With U.S. stock indices near historic highs that are unconfirmed by the rest of the world, let's look at what most would consider the base of the economic pyramid, the banks, to see how fit our financial system might be. This should provide insight into where we should house our capital for safe-keeping.
We will use the decision support engine, which analyzes a large number of variables in stock charts and identifies historical patterns. We will ask about various banks, "If I had no money in this bank currently, would buying or selling actions be objectively indicated, using historical cause/effect evidence?" We'll use the answers to rank bank stocks as good, bad or ugly.
Good banks are defined as having made higher highs than their 2007 peaks, and remain in large degree-of-trend up moves, even if they are in near-term corrective declines. Their reaching of new highs is empirical evidence of qualitatively better corporate and risk management needed to justify investment and capital deposit. Banks on the good list are inferred to be the safest places to deposit capital (loan the bank money in hopes of being repaid upon demand).
Bad banks are defined as having made dramatically lower highs than their 2007 peaks, and have ended, or are ending, corrective rises since their 2009 lows. These banks are anticipated to return to precarious financial condition in the next several years but likely remain in business, either through reorganization or through too-big-to-fail intervention. Bad banks are at higher risk of eventual default and inferred to be questionable places to deposit capital.
Ugly banks are defined as having made dramatically lower highs than in 2007, with corrective bounce patterns since 2009 that appear so weak that the next decline could take them into extinction. Ugly banks are at even higher risk of default, and inferred to be unsafe places to deposit capital.
Only two good banks really stand out. Both Toronto Dominion (TD - Get Report) and Royal Bank of Canada (RY - Get Report) are equally favored and attractive for buying action now. They have nearly identical conditions and can be treated as interchangeable.
Toronto Dominion's monthly bar chart above shows that stochastics have just completed a double-bottom pattern similar to the one at the 2002 low. Just like in 2002, stochastics recently found support near the 20% level, which is only mildly oversold. This time, they're at the likely bottom of a corrective price decline (labeled with a purple "4"), balancing out the 2002 bottom of a sideways correction (labeled with a purple "2"). After stochastics crossed back up in 2002, Toronto Dominion's stock price rose consistently for the next five years before the next stochastics oversold condition was reached (above 90%). Currently, stochastics have just crossed up, and the forecast for the coming 12 to 24 months appears in the blue arrow at the upper right-hand corner of the chart: an eventual test of $57 +/-$2. That represents a 40% rise from Friday's closing price. Although it's not anticipated, any retest of the mid-$30s would only increase the attractiveness of this standout bank. As we'll see below, most banks are nowhere near this strong, according to the objective, empirical data that the crowd is manifesting.
Royal Bank of Canada's chart is nearly identical to Toronto Dominion's. Notice the current double bottom in stochastics as the corrective decline is ending in price (pink box at upper right of chart), labeled as (4). This correction offsets that of wave (2), which ended the corrective decline into the 2009 low. To complete the entire rally from the 2001 low, the forecast is for a rally toward $87 +/-$3 in the coming 12 to 24 months. Although a test of the high $40s can't be ruled out, it's neither required, nor favored, before Royal Bank of Canada's stock price advances to maturity, along the path shown by the blue arrow. Like Toronto Dominion's forecast, the one for Royal Bank of Canada has nothing to do with earnings, politics, favoritism, fundamentals, etc. The decision support engine looks underneath all that subjectivity and compares current conditions to similar conditions that have occurred in the past 300 years of stock market history, looking for correlated cause/effect scenarios. When its hunter/seeker algorithms find matches, probability-ranked outcomes can be generated. These first two represent the best of the bank stocks reviewed, since they're both ranked as current buying action only candidates.
Wells Fargo (WFC - Get Report) joins the list of good banks, but this stock is currently not ranked for buying actions. There are many indicators that are in sell mode. First, there is a bearish divergence sell signal in force, which is triggered when higher highs in price (the bold blue line in the price pane) occur at the same time as lower highs in stochastics (bold blue line in stochastics pane). The currently falling stochastics are in free fall, where the red line is accelerating away from the green line. Next, the rise off the August low displays a clearly corrective structure: up/down/up, with deeply overlapping internal waves (easier seen on daily bars, not shown here). Next, the July peak is labeled as wave 3, suggesting wave 4 is next, which should be a decline that is steeper than the pink box labeled as wave 2. So far, the correction into the August low was equal to wave 2, warning that at least a slightly lower low under $47.50 is due before wave 4 should be counted as complete. The next selling wave should target $44 +/-$2. At that time, selling actions should be halted and buying actions should be started. Wells Fargo will join Toronto Dominion and Royal Bank of Canada in a move to new all-time highs. Wells Fargo should reach toward $63 +/-$2 during that rally. But that will happen only after the coming three to eight months of declining prices that test the lower end of the current pink zone. Therefore, sell stops should be used to protect long positions at $54, as the next decline targets the lower $40s.
