The KBW Bank Index (BKX) daily chart is a pretty textbook example of how the market reacts to what it has declared to be a significant price area, and the importance of observing that action. The $46 range was initial resistance back in the first few months of this year. However, the bulls were able to surpass it in mid-March. In April, the BKX came back down to test $46 and turned it into apparently firm support. On its face, turning a prior established resistance level into support is a bullish development.

However, continuing to test that newfound support ought to raise eyebrows, as the more a key level is tested the more likely it is to eventually give way. As you can see below, the Bank Index did just that when it started hanging out and leaning on $46 too much in early-May. $46 soon gave way to the downside. If you are looking for more evidence that $46 is, in fact, a significant price level at all, look no further than how ferociously the Bank Index sold off once it lost that handle. In other words, plenty of bulls had bought on the idea that $46 had turned from resistance into support, without acknowledging that the multiple retests of $46 as newfound support was a warning sign.

That May stop-loss waterfall led to a plethora of overhead supply or resistance for the BKX to work out, as you can see that each time price came back up to test $46 this summer it was stopped in its tracks. When that happens, either the supply will eventually get worked off, or the resistance will prove to be so insurmountable that it overpowers all demand and sharply rejects price for a fresh leg lower. That latter bearish scenario never materialized, as you can see that the BKX kept coming up for air at $46 despite each previous rejection.

Over the past two weeks, price swings tapered off significantly as mild (no longer wild and violent) indecision soon took over, coupled with volume drying up. Late last week, the bulls finally pushed up through $46 with a surge in buying volume on Friday. Psychologically and technically, the $46 level is now the bulls’ to lose, once again, with the presumption being that overhead supply has been adequately disposed. Keep in mind, just as cocky bulls got slaughtered back in early-May we do not want to presume that $46 must now automatically hold as support.

Instead, we simply respect this development and play along, looking for price to not spend too much time hanging out and leaning back down against this level. Indeed, bulls need to leave $46 in the dust for a while.

And that would be how you tame the bear.

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