If you want to know how things are going in Europe, all you need to do is watch the banks.
No sector has been more vulnerable to the potential for a major financial crisis in Europe than financials, particularly the big, money center banks like Citigroup ( C ) and JP Morgan Chase ( JPM ). And the fact that these stocks have been moving in virtually a straight line higher over the past few days is a clear signal that those betting on the end of the world - or at least the end of Europe as we know it - are taking those bets off the board.
In this process, which consists largely of short sellers frantically buying back borrowed shares, stocks like JPM have rallied like rockets. JPM, for example, has gained for five out of the past seven days, climbing by 18%. Shares of Citigroup have finished higher for six out of the past seven, gaining more than 25%. These gains have been typical throughout the sector.
What has also been typical throughout the sector are newly overbought conditions. With JPM up well over 3% and C gaining well over 5%, both stocks - as well as fellow money center bank Wells Fargo ( WFC ), which added more than 2% - have arrived at levels where sellers and short sellers have tended to emerge to take advantage of short term price highs.
Traders can see evidence of this in previous rallies in these stocks trading below their 200-day moving averages . An overbought close in late October in Citigroup sent the stock lower for the next three days in a row, losing more than 13%. Finishing in overbought territory near the end of August, JP Morgan Chase fell for four out of the next five days, slipping by well over 10%.
Historically speaking, additional strength will be required in order to finally provoke sellers and short sellers to respond to short-term overbought extremes. With all three stocks earning negative edges ahead of trading on Tuesday, the largest negative edge is in Citigroup, which has a negative edge of more than 2%. Shares of JP Morgan Chase have a negative edge of more than 1%, while Wells Fargo has a negative, short-term edge of just under 1%.
All of the stocks in today's report were available from research and data available through The Machine. To learn more, click here .
David Penn is Editor in Chief of TradingMarkets.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.