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Watch the Financials

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The areas of overhead resistance ,that I outlined in last Wednesday's 3:15 update, are in play once again as the Dow and NASDAQ charge ahead to the session highs.

Tech stocks have been pushed higher by solid gains in the Networking (NWX.X), Semiconductor (SOX.X), and Biotech (BTK.X) indices, while McDonalds (MCD), SBC Communications (SBC), and AT&T (T) are leading the way higher in the Industrials.

The proverbial $30,000 question: Does the current rally have legs, or will these gains simply afford the bears a better entry point before the averages experience another rollover from resistance?

The answer to that question might largely depend on the performance of the financial sector. As general market theory dictates, equity rallies without the participation of banking stocks are often short-lived and prone to sharp reversals. The inverse is true as well; strength in the financials has been a key component in the overall market bullishness over the past several weeks. To wit: The Dow Jones has gained 14% from is March lows. Not bad! But in a shining example of relative strength, the BXK.X (money center) banking index is up 20% from its March lows.

Annotated daily chart: BKX.X index:

The sector strength can largely be attributed to powerful rallies in JP Morgan (JPM) and Citigroup (C) - adding a stunning 43% and 30% from the March lows, respectively. The gains haven't been as pronounced in the BIX.X index, which measures the performance of regional banking stocks. Still, the group has held firm near the relative highs while maintaining its trend of higher lows.

Annotated daily chart - BIX.X index:

Traders can monitor these indexes - particularly the BKX.X - as the major averages approach their relative highs. Dow rallies in early-November, late-November, and mid-January all failed once the BKX rolled over near 800. A breakout above that region might portend another powerful upward leg in the Industrials.

Kent Barton

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