With the Federal Reserve signaling that they intend to continually, yet slowly raise interest rates for the foreseeable future we will look to the Financial Sector to see whether or not some opportunities exist for traders. The combination of a healthy economy together with a rising rate environment has often led to nice gains in this sector for individual stocks. However, the field is littered with small banks that may lack institutional sponsorship, have very small share floats and thin daily trading volumes. Morningstar lists 348 banks in this sector, so we have sifted through the inventory for you to see if we can find some interesting charts that may present us with some opportunities. Despite the recent breakout on the sector charts, we found many of the individual names still working through sideways bases. Additionally, many of the stocks that did attempt breakouts thus far failed to register the type of volume you would like to see to confirm the pattern. Let’s start with a look at the sector charts before moving to some individual stocks.
US Regional Banks- Morningstar’s Regional Bank Index shows a 15% gain since bouncing of the bottom of a nine month basing pattern on September 8th. The index cleared major resistance near the 1920.00 level this past Wednesday and quickly ran into the next area of resistance Friday near 1985.00, which marks the all-time high. Interestingly, this chart is nearly identical to the Russell 2000 chart, IWM, which broke out decisively to all-time highs this week. A sign of things to come for the sector?
XLF- Let’s take a quick look at the SPDR Financial ETF, ticker XLF, that shows a similar breakout attempt. The daily chart show a nicely formed Cup & Handle basing pattern but volume shows up at only slightly above average on breakout day as well as declining volume the following two days which shows lack of a follow through to this point.
FITB- Fifth Third, one of the large super regionals, has formed a 10 month cup and handle chart formation on the heels of out of a very similar pattern it carved out last August that led to a 30% advance in the shares. If your a breakout player, the chart looks fairly solid and should be on your radar. The only negative at this point is the lack of volume on the breakout attempt that came in at only average levels, a strong move above $28.00 would confirm the pattern. For larger, thicker stocks we would like to see at least a 30% increase in volume on the day of the breakout. Stock can succeed sometimes on tepid breakouts, but odds of a failure increase.
ZION- This is another big super regional with a similar issue. The stock attempted this week to breakout of a nice looking cup and handle formation, but volume came in lackluster. Weekly volume for this issue has been coming in at approximately 12.5 million shares, but this weeks breakout attempt registered only 11 million shares. Keep your eye on this issue to see if it can convincingly pull away from the $46.50 level on some bigger trade.
UBSI- United Bankshares shows a different pattern that we like to refer to as a Trend Transition pattern. These patterns, when successful, can get you into a stock early before it shows up on other traders radar netting big gains when you hit on them. The stock went into a steep decline starting last December losing 35% before forming a double bottom base between August and September. It has since rallied 20% of those lows forming a nice, tight moving average crossover. These types of patterns can signal a big change in character going forward. At this point we would be looking for a minimum of a one bar pullback before being triggered into the stock, but only on a resumption of the trend above the pullback area.
OSBC- Finally we have a smaller cap issue in Old Second Bancorp. The stock has a market cap of about 400 million and is thinly traded averaging just over 100,000 shares a day. Unlike the others, it has successfully broken out with confirming volume. The chart below shows nearly triple the daily average volume on breakout day followed by several days of follow through again, on much higher than average trade. The breakout trade has been missed, but keep this one on your watch list looking for a continued trend higher as it may set up as a nice pullback trade soon.
Other stocks in the sector to watch for that may possibly set up long trades include RF, PNC, KEY, SNV, CMA, HFWA, TFSL, NBN, TBK.