By Tom Aspray, MoneyShow.com

It has been a rough year for the financial sector, and the widely watched Select Sector SPDR Financial (XLF) traded as high as $17.20 in February, but as low as $10.95 in early October. The big money-center banks like Bank of America (BAC) and Citigroup (C) have gotten much of the attention, though smaller regional banks have also been under selling pressure.

Many of these smaller banks do not face the challenges or overseas exposure of the big banks, and technically, several of these banks have completed daily bottom formations. The SPDR KBW Bank ETF (KBE) has already broken through resistance that goes back to August.

There are several regional banks that also look ready to break out to the upside and have the potential to rally 10%-20% before the end of the year.

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Chart Analysis: The SPDR KBW Bank ETF (KBE) made its low of $18.31 on October 4 before reversing sharply to the upside, closing the day just above $20. The daily chart resistance in the $22.40 area, line a, was overcome on Friday (Oct. 21) and KBE was higher on Monday.

• The daily downtrend is now at $24.70 with last summer’s highs in the $26 area
• The relative performance, or RS analysis, has completed its daily bottom formation, as the resistance at line c has been overcome. The uptrend in the RS, line d, is also positive
• The daily on-balance volume (OBV) has also risen sharply over the past week. It is acting stronger than prices and has surged through resistance at line e
• After initial support at $22.40, there is much stronger support in the $20.50-$21.50 area

Regions Financial Corp. (RF) is a $4.9 billion southeast regional bank. It was one of the most liquid regional banks, averaging 27 million shares per day. There is minor resistance now at $4.00 with stronger resistance in the $4.50 area.

• The 38.2% Fibonacci retracement resistance, as calculated from the February highs at $8.09, is at $4.85 with the 50% level at $5.49
• The daily OBV formed a short-term positive divergence at the October lows, line h
• This was confirmed by the move through the downtrend, line g, and the OBV is acting stronger than prices
• The weekly OBV (not shown) also formed a positive divergence at the lows and has moved above its weighted moving average (WMA)
• There is initial support in the $3.40-$3.70 area

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PrivateBancorp Inc. (PVTB) is a $650 million midwest regional bank that is scheduled to release earnings today. PVTB closed just below resistance at $9.45, line a, which could easily be overcome.

• The 38.2% retracement resistance is at $10.25 with the 50% resistance at $11.50
• The daily OBV broke through resistance almost two weeks ago, and volume spiked last Friday to over two million shares. The OBV formed a positive divergence at the lows
• The weekly OBV (not shown) is still below its weighted moving average
• There is near-term support now in the $8.40-$8.80 area

Comerica Inc. (CMA) is a $4.9 billion midwest regional bank that traded as high as $43.53 at the start of this year. CMA dropped 11% last week after its earnings were released and its net interest margin declined but net income surged 66%.

• CMA is trying to rebound from last week’s lows at $22.85 with next resistance at $26 and more important resistance at $27.37 (line c)
• The 38.2% retracement resistance stands at $29.86 with the 50% resistance at $32.50
• While the price chart shows lower lows, line d, the OBV formed higher lows, line f. The OBV is above its weighted moving average but needs to overcome resistance at line e for an upside breakout
• The weekly OBV (not shown) shows a potential bottom formation that could be completed in the next week or two

What It Means: After being out of favor for most of 2011, these three regional banks have good upside potential as we head into the end of the year. It is too early from a technical standpoint to be confident that major lows are being formed, although it is possible.

As a result, if long positions are established, it would be wise to sell half of the position at first retracement resistance in order to reduce the cost on the core position.

How to Profit: For Regions Financial Corp. (RF), buy at $3.82 with a stop at $3.38 (risk of approx. 11.5%). Sell half the position at $5.22 and raise the stop to breakeven on the remaining position. Cancel the order if $4.22 is hit first.

For PrivateBancorp Inc. (PVTB), buy at $9.06 with a stop at $7.88 (risk of approx. 13.02%). Sell half the position at $10.14 and raise the stop to breakeven on the remaining position. Cancel the order if $9.86 is hit first.

For Comerica Inc. (CMA), buy at $24.14 with a stop at $22.42 (risk of approx. 7%). Sell half the position at $29.58 and raise the stop to breakeven on the remaining position. Cancel the order if $26.76 is hit first.