It is little surprise that the U.S. financial sector is dominated by some of the largest and best-known financial institutions in the world. While most investor attention is given to these giant firms, it could be time to consider a different approach to investing in this important sector.

As you will read about below, chart patterns on regionally specific banks could offer lucrative buying opportunities with well-defined risk characteristics. We will look at charts from across the regional banking sector and try to determine how active traders will be looking to position themselves over the weeks and months ahead.

Key Takeaways

  • National banks get most of the attention when it comes to analyzing the financial sector, but bullish patterns suggest that the regional banks could outperform over the weeks ahead.
  • Nearby levels of support are creating lucrative risk/reward setups across the regional banking sector.

The SPDR S&P Regional Banking ETF (KRE)

As mentioned above, regional banking companies are not as well known as their larger national counterparts. Many active traders must rely on analyzing the top holdings of key exchange-traded funds (ETFs) such as the SPDR S&P Regional Banking ETF (KRE) to identify investment ideas for their portfolios. In the chart below, you can see that the upward momentum in the latter part of 2020 was enough to trigger a bullish crossover between the 50-day and 200-day moving averages. This long-term buy signal is often used by technical traders to mark the beginning of a prolonged move higher.

As confirmation of the move, followers of technical analysis will likely want to note the close above the 52-week highs and recent retracement toward the 50-day moving average. Bullish traders will likely look to place buy orders as close to $52.13 as possible and protect against a shift in market sentiment by placing stop-loss orders below $45 or $41.10, depending on tolerance and investment outlook.

Chart showing the share price performance of the SPDR S&P Regional Banking ETF (KRE)

StockCharts.com

First Republic Bank (FRC)

As one of the top holdings of the KRE ETF, First Republic Bank (FRC) will likely be one of the first companies to appear on the radars of active traders. In the chart below, you can see that the price traded within a period of consolidation for much of 2020. The strong bounce off its 200-day moving average was a clear indication that the bulls were gaining control of the momentum and a strong signal that prices were poised to make a move higher.

The increased buying interest in late 2020 combined with the successful test of its 50-day moving average are likely being used as confirmation of a move higher. Based on the chart pattern, followers of technical analysis will most likely look to place buy orders as close to $141.36 as possible. From a risk-management perspective, traders will probably look to protect against a sudden selloff by placing stop-loss orders below $129 or 118.74, depending on risk tolerance.

Chart showing the share price performance of First Republic Bank (FRC)

StockCharts.com

KeyCorp (KEY)

Another top holding of the KRE ETF that could capture the attention of traders over the weeks ahead is KeyCorp (KEY). Looking at the chart below, you will notice that the uptick in buying interest in late 2020 triggered a bullish crossover between the 50-day and 200-day moving averages. As discussed above, the bullish crossover is commonly used to mark the beginning of major uptrends.

The recent retracement toward the 50-day moving average is significant to active traders because it is offering a buying opportunity with well-defined risk/reward characteristics. Buy orders will likely be placed near current levels, while stop-losses will be placed below $16.52 or one of the other nearby support levels to protect against a move lower.

Chart showing the share price performance of KeyCorp (KEY)

StockCharts.com

The Bottom Line

Regional banking stocks often get overlooked in favor of their larger and more well-known national peers. However, based on the charts discussed above, the end to prolonged periods of consolidation suggests that a new long-term uptrend is just getting underway and could be presenting traders with lucrative risk/reward setups.

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