The strong action in financials last week suggests it is now becoming a market-leading sector. Drilling down, MoneyShow’s Tom Aspray finds two bank stocks that have overcome key resistance and look attractive for a new purchase on the next pullback.

The Select Spyder SPDR Financial ETF (XLF) was one of the two of the main sectors that gained over 3% last week. As I noted in my Week Ahead column, the action of the financial and material stocks may be an important development for the overall market.

Since the June lows, XLF has gained 17.8%, while the Spyder Trust (SPY) is up 13.5%. The XLF was a major drag on the market in 2011 as it lost 18.5% while the SPY was pretty much unchanged.

Clearly, technology stocks have been leading the market higher, and if the financial stocks are now becoming a leading sector it may help push the market to significant new high. The SPDR S&P Bank ETF (KBE) was up over 4% for the week, and two well-known bank stocks have closed above key resistance and are likely to see significant new highs.

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Chart Analysis: The Select Spyder SPDR Financial ETF (XLF) closed above the weekly downtrend, line a, last week. The next resistance is from the early 2012 highs in the $16 area.

  • Using the correction from the early 2012 highs, the 127.2% Fibonacci retracement target is at $16.83, with the February 2011 highs at $17.20.

In 2007, XLF had a high of $38.22, so the major 38.2% retracement resistance is at $18.20. The major 50% retracement resistance is at $22.02.

The weekly relative performance or RS analysis has moved further above its WMA, and has held its uptrend (line b).

The daily RS analysis (not shown) has moved above the July highs, and is in a clear uptrend.

The weekly on-balance volume (OBV) has broken through the resistance that goes back to early 2011 (line c) and shows a solid uptrend (line d).

The 50% support from the 2011 lows was broken in early June, but not on a closing basis.

There is short-term support now at $15 to $15.25, and then at $14.50.

Wells Fargo (WFC) closed above the resistance from 2010 (line e) on Friday. Next major resistance from 2008 is in the $39 to $44 area.

  • The completion of the $12 trading range that has been in effect since 2010 has upside targets in the $47 area.

The weekly relative performance has been in an uptrend since late 2011, as it shows a pattern of higher lows and higher highs.

The RS line closed last week just barely above its WMA, and a move above the major resistance (line f) would be very positive.

The weekly OBV overcame its two-year downtrend (line h) in early 2012, and is in a solid uptrend.

The daily volume last Thursday and Friday was 10 million more than the daily average.

Short-term support now sits at $34.46 to $34.66, with stronger levels in the $33.70 to $34 area. Major support follows in the $32.60 area.

Next: BB&T

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BB&T (BBT) also accelerated to the upside late last week on good volume. The weekly chart shows that BBT closed above weekly resistance (line b) at $32.74.

  • On the long-term weekly chart, there is resistance from 2010 at $35.70.

The long-term downtrend in relative performance (line d) was broken in early 2012, and the RS line has turned up from support (line e).

The RS line is now back above its WMA.

The weekly OBV turned positive last October when it moved through its downtrend (line f).

The OBV has turned up from its uptrend (line g), and is holding above its rising WMA.

The daily OBV and RS lines (not shown) have turned up sharply.

There is initial support now at $32.40 to $31.80, with much stronger levels now at $30.80 to $31.20.

What it Means: The XLF and these two bank stocks are slightly overextended on a short-term basis, as is the overall market.

Both WFC and BBT yield well over 2%, and the long-term breakouts are consistent with another 15% to 20% on the upside. XLF has a 10% weighting in WFC.

I like both of the bank stocks and XLF on a pullback. Those who are already long XLF could add to their positions.

How to Profit: For the Select Sector SPDR Financials (XLF), go 50% long at $15.24 with a stop at $14.42 (risk of approx. 5.4%).

For Wells Fargo (WFC) go 50% long at $34.64 and 50% long at $34.14, with a stop at $32.52 (risk of approx. 5.4%).

For BB&T (BBT), go 50% long at $32.28 and 50% long at $31.86, with a stop at $30.28 (risk of approx. 5.9%).

Portfolio Update: For the Select Sector SPDR Financials (XLF), investors should be 50% long at $14.36. Keep the stop at $14.16.

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