BALTIMORE (Stockpickr) -- Who the heck wants to buy banks right now? The financial sector has underperformed the S&P 500 by 20% in the last 12 months, and it's no surprise that investors are anxious about banks this summer -- especially after Jamie Dimon's high-profile appearance on Capitol Hill yesterday.
But as every good
knows, the crowd is usually wrong at turning points. So the glut of investor anxiety around the financial sector this summer might be exactly why it's worth a second look.
High correlations plague bank and insurance stocks more than any other industry. In other words, a preponderance of factors make all financials trade together - so more often than not, the whole sector is either a buy or a sell; there isn't a whole lot of diversity in the financial sector's price action. But there are a handful of financial names that are looking strong from a technical standpoint. Today, we'll look at five of the big name financial stocks worth buying.
If you're new to
, here's the executive summary:
Technicals are a study of the market itself. Since the market is ultimately the only mechanism that determines a stock's price, technical analysis is a valuable tool even in the roughest of trading conditions. Technical charts are used every day by proprietary trading floors, Wall Street's biggest financial firms, and individual investors to get an edge on the market. And research shows that skilled technical traders can bank gains as much as 90% of the time.
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Every week, we take an in-depth look at big names that are telling important technical stories. Here's this week's look at the technicals of
Bank holding company
is more than just your typical banking stock. The $63 billion firm is best known for its payment card network, and a spend-centric business model that's made some investors nervous that a slump in consumer spending could derail share prices.
But the technicals are saying "buy" right now.
American Express has been trading in an uptrending channel for the better part of the last year, bouncing in between parallel support and resistance levels all the way up. A channel is helpful for traders because it gives us a good way to gauge an optimal entry and exit in AXP -- you want to buy at
and sell as shares approach resistance higher up.
Shares of AXP slammed into support earlier this month, bouncing slightly higher to where they are now in the $55 range. That gives traders a good opportunity to buy. I like the fact that AXP has been so obedient to that
level -- we haven't had a close below that level since well before the October 2011 lows.
If you decide to buy AXP, I'd recommend putting a
just below last week's lows.
I also featured American Express, one of
, recently in "
Capital One Financial
A very similar trade is setting up in shares of
Capital One Financial
, a $30 billion diversified financial services firm that's up more than 23% in 2012. Investors could be in for even more upside in the second half of the year.
Capital One, like Amex, has been in an uptrending channel since October, bouncing in between our parallel support and resistance levels as shares climbed higher. Also like Amex, COF tested trend line support at the start of June, bouncing higher through the channel after catching a bid at support. Even though shares briefly penetrated that trend line support level at the start of the month, a slightly modified morning star pattern formed immediately, reversing the break and putting shares back in the channel.
That's a strong enough reaction from buyers to ignore the two-session slip below support.
As with any trading channel, it's critical to wait for the bounce to happen. After all, support levels do eventually fail, and when they do you don't want to be the one holding the bag. The morning start in COF shows us that there's still buying pressure under trend line support. I'd recommend putting a protective stop at $48 if you decide to buy here.
As of the most recently reported quarter, Capital One Financial was one of the
and also showed up in
I mentioned Jamie Dimon a little earlier, so I may as well talk about his company,
. JPM has been the talk of the town since announcing a hedge-gone-amok that's transformed into a $2 billion (or more) trading loss. Even though the drama is still swirling around JPMorgan this week, it looks like the selling pressures have abated in this stock.
Here's when to buy:
In the short term, JPM is forming an inverse head-and-shoulders pattern, a setup that indicates exhaustion among sellers. The neckline level for this pattern is at $34.50; that's the price where it makes sense to be a buyer. If JPM can breakout above that $34.50 level, we know that buyers have regained control of this giant bank.
Since late December,
has done a stellar job of leading price for JPM this year. With the downtrend in this stock's 14-day RSI broken and a new uptrend begun, an upside breakout seems likely. When it happens, I'd recommend placing a protective stop at $32.
I also featured JPMorgan recently in "
," and it shows up on a list of
is showing traders an almost identical pattern to the one in JPMorgan right now. Like JPM, TD Bank broke its uptrend back in April and corrected hard as early sellers took their gains and weak hands got forced out of the stock. Now, with sellers getting exhausted, a textbook inverse head and shoulders pattern is forming in shares.
Also like JPM, the inverse head and shoulders in shares of TD is a short-term setup, but it could very well lead to a more meaningful move higher. The neckline level to watch for the TD trade is $78 -- that's the price that connects the tops of the setup. A breakout above $78 means buy TD.
Lest you think that this pattern is less useful since it's so well known, think again: an 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 a good reason to keep an eye on both JPM and TD this week. I'd recommend placing a stop just below the 50-day
on this stock.
I also featured TD earlier this week in "
Last up is insurer
, a stock that's showing traders a textbook example of an ascending triangle pattern right now.
Put simply, an ascending triangle pattern is a setup that's identified by a horizontal resistance level to the upside and uptrending support below. As shares bounce in between those two technically significant price levels, they're getting squeezed closer and closer to a
above resistance (in this case at $90). When the breakout happens, we have a signal that the glut of supply that's cause $90 to act as a barrier has been completely absorbed by buyers. That's when we want to buy too.
I like the fact that PRA has hit its head so perfectly on $90 resistance the last seven times it's attempted to move through that level. A strong resistance level like that means that shares will have a much more snappy move once the oversupply of shares above $90 gets taken out.
To see this week's trades 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.