Back On Dec 4, 2006 The Banking Sector Was Doing Fine.

When I wrote the article "Is Banking Tanking?" in early December last year, the banking sector was rallying like every other sector. Well, almost. The only cloud on the horizon: it had gone from a leading sector to a laggard sector since the June 2006 low.

Two and a half months after my article, on February 20, 2007, the Banking Sector (S&P Banking Sector Index, BIX) finally topped out. I guess most of the readers of that original article had forgotten it by then.

But take a look at an updated chart of the S&P Banking Sector Index (BIX): Banking Really Is Tanking!

There was no sign of banking tanking when I published the original article. That was then, but now? Yes banking really is tanking. In fact, it has recently gone into near-vertical free-fall.

I've analyzed the BIX chart and data, and believe it could slide another 20% yet, and ultimately bottom out around 290. That would be 30% below the February high of 414.84. The current near-vertical plunge could take BIX all the way to 290 in a few crazy days of panic. It COULD, but I doubt it will.

What's much more likely is a traditional A-B-C decline in a double zigzag form.

The decline to point A of the zigzag should be very nearly complete. A bounce should follow next to point B (likely to be near 390), then the next plunge to point C of the zigzag, at under 300.

I think BIX should bottom soon in the 345 to 355 range as there is a strong band of support in this region. We should then see it bounce strongly in a zigzag to somewhere near 390.

This coming bounce could last a few months, or even stretch out to the end of the year.

After that bounce another dramatic plummet south should unfold. Only this time I expect the major US indexes to join the plunge south in earnest. Something like eight or more consecutive down days for the DJI, including a few dramatic ones, is what I have in mind (more on that in an upcoming article: "Seven Years Bad Luck").

But that may be next year. Right now we are about to enter what may be the last good buying opportunity in US markets for a long time to come. In the immediate term BIX should not drop below 345 in any persistent way. If it does, even I will be frightened as the only suitable explanation that comes to mind is that dreaded five-letter word: CRASH! I don't think we're heading there - at least not yet. But I may be wrong. This is certainly no time for complacency.

Volatility is back! Yes, I predicted that as well - in my November 2006 article: "Outlook For 2007 And Beyond".

View the full version of this article, including a chart of BIX and links to the other articles mentioned, at www.TrendSensor.com/MarketBrief/ DISCLOSURE: Murray Nickel holds no position in BIX.