Eoin Treacy's view During the recovery from the Nasdaq crash, banks were the leading sector. The underperformance of banks from 2007 was an indication that all was not well with the cyclical uptrend. They subsequently became the epicentre of risk during the financial crisis in 2008.

How banks perform is important because as liquidity providers they should do well in a bull market environment. Central banks globally have done their utmost to ensure the survival of the sector. Widespread recapitalisation has taken place. The spectre of litigation is increasingly being left behind. Interest rates are still at record lows and banks have had the benefit of a wide yield curve spread since 2009 to bolster their earnings.

The S&P 500 Banks Index found support relative to the S&P500 from August and the ratio broke the 18-month downtrend by November. It has held a progression of higher reaction lows for six months and a sustained move below 0.1 would be required to begin to question medium-term scope for continued outperformance.

In absolute terms the Index has been trending higher since August and is now testing the upper side of the developing three-year base. A break in the progression of higher reaction lows, currently near 140 would be required to question potential for a successful upward break. The KRX Regional Banks Index has rallied even more impressively and is also testing the upper side of its base.

Wells Fargo and PNC Financial are testing the upper side of their more than two year ranges. US Bancorp is outperforming and has already broken upwards. Capital One Financial has traded with more of a clear upward bias over the last year and is currently rallying to test its recovery highs.

In the Financial Services sector, American Express broke upwards to new recovery highs this week. Discover Financial Services is becoming increasingly overextended relative to its 200-day MA following 9 out of 10 weeks to the upside. A clear downward dynamic would be required to check momentum. Moody's Corp is currently testing its recovery peak.