No doubt about it, bank stocks have been taking a beating lately.
Since the start of March, the S&P Banks Select Industry Index has shed more than 11% of its market value - meanwhile, the broader S&P 500 Index itself is actually up over that time frame. And even worse, many of the biggest banking stocks on Wall Street look ready to roll even lower this summer.
Simply put, if you own one of these big banks, look out below.
There's a "but" to the bank stock story, however. One of these stocks is not like the other - in fact, one gigantic bank is actually uncoupling from the rest of the banking sector, teetering on the edge of a clear-cut buy signal in June.
To figure out which bank stock to buy - and which you should unload this summer - we're turning to the charts for a technical look at the major signals in the sector (and when you should pull the trigger on them).
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.
So, without further ado, here's a rundown of three technical setups that are showing solid trading potential right now.
We're starting off strong on Friday, with shares of $170 billion banking giant Citigroup (C) . Citi is the sole giant bank you should consider buying this summer. Shares are up almost 30% in the trailing 12 months, and while they haven't done much in 2017, that's because they've spent all year setting up a pretty textbook example of a bullish continuation pattern.
In other words, Citi could be setting up a second leg higher, and shares are within striking distance of that buy signal as I write.
The pattern to watch in Citigroup is an ascending triangle setup, a signal formed by horizontal resistance up above shares at $62, and uptrending support to the downside. Basically, as Citi has pinballed between that pair of technically important price levels all year long, shares have been getting squeezed closer and closer to a breakout through our $62 price ceiling. When that happens, it's time to join the buyers.
Relative strength adds some extra confidence to the upside potential in Citigroup right now. That's because, unlike its peers, Citi's relative strength line has been holding onto higher lows, signaling that Citi continues to outperform the rest of the stock market, even now. Once shares materially clear $62, Citi is a buy.
Meanwhile, most banking stocks look more like JPMorgan Chase & Co. (JPM) right now.
Make no mistake. If you've owned JPMorgan for the last year or so, you've probably done pretty well. Shares are up 25% since last summer, beating the broad market handily. But that rally is showing some serious red flags now. And JPM triggered a major sell signal this week.
That's because JPMorgan has spent quite a while forming a head and shoulders top, a bearish reversal pattern with a silly name but more serious trading implications. The pattern signals exhaustion among sellers, and it's 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 came the violation of JPM's neckline, just below the $85 level.
Now, with that level taken out, JPM could have some meaningful downside risk ahead. If you own shares of JPMorgan right now, this is a chance to take some of your recent gains off the table before shares accelerate their selling.
Royal Bank of Canada
While most major U.S. banks look a whole lot like JPMorgan, the bearish chart setups aren't relegated to U.S. banks. We're seeing an ugly pattern playing out in Royal Bank of Canada (RY) . You don't need to be an expert trader to figure out why shares look ready to roll over here; RY's price setup is about as simple as they get.
After charging higher from last fall, Royal Bank of Canada rolled over in mid-February, kicking off a well-defined downtrend that's been in place ever since. RY's downtrend is defined by a pair of parallel trendlines that have identified the high-probability range for shares to stay stuck within. So far, every test of the top of the price channel has been an opportunity to get out before the ensuing down leg, and shares are testing that level for a fifth time this week.
The 50-day moving average is acting like a decent proxy for that bearish trendline right now, so as long as Royal Bank of Canada stays below the 50-day, it makes sense to steer clear of shares.