Banks

It is "lights out" for Financials.

Below is a daily chart of a capitalisation weighted index of JP Morgan, Bank of America, Wells Fargo, Citigroup and US Bancorp - the largest banks in the USA. As is clear, a very bearish pattern has been activated. I am not sure how long the joke of broader indices at or near the highs will last, but either banks rally hard, or indices come down.

Suspended in Disbelief

This is all getting rather boring. US large-caps are just about the only markets that are pushing towards new highs. EU markets are not, where stronger indices remain about 2% below October highs (DAX) while weaker ones are over 7% below those levels (Italy's MIB). Neither are Asian nor other Anglo-Saxon (Canada & Australia). Overall, I think October highs should provide cast iron ceilings for equities, and they will roll over soon.

This is a daily chart of the German MDAX (German mid-caps, excluding technology, that didn't make it into the DAX 30). Since their October highs, the mid-caps underperformed Germany's blue-chips. The risk is clearly to the downside, with stops above December and November highs.

This is a four-hourly chart of Australia's ASX200 index. It would be particularly sensitive to a China-led recovery. This index made no progress since the October highs, and remains over 5% below those levels. In addition, it looks particularly bearish from a wave perspective.

This is another index that should be quite sensitive to appreciating commodities - Canada's. While stronger than Australia's, Canada's index remains an underperformer relative to the US.

Road Map to Disaster

Stocks world-wide are looking increasingly weak. Banks and other financials are particularly weak.

This is a daily chart of the European Banking Index - and it does not look pretty. Last Friday (US payrolls) highs should act as very strong resistance (those levels are about 4.5% higher right now), and this index ought to fall to its 200 day moving average, about 16% lower.

This is a weekly chart of one of the BRIC darlings - Brazilian Petrobras. With over $200bn market cap, this is one of the largest companies on the planet, and it, too, does not look good.

Shifting Gears

BOTTOM LINE: This week's price action in European stock indices suggests that they have topped for this cycle, and will continue lower after a brief (up to 48 hours) correction higher.

Below is an hourly chart of the German DAX. From the high last Friday (US Payrolls day), the DAX fell in a clear impulse. I believe that the high last Friday finished a corrective structure in play since the 3 November low. This means that a new impulse is unfolding, which should soon take out that November low (5316, or 6.7% lower). DAX is one of the stronger EU indices; Italy's MIB is much weaker, and is perhaps a better candidate for a short.

Crunch Time pt II

BOTTOM LINE: Financials have likely peaked for this cycle, and remain dangerously close to crucial supports. These supports will likely break, pulling down the broader indices.

Below is a daily market cap weighted index of JP Morgan, Bank of America and Wells Fargo. The neckline of the head and shoulders top that took four months to form is about 2% away. I think breach of neckline supports is very likely, and should that happen, there is little in the way of supports until July lows. Not pretty at all.

This is a daily chart of the KBW Banks Index. So far, it is moving exactly according to plan, and yesterday's Bank of America news highs should provide very strong resistance. In the event of a bounce, those highs should be used as stop loss levels. Should those highs give way, a more complex correction is likely unfolding. I do not consider an upside break likely. Targets for this index remain about 12% below current levels.

Home Run

BOTTOM LINE: Not long to wait now for risk and related assets to start falling. Equities will fall, USD, government bonds and volatility will rise.

This is an hourly chart of the KBW Banking Index (BKX), shown with this very count on Tuesday 1 December. I see Bank of America (BAC) up about 3% following their announcement that they will repay $45bn. This would be enough to take the BKX higher by about 2%, given BAC is the largest constituent at 9%... and it would then come to the perfect zone of between 44.50 and 45.50 where the whole correction from 3 November 2009 should end. This will likely mark the end of wave II or B, which in either case would result in a move lower of at least the same magnitude as the October sell-off, which was 12.5%.

Banks

BOTTOM LINE: Banks will not do well. On shorter term charts (below is an hourly chart of the BKX - KBW banking index), ideally, we see a move higher to challenge today's highs. This would complete the corrective structure from 3 November 2009 lows.

Crunch Time

BOTTOM LINE: Risk and related assets retraced between 50% and 76.4% of their post-Dubai declines. The retracements so far, look corrective. Currently, pivots lie about 1.7% either way of the market. That much lower, and the corrective nature of the most recent rally is confirmed. That much higher, and 2009 cycle highs are exposed. For a host of reasons, I think that we break to the downside.

Here is an hourly chart of the German DAX. The rally following a very neat "Dubai" impulse lower is clearly corrective so far.

For technical "geeks": I count the impulse from early November lows to have finished at what, for most indices, is a secondary, later, lower high on 25 November, not an earlier high of 18 November. Of the major global indices, only the DJI managed to break the 18 November high.

Below is an hourly chart of SP500 futures. The count in purple was made 3 weeks ago on 11 November, and the final purple "5" never materialised. I think the red "5" took its place, and is a failure in all but the Dow.