Another bank on the rare list of good banks is JPMorgan Chase (JPM - Get Report) . Like Wells Fargo, JPMorgan Chase has set itself apart from most banks, with new highs in price above its 2007 peak. But it has its own bearish divergence sell signal (bold blue lines pointing in opposite directions in the price and stochastics panes), declining stochastics, corrective up/down/up structure off the August lows. It also has returned to the pink box of resistance, where selling actions are indicated. Thus, JPMorgan Chase should be avoided here for new buying actions. In fact, sell stops should be used to protect long positions at the $63 level, as the red arrow next anticipates a decline toward the high $40s.
KeyCorp (KEY - Get Report) has a different pattern than any so far reviewed. It has a pattern projection of further declines in the coming five to eight months but maintains the potential that the rise off the 2009 low was a completed five-wave Elliott Wave structure into the June peak. If this proves to be the case, the coming decline will fall along the path of the blue arrow, halt in the green box, then reverse and rise strongly in a new bull market that would place it in the league of the best-in-class banks where the first four reside. On the other hand, if the green box of support only provides a short bounce, and then the red arrow path takes over, KeyCorp would take its place initially on the list of bad banks, with potential to join the list of ugly banks. The current bearish divergence sell signal suggests the blue arrow path is operational, and the stochastics' free-fall condition points to months of generally falling prices, not weeks. Friday's price gap lower augments the forecast that at least $8.25 +/- $1.50 is due to be seen. Any bounce into Friday's gap, near $13, should be used to exit long poitions, and sell stops should be placed at $12, as selling actions only are indicated.
The first bank to join the bad bank list is Bank of America (BAC - Get Report) . The chart shows the crash from the 2007 peak near $46 to the 2009 low near $2.50 (a 94% wipeout), requiring stabilization actions. The clearly corrective up/down/up pattern since then, which failed to reach the minimum 38% Fibonacci retracement level, places the evil eye on this bank. While the green box at the lower right corner of the price pane highlights the $4 +/-$2 zone, the only thing keeping this off the ugly bank list is its likely position near the top of the government's too-big-to-fail list. Not only is there a current bearish divergence sell signal visible (bold blue lines in opposite directions), but also, there are bold red lines in opposite directions in both price and stochastics panes, hinting that stealthy efforts to support prices are not being widely confirmed by the crowd. This is another sign of weakening fundamentals, which the decision support engine is picking up on before the news arrives to justify the forecast. Sell stops should be placed at $16.50, in order to protect any profits. This bank has very wide presence, and the noncore banking operations that led to its previous crash are likely still at risk of taking systemic damage to the entire banking system, at orders of magnitude beyond that of Lehman in 2008.
Citigroup (C - Get Report) is the second bank on the list of bad banks. That is due to the monumental crash that took the stock's price from the 2006 peak near $510 to the 2009 crash low near $10 (a 98% slaughter), also requiring stabilization actions. This crash was so extraordinary that the rise from $10 to this year's high near $61 appears as a flat line, until we zoom in on only the action from the 2011 low to now. We show it as a five-wave structure, which would normally be bullish, but this pattern is taking place in the C-circled wave up from 2009's low. That means that the entire corrective bounce has likely ended, and a resumption of the prior impulsive decline (the 2008 crash) is next. Here, too, there is an active bearish divergence sell signal (as the bold blue lines point in opposite directions illustrate). Also, the rise off the August low is corrective in its up/down/up pattern. Combining these sell signals with the stochastics' free fall, as well as the company's place on the bad bank list, the decision support engine warns that selling actions only are indicated here. Therefore, sell stops should be placed at $53 to protect remaining profits from jeopardy. Like Bank of America, this stock is widely held by investors and is trusted with many depositors' capital. Being another too-big-to-fail institution is the only reason Citigroup is not on the ugly bank list. But, be careful, as this one failing would also have systemic ramifications far beyond Lehman's worst nightmare.
Finally, Zions Bancorporation (ZION - Get Report) becomes the first bank to officially join the ugly bank list. As its chart shows, the yellow box of corrective action, from the 2009 low to the June high, likely ended the entire bounce of wave (B), leaving only wave (C) of C-circled of II-circled to arrive, before the final low can be considered in place. The worry is that the target for equality between waves (C) and (A) would put the stock's price below zero. Obviously, that is not possible if the company is to remain viable. The next most common ratio for wave (C) is to be a Fibonacci 62% the size of wave (A). That would require a decline in price to the $3 level, which would likely be the harbinger of failure. Stochastics are in a bearish divergence sell signal and are in free fall. There are several other sell signals, too. All of this means the $28 level should now be used as stop loss! With wave (A) having taken only six months to swamp Zions Bancorporation from $53 to $5 (90%), there is no time like the present to exit this stock as an investor, and as a depositor.
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