5 Banks to Buy After JPMorgan's Big Mistake
BALTIMORE (Stockpickr) -- JPMorgan Chase (JPM), the world's biggest bank, is still getting plenty of attention this week -- for all the wrong reasons.
After CEO Jamie Dimon announced that the firm lost at least $2 billion on a poorly managed trade, all eyes have been on JPM and its freefalling stock; shares of JPMorgan have tumbled close to 12% since Thursday afternoon. There are a couple of consequences from the loss at JPM (aside from the ceremonial career Seppuku offered by a few unlucky execs). The first is that investor anxiety is ramped up even higher over the risks at banks, and the second is that there are some definite trading opportunities on the heels of the shakeout.
Even though a lot of analysts have made value arguments for buying the big banks right now, I think that investors are right in discounting the labyrinthine balance sheets and risk management at the bigger names. But from a technical analysis perspective, there are trades to be made here.
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.
Here's a look at five technical setups in bank stocks that could deliver breakout gains to your portfolio this week.
Although Wells Fargo's(WFC) balance sheet has a few murky areas, this big bank is showing up on our list as an attractive technical trade. Since the start of March, shares of WFC have been consolidating sideways, trading in a range between resistance at $34.60 and support at $32. That's setting up an ideal "if/then trade" for us this week.Put simply, an if/then trade is a sideways setup whose direction is contingent on which way shares of WFC break out of their channel. It works like this: If shares of WFC break out above $34.60, then traders have a buy signal. Otherwise, if WFC breaks down below support at $32, then this giant bank becomes a short candidate.
Momentum, as measured by 14-day RSI, has been downtrending for the last couple of months, a factor that gives this setup a little bit of downside bias. Still, the fact that RSI is in neutral territory right now means that shares have plenty of room to move in either direction once the break outside of the channel happens.
Either way this trade pans out, I'd strongly recommend waiting for WFC to exit the channel before putting your money on the line.
Wells Fargo shows up on recent lists of 10 Stocks That Fidelity Funds Are Buying and 5 Large-Cap Bank Stock Buy From Guggenheim.
Regional banking stock Fulton Financial(FULT) is a smaller name that's showing traders an attractive long-term pattern this week. For the past several months, Fulton has been forming an ascending triangle setup, a formation that has bullish implications for buyers right now.
Here's how to trade it:
Two important technical levels form an ascending triangle: horizontal resistance above shares (in this case at the $10.60 level), and uptrending support below them. As FULT bounces in between those to lines, it's getting squeezed closer and closer to a breakout above resistance at $10.60. That breakout becomes the buy signal that traders need to look out for.
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Trading volume has been declining over the course of this pattern, an unlikely positive sign for our ascending triangle setup. In a textbook ascending triangle, traders actually want to see volume taper off, only to spike when the breakout happens. The spike in volume above $10.60 tells us that buyers are participating in the breakout.
Wait for that to happen before you participate too.
Prosperity Bancshares(PB) is another name that's forming an ascending triangle right now -- albeit in a shorter-timeframe. PB's ascending triangle has been forming since the start of March, with the resistance level to watch coming in at $47.
It's important to remember that ascending triangles don't work just because triangles are easy shapes to draw on a chart. Instead, it's not the triangle itself, but rather the technical forces that cause the triangle that investors should be focused on. Horizontal resistance is caused by a glut of supply of shares at that $47 level; in other words, it's a price where sellers have historically been more eager to sell and take gains than buyers were to buy. At the same time, uptrending support indicates that buyers are accumulating shares at higher levels.
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A breakout above resistance is a buy signal because it means that buying pressure has absorbed the excess supply at that price. Without the overhead stumbling block of resistance at $47, being long suddenly becomes a high-probability trade. Until then, though, it's not; that's why it's important to wait for the breakout before buying.
Now, back onto a bigger name: $10 billion Peruvian bank Credicorp(BAP). Credicorp has been trading lower for the past month and change, making some investors worry that this stock is topping after rallying double-digits in the last six months. But there's another story going on in BAP right now.
Shares of Creditcorp have been locked in an uptrend since August, trading higher in a channel that's bounded by trend line support and resistance levels. Because trend line support hasn't been broken yet, the uptrend is still in force. And in fact, with shares testing trend line support, traders could be looking at an optimal entry point to start buying BAP; it all comes down to whether shares can catch a bid and bounce off of support here.
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RSI has been showing a bearish divergence with price for the last month or two, a bit of a red flag for the uptrend. Even so, price action is the more important factor to watch. I'd be a buyer on the first bounce off of that blue trend line, with aprotective stop in place just below it.
Mid-cap bank City National (CYN) is showing traders a nearly identical setup right now. Shares rallied higher off of an inverse head and shoulders bottom that triggered back in late December, and they've been locked in a textbook uptrending channel ever since. Each of the past three times shares tested trend line support, they've reversed and rallied higher. Now the question is whether CYN can do it again for a fourth time.
Again, even though shares have moved lower for the past month or two, the fact that support hasn't been broken means that the uptrend is still intact. In CYN, I'd be a buyer on the next bounce off of support - with early price action looking strong this morning, it could trigger today. Either way, keep a tight stop on this trade.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
Jonas Elmerraji
05/15/12 - 11:55 AM EDT
-- Written by Jonas Elmerraji in Baltimore.
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