In recent weeks, the financial sector has started to gain attention from active traders. While the sector has lagged many of the others for much of 2020, recent momentum in niche subsectors such as insurance and regional banks suggests that now could be the ideal time for followers of technical analysis to consider adding financials to their portfolios.

Key Takeaways

  • Recent breaks from influential levels of resistance on charts across the insurance industry suggest that this could be the segment to watch over the final weeks of 2020.
  • Trendlines on the charts of insurance-related stocks and exchange-traded funds (ETFs) will likely be used by traders for determining the placement of buy and stop orders.

SPDR S&P Insurance ETF (KIE)

Exchange-traded products such as the SPDR S&P Insurance ETF (KIE) are popular choices for most active traders who are interested in gaining exposure to niche market segments such as insurance. Fundamentally, the KIE ETF comprises 51 holdings from across the insurance industry such as insurance brokers, life and health insurance, property insurance, and reinsurance. Looking at the triangle pattern below, you can see that the price of the fund has been trading within a consolidation pattern since reaching the March lows.

Trend traders will note how the 200-day moving average has acted as the strongest level of resistance over the past several months and how the price action has changed since making consecutive closes above that level. The break above the 200-day moving average and then the dotted trendline, as shown by the blue circle, clearly shows that the bulls are in control of the momentum. Traders will likely use this recent price action as a sign that prices across the industry are poised to move higher over the final weeks of 2020. From a risk-management perspective, stop-loss orders will most likely be placed below $28.35 in case of a sudden shift in market sentiment or underlying fundamentals.

Chart showing the share price performance of the SPDR S&P Insurance ETF (KIE)
StockCharts.com

American International Group, Inc. (AIG)

As one of the top holdings of the KIE ETF, American International Group, Inc. (AIG) will likely pop onto the radar of active traders over the weeks ahead. Looking at the chart below, you will notice that the price of the stock recently surpassed the resistance of the 200-day moving average.

Active traders will be most interested in noting how the breakout has also triggered a bullish crossover between the 50-day and 200-day moving averages, as shown by the blue circle. Followers of technical analysis will likely look to buy as close to the dotted trendline as possible and protect against a move lower by placing stop-loss orders below $30.48.

Chart showing the share price performance of American International Group, Inc. (AIG)
StockCharts.com 

Aflac Incorporated (AFL)

Another top holding of the KIE ETF that could capture the attention of traders over the weeks ahead is Aflac Incorporated (AFL). Looking at the chart below, you can see that the price of the stock has been confined within a channel pattern since its recovery from the March lows. The recent break beyond the combined resistance of the dotted trendline and its 200-day moving average is a clear signal that the bulls are in control of the momentum.

As discussed in the case of AIG above, the bullish crossover between the long-term moving averages will likely be of specific interest to active traders. The popular long-term buy signal is often used to mark the early stages of a long-term uptrend. Traders will most likely protect against any sudden shifts in market sentiment or underlying fundamentals by placing stop-loss orders below $36.87.

Chart showing the share price performance of Aflac Incorporated (AFL)
StockCharts.com 

Insurance companies base their business models around assuming and diversifying risk. The essential insurance model involves pooling risk from individual payers and redistributing it across a larger portfolio. Most insurance companies generate revenue in two ways: Charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interest-generating assets.

The Bottom Line

The financial sector has started to capture the attention of active traders due to recent performance and nearby support and resistance levels. More specifically, this article provides a closer look at how some traders will likely be planning to focus their attention on the insurance industry – since many assets in this niche seem to have the most favorable risk/reward setups.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.