Heightened risk of trade war and the resulting levels of increased financial volatility have investors looking for segments of the market where they can protect their capital. While it may not seem obvious at the moment, one of the market segments that is worth a closer look is U.S. financials.
The size, scale, and overall importance of the companies from this sector mean that they are essential to long-term success of the global economy. To date, they've shown the prowess to navigate challenges along the way, and the recent dip could be an ideal time to increase exposure.
Financial Select Sector SPDR Fund (XLV)
One method that many individuals use for gaining insight into broad segments of the market is to analyze popular exchange-traded-products such as the Financial Select Sector SPDR Fund (XLF). As you can see from the chart below, the recent talk of Chinese currency manipulation and heightened risk of trade war has coincided with a bounce off of an influential trendline. The drop over the past couple of trading sessions has sent the price near the support of the lower trendline and the 200-day moving average.
These levels have consistently acted as strong guides for determining the placement off buy, sell, and stop orders over the past several months. Followers of technical analysis will likely hold a bullish outlook on the financials sector and use the recent retracement as an opportunity to enter with one of the best risk-to-reward setups of the year. Stop-loss orders will most likely be placed below $26 in case the weakness is enough to reverse the direction of the long-term trend.
Bank of America Corporation (BAC)
Bank of America Corporation (BAC) is one of the behemoths of the U.S. financial sector and is a "go-to" stock for many long-term active traders. Taking a look at the chart below, you can see that the price is trading near the long-term support of the 200-day moving average (shown by the red line). The doji-style candlesticks that have formed over the past two sessions illustrate that the bulls are still in control of the trend and that a bounce higher could be in the cards.
Bullish traders will want to enter a position as close to current levels as possible and look for a bounce back toward the trendline near $31. By placing a stop-loss order below the recent low, this setup essentially means that traders are risking pennies to earn dollars should the momentum move in their favor.
The Goldman Sachs Group, Inc. (GS)
The global nature of the business of The Goldman Sachs Group, Inc. (GS) means that the company has strong exposure to geopolitical risk. However, with that said, the nature of Goldman Sachs also means that it has strong exposure to ongoing, established, and up-and-coming businesses from around the world, which act as a natural hedge. With a long-term view, entering a position in a company like Goldman Sachs during periods of market weakness is what many traders often dream of.
As you can see from the chart, the recent move toward the long-term support of the 50-day and 200-day moving average has also coincided with a bullish crossover between these two common indicators (as shown by the blue circle). This setup will be of specific interest to active traders because it is often used to mark the beginning of a major uptrend. Current levels also suggest that the risk/reward is clearly in favor of the bulls, and many will likely place stop-loss orders either below $196.80 or $182, depending on risk tolerance.
The Bottom Line
Recent market weakness has sent the price of major U.S. financials toward major levels of long-term support. As shown on the charts above, active traders will likely be looking to the recent weakness as an opportunity to buy. In most cases, traders will try to make the risk/reward setups work in their favor by placing stop-loss orders below the identified support levels in case the fear of trade war continues to escalate.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.