BALTIMORE ( Stockpickr) -- Stocks are trying to regain their lost ground this week -- and the financial sector is leading the charge. >>5 Stocks Under $10 Set to Soar Actually, financials have been leading the way for the last few months, shoving their way higher at the same time that the broad market corrected. That relative strength shouldn't be lost on you. Statistically, stocks with outsized relative strength tend to continue to beat the market for three-to-ten months. That's material outperformance. That's why we're taking a technical look at the trading setups brewing in five financial stocks today. 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. >>5 Stock Charts You Need to See So, without further ado, let's take a look at five technical setups worth trading now.
Up first is banking giant Wells Fargo ( WFC). Wells has been testing a breakout for the last few trading sessions -- and we could see a buy signal get triggered in today's session. Here's how to trade it. >>5 Stocks Ready to Break Out Wells Fargo has been forming an ascending triangle setup for the last month and change. The ascending triangle is formed by a horizontal resistance level above shares at $41.50 and uptrending support to the downside. As WFC bounces in between those two technically important price levels, it's getting squeezed closer and closer to a breakout above that $41.50 resistance level. When that breakout happens, it's time to step into a position. The recent momentum breakout in WFC adds some extra upside confidence to this setup. Our momentum gauge, 14-day RSI, had been trending lower since the first week in May. The breakout this week increases the probability of a breakout in price. If you decide to jump into WFC, I'd recommend a protective stop at the 50-day moving average.
We're seeing the exact same setup in shares of EverBank Financial ( EVER) -- just in the longer-term. EverBank has been forming an ascending triangle pattern of its own since all the way back in early March. For this pattern, resistance comes into play at $17, and uptrending support connects the 200-day and 50-day moving averages. A breakout above $17 is the signal to jump into shares. Why exactly? >>4 Hated Earnings Stocks You Should Love Whenever you're looking at any technical price pattern, it's critical to think in terms of buyers and sellers. Triangles and other price pattern names are a good quick way to explain what's going on in this stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares. That resistance line at $17, for example, is a price at which there's an excess of supply of shares; in other words, it's a place where sellers have been more eager to take recent gains and sell their shares than buyers have been to buy. That's what makes the breakout above it so significant -- a breakout indicates that buyers are finally strong enough to absorb all of the excess supply above that price level. Don't go long EVER until that happens.
You don't have to be an expert technical analyst to figure out the pattern shaping up in shares of Comerica ( CMA); the $7.5 billion banking stock has been in a well-formed uptrending channel since all the way back in November. >>4 Big Stocks on Traders' Radars In a lot of ways, the uptrend in Comerica has mirrored the one in the broad market. There's been just one big difference: Comerica held its trendline support level in June when the S&P 500 broke down. That's a key indicator that CMA is outperforming the broad market. And that fact makes Comerica a "buy the dips" stock -- the ideal time to jump into shares comes on a bounce off of support. Buying on a bounce off of support makes sense for a couple of reasons. First, it's the place where there's the most upside potential to the top of the channel, and second, it's the place where we'll know we're wrong most quickly. A breakdown below the bottom of the channel is the exit signal in CMA; since it's been a good proxy for support, I'd recommend keeping a protective stop at the 50-day moving average.
Arthur J. Gallagher
The chart of Arthur J. Gallagher ( AJG) looks a lot like the chart of Comerica, except AJG is flipped over on its side. Unlike Comerica's uptrend, this insurance brokerage stock has been trending sideways in a pattern called a rectangle. The rectangle gets its name because horizontal resistance and support levels basically "box in" price action. But just like the other setups here, the trade ultimately comes down to buyers and sellers. >>3 Hot Stocks to Trade (or Not) So while Comerica's trend channel was a range trade, the rectangle in AJG is a breakout trade. After all, buying AJG at support provides a pretty paltry upside expectation -- it's a mean reversion trade that's been chugging along sideways. So instead, it makes sense to buy the move outside of this stock's range: resistance comes in at $45.50 in AJG, with support at $42.50. I like to think of rectangles as an "if/then trade," In other words, if shares break out above $45.50, then it's a signal to buy shares. Otherwise, if shares break down below $42.50, then AJG is a short candidate. Don't put money in this stock until it resolves its direction with a breakout,
There's a while lot more directional bias in shares of big insurer AIG ( AIG). This stock has been shelling out some stellar performance in 2013, up more than 27% year-to-date. But this stock's recent price action indicates that it could be in store for even higher ground in the near-term. >>5 Short-Squeeze Stocks Primed to Pop That's because AIG is currently forming an inverse head and shoulders pattern, a setup that indicates exhaustion among sellers. Right now, AIG has only formed the left shoulder and head of the pattern, leaving the right shoulder yet to develop. But it doesn't really matter. Remember that in the real world, supply and demand forces matter a whole lot more than textbook pattern names -- so whether the right shoulder forms or not, AIG's trading implications remain the same. This stock triggers a buy signal on a move through $46. Lest you think that the 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 a very close eye on AIG this week. 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.