A reader asked me to cover the Canadian banks – a great idea considering their changing technical profile of late. The big Canadian banks are looking precarious right now. Using the BMO “ZEB” ETF shares as our proxy, we can see that the sector is suffering. A double top formation on the daily chart was verified by a neckline break of $28. The ETF is now testing support around $27. If that level doesn’t hold, the Canadian banks could enter into a new world of pain. Volume on the topping formation is high, which suggests that this top may be the real deal. The volume is unique to the ETF, but ZEB is owned by many investors who want exposure to the sector—so the higher volume is indicative of the changing viewpoint on the sector. Watch $27 carefully on this ETF – a break would be quite bearish.

Something I found of interest on this chart is that virtually all of the momentum studies I follow– short (stochastics), mid-term (RSI) and longer termed (MACD) were diverging long before this top occurred. Despite the two peaks of the recent highs being about the same, there was an early warning negative divergence on the momentum oscillators—as shown by my pink trendline notations on the indicators. Note that all of the indicators are oversold right now, but are not yet hooking up. There is a good chance that the banks will stage an oversold rally at current $27 support. But I would be cautious as to the legitimacy of such a rally.

Should $27 hold – investors may want to hold their shares. But a break of that level for more than a few days could mean trouble. This is a sector I am avoiding for the time being.

Keith on BNN

Just a heads up—I’m on MarketCall on Monday April 3rd at 5:30pm. I’ll post another notice before the show.