By Tom Aspray, MoneyShow.com

All of a sudden, regional bank stocks seem to be the flavor of the week, which is not surprising considering they have done so well since the October lows. Though the chart formations suggest that they can move even higher in 2012, now may not be the time to buy.

Most regional banks have a level of strong resistance not far above current levels, which is likely to cause a sharp setback for late buyers. As I have discussed frequently, a poor entry level is the root cause of many losing trades.

Though this week's action in the banking sector has been impressive, the probability of a fairly sharp correction in the next week or two has increased. Such a correction is likely to stop out many market skeptics, who after months of proclaiming the end of the world are just now buying stocks.

Given the typical seasonal pattern, a correction before the end of January is likely to set up a good buying opportunity and provide a better entry point for regional banks. Those that I recommended in the latter part of October (see "Regional Banks Ready to Break Out") are doing quite well, and I would now look to take partial profits on those positions in the near term.

There are also quite a few stocks -- including some regional banks -- that have just completed significant chart formations. Therefore, a 3% to 5% pullback should set up a good buying opportunity.

Click to enlarge

Chart Analysis: This weekly chart of the SPDR S&P Bank ETF (KBE), also known as the SPDR KBW Bank ETF, shows a nice rally from the October lows at $16.17, and with Tuesday’s close, it is up 30%. The former support (now resistance, line b) is at $22.25.

• The long-term downtrend on the weekly chart from the early 2010 highs, line a, is significantly higher at $26.30
• Relative performance, or RS analysis, has just completed its weekly bottom formation, moving above its previous peak and its now-rising weighted moving average (WMA)
• There is long-term RS resistance at line c
• October’s volume surge pushed the weekly on-balance volume (OBV) sharply above its moving average; the weighted moving average is rising and the OBV is acting stronger than prices, as it is already close to the early 2011 highs
• There is first good support at $20.30 to $20.50, with much stronger support in the $19.50 to $18.50 area

Regions Bank (RF) completed its reverse head-and-shoulders bottom formation just before Christmas as the neckline (line d) was overcome. Though RF is up 55% from the October lows at $3.02, in 2006, RF traded as high as $39.50.

• The minor 38.2% Fibonacci retracement resistance from the early 2011 highs is at $4.85 with the weekly Starc+ band at $5.20; the more important 50% retracement resistance stands at $5.50
• Daily RS analysis has a solid uptrend from the late September lows (line f) and broke its longer-term downtrend, line e, in the latter part of December; the overall pattern does looks positive
• Daily OBV broke through resistance, line g, just as RF was making its low in October
• Volume was the heaviest in early August when the left shoulder was being formed and was lower in December when the right shoulder was being formed
• Weekly OBV (not shown) formed a positive divergence at the October lows and is now above its weighted moving average
• There is initial support now in the $4.40 to $4.20 area with stronger support at $3.80

Click to enlarge