Financials: Stay Short, Morgan Stanely Next Domino

I last covered these charts in Financials: Where Will the Rally Stop?: “With a little more time, a confluence of resistance put a lid on prices around the $75.00 area. The declining 200 day EMA (green line) and the declining trend line (black) will converge upon resistance around $75.00 (horizontal red).

For any of this to come into play, BKX must first break out of the current trading range of about $71.00.”

That was on September 4th and that is exactly what happened. Resistance around $75 held and prices dropped back “into the box”. Expect prices to test the lowers bounds around $60, before collapsing to the lows around $45.

“Regional Banks (KRX) bounced 60% from about $44.00 to about $71.00. The declining 200 day EMA (green line) acted as resistance. As long as the recent high of $71 holds, expect an eventual test of the lows around $45.00.”

That did NOT work out. Prices broke UP and OUT above $71 and are now well postured on SUPPORT. The slope of the 200 day EMA (green line) has actually turned up.

Personally, I’m not convinced yet that this is “real”. This may be forced hedge fund liquidation of short positions. For example, the failure of Lehman and AIG has resulted in the pulling of credit lines from some hedgies.

That being said, I’m willing to entertain the idea that as certain large institutions wobble, deposits and business may be rushing into smaller regional banks. For example, as Washington Mutual (WM) circles the drain, retail and corporate accounts may be fleeing to smaller regional banks.

The real economy hasn’t completely unraveled yet. It will. Believe it. Until then, I’m out of regional banks and I’ll wait until the charts scream “Get Short”.

While the UltraShort Financials ETF (SKF) certainly is volatile, prices only briefly violated a key support level. Since this is a derivative of a derivative, technical analysis doesn’t nearly have the same relevance on SKF. Because I have a diversified portfolio, I was able to ignore the spike down in price to $96.40 (it was pre-market after all) below my ‘stop out’ area of $106.45. I liked the price action so much over the course of the day, and other important positions of mine (DUG, SMN) moved so much in my favor, that I elected to keep the position. (As a discretionary trader I remain flexible. However, this can be a dangerous game to play.)

Now that one finance firm after another is getting whacked, I expect the three largest components of SKF (JPM, BAC and C) to fall significantly over the next few months.

“BAC is going to come up against a confluence of resistance around $34.00 where outright resistance (horizontal red line), the declining trend line (black line) and the declining 200 day EMA will all meet up. With prices now overbought, and up volume still anemic, it is probable that resistance will hold.”

These levels held and violently rejected prices. BAC fell back “into the box” and then dropped through support around $28 before closing above that key level. BAC is run by executives blinded by greed. Countrywide Financial was not a bargain. Merril Lynch (MER) is not a bargain. They are giant, undefined liabilities. To expand like this in a credit crisis is border line retarded. BAC shareholders will eventually realize this…

Heads up. Morgan Stanely (MS) appears to be the next domino targeted for the fall…

Pre-market MS is down 15%...