BALTIMORE (Stockpickr) -- The back-and-forth is continuing in stocks. After the worst week for the S&P 500 since 2012 at the start of April, stocks regained all of that lost ground last week in a 2.71% four-day buying spree.
That one-step-forward-one-step-back trading is precisely why, nearly four months into 2014, 1.3% is all the S&P 500 has to show for us since the start of the year. But even though the market hasn't offered up a broad-based rally like it did in 2013, there are still big opportunities in individual stocks. It pays to be tactical in your trades right now, and the financial sector is one space where stock pickers have no shortage of profitable prospects.
So as another day looks ready to reverse the previous day's price action today, we're taking a technical look at five financial sector stocks that look tradable this week.
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.
First up is $9.1 billion retirement investment manager and insurance company Voya Financial (VOYA). If the name doesn't sound familiar, the business should be. Voya is the new name for ING U.S., which got spun off last year by its Dutch parent company (which itself looks pretty bullish right now). Even though VOYA has rallied 69% in the last year, this stock looks ready for breakout gains as we head into May.
VOYA is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares at $37 and uptrending support to the downside. Basically, as VOYA bounces in between those two price levels, it's getting squeezed closer to a breakout above that $37 price ceiling. When that breakout happens, it's time to buy this name.
Relative strength, on the lower subchart, looks stellar in Voya right now. In fact, this name has been outperforming the broad market for a full year that's not a big surprise since asset managers are basically leveraged bets on rising asset prices, but it's a bullish add-on indicator that a breakout above $37 will hold.
We're seeing the exact same setup in another, larger asset manager right now. Well, actually, BlackRock (BLK) is the biggest asset manager in the world, with more than $4.4 trillion in assets under management. And with big exposure to fixed income, BLK has been benefitting better than most in 2014 as momentum equities lose steam and cash piles into yield.
Like VOYA, BlackRock is forming an ascending triangle setup. BLK's resistance level to watch is $320. A breakout above that price level is the buy signal for this firm. Why does $320 matter so much? It all comes down to buyers and sellers. Price patterns are a good quick way to identify what's going on in the price action, but they're not the reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for BlackRock's stock.
The $320 resistance level, for instance, is a price where there has been an excess of supply of shares; in other words, it's a place 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 $320 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Discover Financial Services
You don't have to be an expert technical trader to figure out what's going on in Discover Financial Services (DFS) -- the setup in this $27 billion payment services stock is about as simple as they get. DFS is currently bouncing higher in an uptrending channel, a move that's setting up a textbook buying opportunity this week.
When it comes to price channels, up is good and down is bad. It's really just as simple as that. Discover's channel is bounded by resistance above shares and trendline support below them; those two parallel trend lines provide a high probability range for shares of this stock to trade between. And so, as shares bounce off of trend line support for a sixth time since May, it makes sense to be a buyer here.
If you decide to take the DFS trade this week, I'd recommend keeping a protective stop at the 200-day moving average. That line has been paralleling our support line for the last few months, so if it gets violated, our uptrend is broken.
Waddell & Reed Financial
Investment services firm Waddell & Reed Financial (WDR) is another financial sector name that's showing investors a textbook uptrending channel. So just like with DFS, it makes sense to "buy the dip" in Waddell & Reed -- and we're getting a dip this week. More specifically, from a risk management standpoint, you want to buy the bounce off of support. While that leaves a little money on the table versus anticipating a bounce, it's a much stronger strategy.
Waiting for a meaningful bounce off of support is crucial for two big reasons: It's the spot where shares have the furthest to move up before they hit resistance, and it's also 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 WDR can actually still catch a bid along that line before you put your money on shares.
I'd recommend keeping a protective stop just below the last swing low at $65.
Finally, we're looking at a bullish setup in small-cap banking stock Sterling Financial (STSA). Sterling Financial has been a big performer in the last year, rallying more than 59% since last April while still paying out a solid 2.42% dividend yield (a sizable payout for a bank). Now this name is showing us a high-probability buying opportunity that's anything but textbook.
Sterling Financial is currently forming an inverse head and shoulders pattern, a classic technical setup that indicates exhaustion among sellers. The pattern is formed by 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 patterns neckline level, currently right at $34.50.
Typically, the inverse head and shoulders is a "bottoming" pattern -- it comes at the end of a protracted downtrend. Even though STSA's pattern is at the top of its recent range, the trading implications are exactly the same if and when shares can close above $34.50. Momentum adds some confidence to the staying power to STSA's breakout -- 14-day RSI has been making higher lows over a stretch when price has been flat. Since momentum is a leading indicator of price, that bodes well for bulls in STSA this spring.
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.