BALTIMORE (Stockpickr) -- Stocks may be having a tough year in 2011, but the selling in the broad market doesn't even come close to the pain that's been felt in the financial sector this year. As a group, financials have sold off by more than 30.6% year-to-date, leaving investors in need of a 44% rebound just to get back to breakeven. But that may be exactly why it makes sense to buy financials right now.
Even though the selling in the financial sector has been brutal this year, a large number of financial names have been basing in recent weeks and months, pointing some traders to indications that we could see some semblance of a recovery in financials for 2012. With valuations looking cheaper than ever for the sector, value investors could join in on the act too.
The only caveat, of course, is that it doesn't make sense to buy up financial sector names with both hands. There's still considerable risk weighing against this industry. To find the names worth watching this week, we'll turn to the technicals.
For the unfamiliar,
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.
2012 Stock Predictions and Outlook
With that, here's a look at
that could deliver breakout gains to your portfolio this week.
American Financial Group
Things have been comparatively good this year for shares of
American Financial Group
, a mid-cap property and casualty insurance company that's rallied 10.47% year-to-date in addition to a 1.96% dividend yield for shareholders. As positive as this stock's performance may have been in 2011, shares look primed to deliver more stock outperformance in 2012.
That's thanks to a bullish ascending triangle setup in shares. An ascending triangle can be identified by a staunch horizontal resistance level (at $37, in AFG's case) and uptrending support below shares. When this stock breaks out above that $37 level, it's a signal that it's time to become a buyer of this stock.
is acting like a reasonable proxy for support right now. For that reason, it makes sense to use that MA as a protectivee stop level for AFG. Because the moving average approximates the trend in this stock, it'll act as a trailing stop.
is another name that's sporting an ascending triangle pattern right now. In the case of this Florida-based banking stock, overhead resistance is in at $23, and support is trending higher from the company's late-October lows. The buy signal comes on the breakout above $23.
In an ascending triangle pattern, as with any other technical formation, it's great to know how to spot it -- but it's more important to understand
the setup works. In BKU, for instance, the $23 resistance level identifies a large pocket of supply of shares. As buyers bid the stock higher, bids get absorbed by selling pressures at the $23 level, causing that price to act as a sort of "ceiling" for shares. In an ascending triangle, though, shares bounce in between support and resistance, squeezing shares closer and closer to that resistance level and increasing the probability of a breakout.
Once shares actually push above $23, we'll have a good indication that the excess of supply above $23 has been completely absorbed. Another important factor in BKU right now is
, a leading indicator that's measured in this case by the 14-day RSI at the top of BKU's chart. In this situation, momentum confirms the upside potential of the triangle.
While most investors would normally think of
as a real estate play, it's really not. This REIT, like most others, uses long-term triple-net leases to effectively remove most of the short-term exposure to the commercial real estate market from its income statement. Instead, this financial trust should really be thought of purely as an income vehicle.
Kimco hasn't been immune to selling this year, but shares have been forming a horizontal base since the start of August. That behavior points to the potential for a recovery in shares -- but the direction of this trade isn't as clear as it is in AFG or BKU.
Instead, Kimco is currently forming an "if/then trade," a setup whose direction is contingent on the direction of the breakout from its horizontal channel. The setup works like this:
shares of Kimco breakout above $17.50 resistance,
it becomes a buy. Otherwise,
shares break down below the support range between $14 and $14.50,
it becomes a sell.
Either way this trade materializes, I'd recommend keeping a protective stop just back within the channel.
I featured Kimco last month in "
is showing traders a more directional setup right now. Shares of the $10.5 billion financial services firm have gotten dragged down alongside the rest of the industry in 2011, tumbling more than 19% year-to-date, but this stock is showing signs of a bottom right now.
More precisely, that bottom came in early October, when Ameriprise mirrored new lows being set in the broad market. Since then, shares have bounced higher to form an inverse head-and-shoulders setup, a pattern that indicates exhaustion among sellers. In Ameriprise, the buy signal comes on a breakout above the pattern's neckline at $48. While it's a short-term pattern, the trading implications look strong in this name going into 2012.
RSI is confirming the upside bias in Ameriprise right now. A break of the RSI trendline would be an early warning signal to watch for a sell signal in Ameriprise. In the mean time, it makes sense to keep a protective stop just under the right shoulder at 44.
I also featured Ameriprise, which shows up on a list of
, in "
Canadian Imperial Bank of Commerce
Things are looking somewhat less bullish for
Canadian Imperial Bank of Commerce
, also known as CIBC, one of Canada's big-six banks. CIBC has been locked in a downtrending channel for most of the last six months, bounded by well defined resistance to the upside and support below. That channel provides short sellers with a quantifiable risk/reward tradeoff right now.
For investors looking to short CIBC, the ideal entry comes on a bounce off of trend line resistance. The key word there is bounce -- trend lines do eventually fail, and traders will need to see that the resistance level in this stock is still intact before taking a position in shares. When it happens, the price target to watch is a move back down to the bottom of the channel.
To see these plays in action, check out the
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.