Amid last week’s chaos, a little bit of hope showed up in a critical chart.

The Bullish Percent Index for the financial sector (BPFINA) just turned higher from oversold conditions.

Meaning that we now have a buy signal for the banking stocks.

And, since the action in the banks tends to lead the action in the broad stock market, a BPFINA buy signal could mean we’ve seen the worst of the recent stock market decline…

Take a look at this chart of the BPFINA…

(Click here to expand image)

Long-time readers know that a bullish percent index (BPI) shows the percentage of stocks in a sector that are trading in bullish technical patterns. It’s an easy way to measure overbought and oversold conditions for a sector.

Typically, a reading above 80 – meaning 80% of the stocks are trading in bullish technical patterns – indicates a sector is overbought. Readings below 30 indicate oversold conditions.

Buy and sell signals occur when a BPI reaches extreme levels and then reverses.

For example, when a BPI rallies above 80 and then turns lower, it generates a sell signal. When a BPI dips below 30 and then turns higher, that’s usually time to buy. At least… those are the general rules.

But it’s not a perfect indicator.

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The BPFINA turned higher from oversold conditions earlier this month. That buy signal was negated a few days later when the BPFINA dropped to a lower low. That led to a deeper decline in the banking sector and continued selling pressure in the broad stock market.

However, last week, the BPFINA dropped to its lowest level of the year (right blue arrow) – meaning the financial sector was more oversold than at any time in the past twelve months.

It turned higher on Friday… so, we have another buy signal.

Of course, there’s no guarantee this one will play out. But it’s rare to get two failed signals in a row. So, I like the odds.

The BPFINA buy signal back in March led to a 10% rally in the KBW Bank Index (BKX) in just two weeks. And that move went along with a 10% rally in the S&P 500 during the same time frame.

The BPFINA is more oversold today than it was in March.

So, I suspect whatever rally or bounce we get from this setup will be even stronger than what we saw in March.

Best regards and good trading,

Jeff Clark

Reader Mailbag

In today’s mailbag, Jeff Clark Trader member Frank shares his thoughts…

Jeff, I always thought that a naked put is a very dangerous strategy that can result in a big loss of capital or (if I’m lucky) maybe a big profit!

Nice to be back with you again. I’ve been losing money trading in this volatile market. I was lured in by your great price of $19.95 and hope you can get me back on the winning trail.

– Frank S.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at [email protected].