This column was originally published on RealMoney on March 21 at 12:30 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
Bank stocks have been running in place since the Philadelphia Banking Sector Index (BKX) broke above multiyear resistance in February.
Now, despite the mediocre performance, it appears this important group will move substantially higher in the months ahead.
You can take advantage of this embryonic rally by trading the strongest stocks and best-looking patterns in the sector. But keep in mind these two attributes are often in conflict.
Quite often, top-ranking stocks have risen so far they look overextended and dangerous to buy.
So it's best to focus your efforts on banking stocks that have slipped under the radar, with run-of-the-mill strength rankings and poorly defined uptrends.
A handful of these quiet issues will show pattern characteristics predicting they'll eventually become sector leaders.
Let's look at six of these emerging opportunities.
SVB Financial Group (SIVB)
rallied to a five-year high at $52.33 last July and pulled back in a deep correction.
It found support in the mid-$40s and ground sideways for more than four months before rallying back to the high last week. This should set the stage for a major uptrend.
The short-term pattern is unstable after last week's run into resistance. So look for a sideways consolidation lasting one to three weeks near current levels before the stock pushes into the mid-$50s.
That breakout should signal a continued run-up to the all-time high at $65. That lofty level would mark an excellent place to take profits.
Bank of America (BAC)
hit an all-time high at $47.47 in late 2004 and entered a long-term sideways pattern. Note the three lows in this broad trading range. These price levels now mark the outline of a bullish inverse head-and-shoulders pattern. This indicates a rally through $48 will trigger a multiyear breakout.
Last week's spike into resistance should yield to a quiet period of testing near current levels, before the stock starts its breakout run. This would offer longer-term players a good opportunity to build positions at advantageous price levels. This pattern shows excellent potential, with the six-point "head" predicting a short-term target in the mid-$50s.
New York Community Bancorp (NYB)
has been cut in half since peaking over $35 in 2004. Price stabilized in the midteens late last year and ran in place until last week, when the company was named as a possible addition to the S&P 500
index. The ensuing speculation triggered a sharp rally above five-month resistance and the 200-day moving average.
This breakout suggests the stock will begin a slow and persistent run back to old highs. But the recovery pattern demands a lot of patience, because unhappy shareholders caught in the 2004 selloff will keep pressure on rising prices for some time. So the best plan is to put this stock into a longer-term portfolio, with a stop loss below $15.
Several analysts have mentioned Amsouth (ASO)
as a takeover target in recent weeks. The rumor mill is now putting a strong bid under this East Coast banking stock. Also, take note of the broad triangle at resistance, started last December. This looks like a bullish consolidation before price breaks out above last year's high at $28.29.
That rally should trigger a strong uptrend that lasts for a number of weeks or months. Looking back, the stock reached its all-time high near $35 in 1999. This level marks a logical reward target for positions taken on a breakout above the triangle.
PNC Financial Services (PNC)
shows a bull pattern that might offer a better opportunity for traders than for investors. The stock rallied into four-year resistance at $71 in February and started to pull back in a bull flag. This pattern now looks like it will yield to a short-term breakout in the next week or two.
That rally should trigger a strong move above the February highs. But the stock faces further resistance at its all-time high just above $75. In fact, this barrier could trigger a downtrend that carries price far below the current pattern. So traders should take profits as the stock moves toward that key level.
Cathay General Bancorp (CATY)
is a West Coast bank that serves individuals and small businesses. The stock rallied to an all-time high at $40 in 2004 and pulled back in a deep correction. It found its low in early 2005, returned to the high last November and sold off once again. It's now gathering strength for a third run at resistance.
The next spike to $40 will complete a multiyear cup-and-handle pattern. Once it mounts this bullish formation, the stock should start an uptrend lasting for months. Prior to 2004, Cathay was a sector leader for nine years so it's possible the breakout will return the company to its former glory.
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