As the stock market fell last week, Financials was the hardest hit sector, with the Financial Select Sector SPDR (ARCA:XLF) down 4.01%. The drop is threatening minor support, and if broken, warns of continued selling pressure. The following financial stocks have already broken lower, showing significant relative weakness over the previous weeks and months. With the potential for further declines in the sector as a whole, these stocks offer shorting opportunities.
Lincoln National (NYSE:LNC) has been very strong over the last year, up 40.61%, but was down 9.04% last week on very aggressive selling. Over the last several months the stock made a number of attempts to break and hold above $52, but was unable to do it. This created the potential for a major double top formation. The low of the formation was $45.71, which was broken on April 11. Continued selling below that level confirms the double top and signals further downside, likely into the $40 to $39 region. Even if the price bounces higher off support, another shorting opportunity comes in between $47 and $49. A move into this region, followed by a move back lower, signals the short trade and an eventual move to the target zone.
Prudential Financial (NYSE:PRU) topped out in December and has been making lower-highs since. The stock was down 7.97% last week as it broke well below the prior swing low of $79.54. This indicates a downtrend is likely underway. There, support down to $76, which could cause a short-term bounce. A rise into the $83 to $85 zone provides another potential shorting opportunity, once the price enters the zone and begins to drop again. If price breaks below $74.10 a major topping pattern will be in place, indicating a long-term target of $60.
Fortress Investment Group (NYSE:FIG) has been largely range-bound since September, but a 6.69% drop last week took the price below support. That breakout could take the stock down to $5.50. On the other hand, a rally back above $7.75 indicates the downside breakout could be false, signaling a continuation of the range. Given the sell-off on April 11, and the numerous failed attempts to break and hold above $9, downside momentum is likely to continue. Minor rallies that stay below $7.75 also present opportunities to take a short position.
State Street (NYSE:STT) finished down 6.58% last week, but more notably broke through support on a major topping pattern. Since July the price has made a large head and shoulders pattern, with support above $64.21. On April 11 the stock closed below that level, signaling a longer-term downtrend has likely begun. The downside target is $55 based on the pattern. A sharp rally back above $65 could indicate the range which began in mid-January is continuing. Although given the larger context, the price is unlikely to rally above $71, and therefore short-term rallies present selling/shorting opportunities.
Goldman Sachs (NYSE:GS) was also down more than 6% last week, and is down more than 13% YTD.
The Bottom Line
The S&P 500 has seen some aggressive selling lately, led by the financial sector. This has been a relentless bull market though, so caution is warranted when taking short positions. Though, if taking short positions against a broader rally, it is best to acquire positions in stocks that are already showing weakness, and where there is evidence that the weakness will continue. Manage the risk on trades with a stop loss, placed at such a level that it is unlikely to be reached on minor rallies, but limits risk to a small percentage of your trading account if the price trend reverses higher.