BALTIMORE (Stockpickr) -- The financial sector hasn't exactly been a bastion of outperformance so far in 2015. Since the calendar flipped to January, the SPDR Financial Sector ETF (XLF) has shed 1.5%.
But the tide is turning. While the year-to-date numbers aren't pretty, they mask the fact that financial stocks have actually been outperforming the rest of the market for the last two months now. And by the time the strength in financials is big enough to get noticed by everyone, it's already going to be behind us.
That's why we're taking a closer look at five financial stocks to trade for gains this week. These technical trades have breakout potential as we head into the second quarter.
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.
Big Canadian banking firm Toronto-Dominion Bank (TD - Get Report) has been a perfect example of the financial sector selloff in 2015. Since the calendar flipped to January, TD has shed almost 8% of its market value, selling off hard in January and spending most of the rest of the year fighting to get back to even. But patience could be about to pay off for long-suffering TD Bank shareholders.
That's because TD is currently forming an ascending triangle bottom, a bullish reversal pattern that's formed by horizontal resistance up above shares at $44 and uptrending support to the downside. Basically, as TD bounces in between those two technically important price levels, it's been getting squeezed closer and closer to a breakout above our $44 price ceiling. When that happens, we've got our buy signal.
Momentum, measured by 14-day RSI, adds some extra upside confidence to TD's reversal setup. Our momentum gauge has been in an uptrend since just before shares bottomed January, signaling that buying pressure has been building here. Wait for $44 to get taken out, then buy.
We're seeing the same setup in shares of $71 billion investment bank Morgan Stanley (MS - Get Report). Just like TD, Morgan Stanley is currently forming an ascending triangle pattern, in this case with resistance at $37. A breakout above that $37 level is our buy signal to watch this week.
Why all of that significance at that $37 level? It all comes down to buyers and sellers. Price patterns, like this ascending triangle pattern in MS, 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 Morgan Stanley's stock.
The $37 resistance level is a price where 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 $37 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
It's important to be reactionary on this breakout trade. Wait for shares to catch a bid above $37 before you buy MS.
Axis Capital Holdings
You don't need to be an expert trader to figure out what's going on in shares of $5 billion reinsurer Axis Capital Holdings (AXS - Get Report) right now. Instead, the price action here is about as simple as it gets. AXS has been in rally mode in recent months, up more than 22% since the start of August. Now, as shares gain steam in April, it makes sense to buy this bounce.
Axis Capital has been in a well-defined uptrending channel since the end of last summer, providing a very tradable setup for buyers to get in along the way. The uptrending channel in AXS is formed by a pair of parallel trend lines that identify the high-probability range for shares to stay stuck within. So far, every test of trend line support has been a low-risk, high-reward opportunity to be a buyer in this stock. As shares bounce off of support for a fifth time, it makes sense to join the buyers.
Relative strength, down at the bottom of the chart, adds some extra evidence to the upside in AXS. That's because relative strength has been in an uptrend of its own since last summer, which indicates that Axis Capital isn't just moving higher -- it's outperforming the rest of the market too. And as long as that relative strength uptrend remains intact, AXS should keep beating the S&P.
$31 billion financial market operator CME Group (CME - Get Report) is another stock that's been in a textbook uptrend in recent months. CME started heading higher back in the fall, trading within a well-defined uptrend of its own. Just like with AXS, it makes sense to buy this week's bounce off of trend line support.
Waiting for that 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 CME can actually still catch a bid along that line before you put your money on shares.
If you decide to be a buyer here, CME's most recent swing low at $90 is a logical place to park a protective stop.
Not every name in the financial sector is set up for success right now. In fact, some are looking downright "toppy." We're rounding out our list with a look at a large-cap financial stock that's showing some cracks. Ironically, it just so happens to be one of the best-performing banking stocks that's waving the biggest red flags in 2015: $42 billion Indian bank HDFC Bank (HDB - Get Report).
Even though HDB is up more than 16% in 2015, it might be time to start thinking about booking some gains if you already own it.
Since January, this stock has been forming a classic head and shoulders top, a setup that indicates exhaustion among buyers. The setup is formed by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal comes on a move through HDB's neckline, currently at $58.
Momentum confirms the downside risk in HDB here. 14-day RSI, our momentum gauge, made lower highs on each peak in the head and shoulders, indicating that selling pressure has been building in spite of the fact that shares are still near the high-end of their recent range. That's a definite red flag to keep an eye on. Again, it's key to be reactionary with this setup. If $58 gets materially violated, then it's time to be a seller.