By Jim Donnelly, Olson Global Markets

Despite overbought conditions on the weekly time frame, the Keefe, Bruyette & Woods U.S. Bank Index (BKX) continues to push steadily higher following a break above key “neckline” resistance (at 49.50) of a bullish reverse Head & Shoulders pattern. This is an important observation since the “target” or “objective” of this pattern sits at the lofty level of 79.50.

In many ways, the BKX is emblematic of the equity markets in general since it appears to be “climbing a wall of worry” not seen for quite a while. A rise in bank stocks also encourages the tendency for a virtuous cycle of capital building to begin at the banks themselves. This is due to the likelihood that, in the future, banks will have the ability to issue common equity, preferred stocks and a variety of debt issues all designed to improve their capital ratios. In turn, this process should become the basis for a return to friendlier lending practices that should generate economic growth.

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