The financial sector kicked into high gear at the end of 2016, but it's posted a much less impressive performance this year, with the Financial Select Sector SPDR ETF (XLF) up all of just 1.4% since the calendar flipped to January.
That's a conspicuous about-face -as XLF rallied more than 20% in the final three months of 2016.
But while financials have been missing out on 2017's run to record highs, it's a mistake to count out the sector as we head into Q2. In fact, some of the biggest financial stocks on the market are teetering on the verge of breakout territory in April. To find the financial sector stocks that look best positioned for a reversal higher this month, we're turning to the charts for a closer look at four stocks showing buyable technical trading patterns.
In case you're unfamiliar with technical analysis, here's the executive summary: 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, here's a rundown of four technical setups that are showing solid trading potential right now...
Leading off the list is banking behemoth Citigroup Inc. (C) . Citi is one of the biggest financial firms on the planet - and it's been one of the most conspicuous outperformers since last year. Shares are up 40% in the last 12 months, beating the rest of the S&P 500 by a wide margin. But don't worry if you've missed out on that long-term rally in Citi; shares look primed for a second leg higher in 2017.
Citigroup has spent all of 2017 forming a textbook example of an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at $62, and uptrending support to the downside. Basically, as shares of Citi have bounced in between those two technically significant price levels, shares of this stock have been getting squeezed closer and closer to a breakout above their price ceiling up at $62. When that breakout happens, we've got a buy signal.
Relative strength, measured by the indicator down at the bottom of Citi's price chart, adds some extra confidence to upside in shares. That's because Citigroup's relative strength line has been in an uptrend of its own since last summer, an indication that this stock isn't just beating the rest of the sector - it's still beating the rest of the broad market in the long-run. As long as that uptrend in relative strength stays intact, Citi is predisposed to outperform in 2017. Wait for shares to crack resistance up at $62 before you buy...
We're seeing the exact same long-term continuation trade coming together in shares of investment management giant BlackRock Inc. (BLK) . Like Citigroup, BlackRock has spent all of 2017 - and then some - forming an ascending triangle pattern. For BlackRock, the big breakout level to watch out for is long-term resistance up at $395.
What makes $395 the decisive price level for BlackRock? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" is driven by basic supply and demand for BLK's shares themselves.
The $395 resistance level is a price where there is an excess of supply of shares; in other words, it's a spot where sellers had previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $395 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Once BlackRock moves above that price level, the 200-day moving average is a logical place to park a protective stop.
Intercontinental Exchange Inc.
Meanwhile, it doesn't get any simpler than the price pattern we're seeing in shares of $35 billion financial exchange operator Intercontinental Exchange Inc. (ICE) . Since the beginning of last summer, ICE has been bouncing its way higher in a well-defined uptrending channel. Put simply, ICE is still a "buy the dips stock" in April.
Intercontinental Exchange's uptrend is formed by a pair of parallel trendlines that have marked the high-probability range for shares to remain stuck within. Put simply, every test of the bottom trendline has provided a low-risk opportunity to buy shares before the next leg higher. So, as ICE touches trendline support for the eighth time this week, it makes sense to buy the next up-move.
Actually waiting for that bounce is important for two key reasons: it's the spot where shares have the most room 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 the channel breaks, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring ICE can actually still catch a bid along that line before you put your money on shares.
Sliding down the market cap spectrum brings us to shares of $2.6 billion specialty insurance provider RLI Corp. (RLI) . RLI hasn't done much in 2017 - since the calendar flipped to January, shares of this financial firm are down 7%, trailing the big stock market averages by a big margin. But don't count RLI out just yet: shares are looking "bottomy" this month.
RLI has been forming an inverse head and shoulders pattern since the end of January. The inverse head and shoulders is a technical reversal setup that indicates exhaustion among sellers. You can spot this price pattern by looking for two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through RLI's neckline - that's currently at the $61 level.
Remember to be reactionary with RLI Corp., or with any of the other potential breakout trades on our list that haven't crossed their breakout prices just yet. Technical analysis is a risk-management tool, not a crystal ball - and RLI doesn't become a high-probability buy until shares can crack above the $61 price level. From there, prior support at $58 becomes a logical place to park a protective stop.