2016 was an exceptionally strong year for investors who held positions in the financials, and a recent pullback could provide investors with an opportune entry point should the momentum continue. In the article below we’ll dive into the charts and try to determine how technical traders will look to trade the resumption of one of the strongest trends in the public markets. (For more, see: Top 4 Financial Stocks for 2017).
Financial Select Sector SPDR Fund
With total net assets of $22.3 billion, the Financial Select Sector SPDR Fund (XLF) ETF is one of the most popular exchange-traded funds used by retail investors for gaining exposure to financials. In case you aren’t familiar, this ETF is comprised of 65 high-quality financial companies, and it trades with a reasonable gross expense ratio of 0.14%. Taking a look at the chart, you can see that the bulls were tripping over each other to get into a position in late 2016 and that the price is currently in the process of reverting toward the support of a major long-term level of support. As you may know, mean reversion theory suggests that sustainable trends are created when prices move back to long-term averages after a strong short-term rally. Based on the pattern below, the bulls will likely be looking for buying opportunities near $21.50, which is the level of the 200-day moving average and the long-term ascending trendline.
Citigroup, Inc. (C) is one of the behemoths when it comes to the financial sector. With a market cap of $160 billion, there are only a handful of players with broad enough operations to be able to even compete with the company. Taking a look at the chart, you can see that the price has been trading within a confined trading range for most of 2017 and the recent pullback could be providing an excellent buying opportunity for those who expect the price to break above the resistance near $62.50. From a risk-management perspective, active traders will likely place their stop-loss orders below either the ascending trendline or the 200-day moving average (red line) depending on risk tolerance. (For more, check out: How Citigroup Makes Its Money).
Bank of America Corp.
One of the most widely-followed financial companies is Bank of America. BAC's enormous market cap of $227.4 billion, puts it in a class of its own. Taking a look at the chart, you’ll notice that the recent pullback toward the horizontal trendline could provide the support that traders are looking for in timing their entry. Some traders may choose to wait on the sidelines and try buying near longer-term levels of support such as the ascending trendline or the 200-day moving average. (For more, see: Good Omen for Financials: BoA’s Net Interest Income Surges).
The Bottom Line
The financial sector was one of the darlings in 2016. As discussed above, if the momentum continues in 2017, then the recent pullback toward key support levels could be the buying opportunity many bulls have been waiting for. (For more, see: Top 5 Financial Sector Mutual Funds).
At the time of writing, Casey Murphy did not own shares of any of the assets mentioned.