BALTIMORE (Stockpickr) -- Did you notice the subtle shift in stocks at the beginning of the summer? It was easy to miss, but grabbing hold of the new leadership in the market could help boost your gains in September. And it all comes back to the financial sector.
Financials started the year on shaky ground, but that suddenly changed at the start of June. Since the calendar June, financials have outperformed the rest of the S&P 500 by double, handing investors 6% gains on average. And from a relative strength standpoint, the financial sector is on a trajectory to continue that outperformance into the final quarter of 2014.
To make the most of that big stock shift, it still pays to be selective. That's why we're taking a closer technical look at five financial stocks to trade for gains in September -- four to buy and one to sell.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Up first is Royal Bank of Canada (RY) - Get Report , the second-largest banking stock in our neighbor to the North. Outperformance in shares of RY is nothing new -- the $118 billion banking stock has rallied more than 14.6% year-to-date, including $2.09 in dividends. But technically speaking, shares look ready to set off on another rally leg in the in the final months of 2014.
That's because RY is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (in this cast at $75) and uptrending support to the downside. Basically, as Royal Bank of Canada bounces in between those two technically significant price levels, it's getting squeezed closer and closer to a breakout above that $75 price ceiling. When that happens, we've got a big buy signal in shares.
The 50-day moving average has become a good proxy for support in recent sessions – if you decide to buy the $75 breakout in RY, I'd recommend putting a protective stop on the other side of that level.
We're seeing the exact same setup in shares of investment manager Federated Investors (FII) - Get Report . Like RY, Federated is forming an ascending triangle pattern, the big difference being that this setup is far more long-term. The buy signal comes on a move above resistance at $31.
Why all of that significance at that $31 level? It all comes down to buyers and sellers. Price patterns such as the ascending triangle are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Federated's stock.
The $31 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $31 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. It makes sense to sit on the sidelines until the breakout is confirmed with a close materially above that $31 mark.
Brazilian banking giant Itau Unibanco (ITUB) - Get Report has been correcting hard in September. Shares are down more than 10% since the start of the month, in fact. But zoom out a little further, and the context looks bullish. In fact, you don't need to be an expert technical trader to figure out what's going on in this stock; this setup is about as simple as they get.
ITUB has been bouncing its way higher in a textbook uptrending channel. The channel is formed by a pair of parallel trend lines that have corralled this stock's price action going all the way back to February, and so far, every successive test of trend line support has provided a low-risk, high-reward chance to buy shares. Put another way, this is a "buy-the-dips stock," and we're coming up on another dip this week.
It makes sense now to buy the bounce. Waiting for a bounce is important for two key reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring ITUB can actually still catch a bid along that line before you put your money on shares.
Big U.S. bank Wells Fargo (WFC) - Get Report has spent the summer consolidating sideways, bleeding off overbought momentum after moving higher in the first half of the year. But after doing a whole lot of nothing for the last few months, Wells is showing signs of a breakout thanks to a classical technical pattern that's forming in shares.
WFC is currently in forming an inverse head and shoulders pattern, a bullish setup that indicates exhaustion among sellers. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern’s “neckline” level, currently right at $52 resistance.
Lest you think that the inverse head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant." That's good reason to keep an eye on that $52 price tag in Wells Fargo this week.
Last up is $94 billion Australian bank Westpac Banking (WBK) - Get Report , our sole downside setup to watch this week. Westpac has had a pretty perfunctory year so far in 2014 -- shares have more or less kept pace with the rest of the financial sector from a performance standpoint, but don't fall into the trap here. WBK looks ready for a drop.
WBK is currently forming a broadening top, a bearish reversal pattern that's formed by a pair of diverging trend lines on this stock's chart. Statistically, broadening patterns have been found to lead to downside in stocks -- and worse, they inject additional volatility into price action. The sell signal comes on a breakdown through the bottom of the setup, currently at $30.50.
Relative strength adds some confidence to the downside bias in shares of WBK right now. This stock's relative strength line has been making lower highs since the pattern started forming in April, an indication that this stock is underperforming the broad market in good times and bad ones. As long as the relative strength downtrend remains intact, so will WBK's underperformance.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
Follow Stockpickr on Twitter and become a fan on Facebook.
At the time of publication, author had no positions in stocks mentioned. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji