Heads Up, Watch the Financials

Posted February 11th, 2011 by Josip Causic in Education

Heads Up, Watch the Financials

In some of my previous articles, I emphasized the importance of the Financials - please click here to review one of the articles: Importance of the Financials. The point was that as long as the financials were going sideways, the US stock market would probably continue to chop around.

To find out what is currently taking place, let us go to the charts. Specifically, I will analyze four weekly charts starting from left to right: the KRE, $XBD, $BKX, and XLF.

Figure 1

Part I: The KRE or SPDR KBW Regional Banking Index

Let's start with the Regional Banks. Notice that I have marked with a light blue oval the April high on all four charts as a point of reference. I have also utilized the horizontal blue line which shows that exact level for each of the four underlyings. KRE is currently trading at 26.39, while its April high is almost three and a half points higher. On a positive note, KRE has cleared the major channel in which it has traded for the greater part of the last year. As long as the KRE stays above the 25 level area, there is a high chance that it might attempt to retest its April highs. However, there has been no immediate stab at those highs, but one could possibly come later on this year.

Part II: The AMEX Securities Broker Dealers ($XBD)

The Broker Dealers ($XBD) are the strongest of the four, and they have been for a while. Please review my article from August 10, 2010, Financials: Part II. There is one thing certain on the chart that should catch your eye, and that is that the price action has cleared the April high and is poking into another level of resistance, the yellow rectangle. In the past, the B/D (Broker Dealers) were the leaders so keep your eye on them and do not ignore them.

Part III: The KBW Bank Index ($BKX)

Observe on the chart of $BKX the high of 58.73 from April of last year. Currently, we are trading at 53.86 or about five points lower than the high. However, the good news is that we have cleared the channel between 44 and 51 that we were stuck in between July to December of last year.

Part IV: The Financial Sector SPDR (XLF)

The XLF chart is not that much different from the previous one due to the fact that both of these underlyings maxed out in April of last year and since then have traded sideways. The XLF channel was basically between the 13.50 and 15.50 areas. It is only recently that the XLF has cleared the supply level of 15.50 and is heading towards its previous April high of 17.

The Next Step

What does all that technical analysis mean to an option trader? Well, knowing what the broad market, as well as its sectors, and industries are doing undoubtedly helps us in our stock selections. Financials are composed of different banks, insurance companies and Broker/Dealers. The strongest of them currently is the B/D. The B/D components specifically include the following tickers: AMP, AMTD, ETFC, GS, IBKR, JEF, MS, NMR, RJF, and SCHW. Out of those, the strongest two stocks, right now, are AMP and RJF.

Figure 2

Having selected technically and fundamentally what to trade, the next step would be to check the I.V. for each of these two and then to proceed with the correct option strategy selection. I will address the other steps (I.V. reading and correct options strategy selection) in one of my future articles.

In conclusion, knowledge of what specific sectors of the US market are doing technically is essential. The fact that there is a bit more room left on three out of four big charts tells us that the S&P could go even higher. Yet be aware of the fact that the financials are approaching their respective supply levels. Pick your trades carefully.

- Josip Causic

"