevitable test at the bear market lows.

PowerShares QQQ Trust
chart
eSignal

What about tech stocks in the weeks ahead? The PowerShares QQQ Trust ( QQQQ), the proxy for the Nasdaq-100 index, held firmly above the deep November low on the last down wave, keeping its recent leadership role intact. However, it now faces considerable resistance at the broken January low and 50-day moving average.

The instrument needs to press firmly above both barriers before the technicals look more appealing. Until then, positions in tech stocks should be viewed as short-term rentals, with profits taken aggressively on all rally spikes. If somehow this bounce turns into something more interesting, there will be plenty of time to get on board with long-term positions.

KBW Bank Index
chart
eSignal

The KBW Banking Index (BKX) is now in uncharted territory, after dropping below 1990s support at around 25. You can see from this year's price action that traders knew about this level, triggering two strong reversals in January and February. The instrument finally broke through support on Feb. 17 and tested it eight sessions later.

The sharp downswing off that failed test yielded the capitulatory selloff we've suffered through in the last few weeks. In turn, the price level now marks a major inflection point for any countertrend rally. This is reinforced by a down channel carved out by the lower highs and lower lows posted since the start of 2009.

This convergence suggests that traders will be more than willing to buy the index until it gets into the mid-20s. That level marks a logical price point for short-sellers to re-enter positions throughout the financial sector. Finally, note how the last two bounces fizzled out after a week or so; this predicts a similar time frame for this countertrend event.

Downward channels are difficult to break in either direction, once they are set into motion. In fact, they're among the most unyielding selloff patterns in a major bear market. They're especially dangerous because of the way they deny capitulative selling pressure, i.e., a deep and emotional plunge that attracts renewed buying interest.

This rock-steady pattern will make it more difficult for the index to rally above the mid-20s and test the broken November low. In addition, note the falling 50-day moving average, which is working its way down toward the channel and adding to the crazy quilt of resistance this instrument needs to overcome before improving its technical outlook.

What types of short-term plays should you consider in the banking group during this oversold rally? I think it's best to stick with the handful of money-center banks that show less than catastrophic price patterns, These include SunTrust Banks ( STI), KeyCorp ( KEY) and Credit Suisse ( CS).

Amex Securities Broker/Dealer
chart
eSignal

Broker-dealers have outperformed the banks by a wide margin in the first quarter, but the group took a major swan dive during the recent selloff. Consider Goldman Sachs ( GS), which fell over 20 points just eight trading sessions before Tuesday's big bounce. Morgan Stanley ( MS) followed suit with its own plunge, dropping nearly 28% in the same period.

The Amex Broker-Dealer Index (XBD) established a trading range between 63 and 80 after the November low and held it firmly until last week's breakdown. The selloff initiated a test of the bear market low at 51.46, which is still in progress, despite this week's turnaround.

It's a tough call whether this support will hold up or break down in the weeks ahead. However, it's decidedly bullish that the index is trading above last year's low when so many other sectors have fallen apart. This resiliency suggests the current uptick will return the group to the leadership position it held in January and February.

Playing the broker-dealers after this week's big reversal is a really no-brainer, because there isn't much to look at, aside from Goldman and Morgan. The national brokerages, except for these two survivors, are suffering mightily in this bear market and show price patterns that should be avoided at all costs.


Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.


Know What You Own: The PowerShares QQQ Trust's holdings include Apple ( AAPL), Qualcomm ( QCOM) and Microsoft ( MSFT).
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.

Alan Farley is a private trader and publisher of Hard Right Edge, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of The Daily Swing Trade, a premium product that outlines his charts and analysis. Farley has also been featured in Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product, The Daily Swing Trade, brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.

If you liked this article you might like

NYSE Stocks Dive as Auto-Sell Programs Are Triggered

NYSE Stocks Dive as Auto-Sell Programs Are Triggered

Kostohryz: Is the S&P 500's New High Fundamentally Warranted?

Kostohryz: Is the S&P 500's New High Fundamentally Warranted?

Jobs Picture Improving For First Time Home Buyers: Trulia

Jobs Picture Improving For First Time Home Buyers: Trulia

Jobs Report Looms in Busy Coming Week

Jobs Report Looms in Busy Coming Week

Jobs Shocker: Only 38,000 Added

Jobs Shocker: Only 38,000 Added