BALTIMORE (Stockpickr) -- The financial sector is off to a shaky start in 2015. Since the calendar flipped to January, financial stocks in the big S&P 500 index are down more than 5.4%. For comparison's sake, the rest of the index is down just 1.85% year-to-date.
The good news is that the financial sector's selloff in 2015 could be the very catalyst that's presenting a buying opportunity in a handful of financial sector stocks this week.
Sure enough, this year continues to present investors with a stock picker's market. Correlations are relatively low, and selecting the right stocks means dramatically different performance than the rest of the sector. So today, we're taking a closer look at five financial sector stocks to trade for gains in February.
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 on our list of financial sector breakout trades is Erie Indemnity (ERIE - Get Report) . This $4 billion insurance company has been in rally mode for the last year, climbing more than 28% higher since the first week of February 2014. But don't worry if you've missed the move so far. ERIE looks ready to kick off a second leg higher in 2015.
Erie is currently forming a symmetrical triangle, or “coil," pattern, a bullish continuation setup that's formed by a pair of converging trend lines. Consolidation patterns such as the symmetrical triangle are common after big moves. They give investors a chance to catch their breath and figure out their next step. The buy signal comes on a breakout to the topside of the pattern, currently right at the $90 level. If shares can catch a bid above $90, then we've got a strong indication that the sideways trading is over and buyers are ready to step up their trading in ERIE.
The constricting action of ERIE's symmetrical triangle is setting shares up for a volatility squeeze. Since volatility is cyclical, periods of very low volatility are typically followed up by a swing to high volatility. That means that ERIE's initial move is likely to be very fast. Don’t miss it.
Asset management and investment operations firm SEI Investments (SEIC - Get Report) is another financial sector stock that's been in rally mode for the last year. SEIC is up 19% in the trailing 12 months, outperforming the S&P 500 by more than 6%. And like Erie, SEI Investments looks ready for another breakout buy signal here.
SEIC is forming a rounding bottom pattern, a bullish price setup that looks just like it sounds. The rounding bottom indicates a gradual transition in control from sellers to buyers — and while it's typically a reversal pattern that comes at the bottom of a down-move, SEIC's chart is showing us a rounding bottom at the top of this stock's recent rally. That's just fine. Even though the setup isn't exactly textbook, the trading implications are exactly the same in SEIC.
The buy signal comes on a breakout above $41 resistance. That $41 level is the price ceiling that's been swatting shares of SEIC lower since December. Once the breakout happens, I'd recommend parking a protective stop at the 50-day moving average.
The good news is that you don't need to be an expert technical trader to figure out what's going on in shares of Indian banking stock Icici Bank (IBN) . The trading setup in IBN is about as basic as they get. Basically, IBN has been a “buy-the-dips stock" since last fall, so, as shares dip for a sixth time now, we're looking at a buying opportunity for Icici Bank.
IBN's trading setup is an uptrending channel, a price pattern formed by a pair of parallel trend lines that identify the high-probability range for shares of IBN to stay stuck within. In other words, every test of trend line support has provided a low-risk, high-reward opportunity to be a buyer in IBN, and as shares close in on that support line this week, it makes sense to buy the next bounce higher.
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 IBN can actually still catch a bid along that line before you put your money on shares.
KB Financial Group
Korean banking firm KB Financial Group (KB - Get Report) is another big foreign bank holding company that looks ready to move higher this month. KB has actually been selling off for the last six months now, down more than 18% from its September highs. But a classic reversal pattern in KB financial is giving us a big buy signal if shares can move above $35.50.
KB is currently 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 (that's the $35.50 price level I mentioned earlier).
Relative strength is the side indicator to watch in shares of KB right now. While relative strength started off the last quarter moving lower, it actually broke that downtrend and reversed into an uptrend two weeks ago. As long as that new uptrend in relative strength remains intact, this stock should start meaningfully outperforming the S&P.
We're seeing the exact same price setup in shares of $58 billion financial services giant Barclays (BCS) . Like KB Financial, Barclays is currently forming an inverse head and shoulders pattern -- just in a longer-term timeframe. The breakout level to watch for BCS is $15.50.
Why all of that significance at that $15.50 level? It all comes down to buyers and sellers. Price patterns such as the inverse head and shoulders 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 Barclays' stock.
The $15.50 resistance level is a price at which 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 $15.50 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for shares to catch a bid above $15.50 before you buy BCS.
Don't get thrown off by the abundance of gaps on Barclays' chart right now. Those gaps, called suspension gaps, are caused by overnight trading on the London Stock Exchange. They can be ignored for trading purposes.
-- Written by Jonas Elmerraji in Baltimore.