Rising risks of trade war along with the resulting degrees of increased levels of financial volatility have investors on the lookout for areas of the market where they can increase their capital protection. It might not be immediately evident, but one of the market segments that is worthy of closer inspection is US financials.
With massive dimensions, scope and vitality, this sector consists of the very companies that represent the ‘bedrock’ for the future of the world’s economy – just look at what they have done thus far, withstanding the rigours of the path along the way, and in this case, the recent dip could represent the opportune moment to add more exposure.
Financial Select Sector SPDR Fund (XLV)
A favourite vehicle used by many to gain insight into a particular segment of the market is an exchange traded product(ETP). The chart below shows popular XLF (Financial Select Sector SPDR Fund). As you can see that discussion of miracle weakness associated with Chinese currency manipulation, and a risk of a trade war with China, has coincided with a bounce off an important trendline. As price has dropped the last couple of days, it has backed against the support of the lower trend line and the 200-day moving average.
These levels have presented excellent guides for setting stop, buy and sell orders for the last six months, and technical analysts will likely feel confident about the financials sector heading higher and want to buy the dip for one of the best risk-to-reward set-ups of the year. Their stop-loss orders will more than likely be below $26, should the weakness prove to be strong enough to take this market higher.
Bank of America Corporation (BAC)
Bank of America Corp (BAC) is one of the giants of the US financial sector and is well bought for long term active traders because it is a “go-to” stock. The following chart shows a clear buy signal because prices are currently trading at the long-term technical level of support called the 200-day moving average (red line) and the doji style candlesticks formed over the past two trading sessions show that the trend is still in the hands of the bulls.
Bullish traders would like to get into a position as close to these levels as possible and look for a recovery toward the trendline near $31. An entity setting up this particular strategy would likely put an order in to buy as close to today’s prices as possible, place a stop-loss order beneath the recent low, and look for the momentum to move in their favour to get out at a profit. This would be a classic momentum trade, risking pennies to make dollars, as the saying goes.
The Goldman Sachs Group, Inc. (GS)
Because GS has global reach, it is indeed subject to geopolitical risk, but the very nature of Goldman Sachs also represents strong country exposure to businesses that continue to be on the go – both established and emerging – which are a natural hedge. From a contrarian viewpoint looking at long-term horizons, piling into a company like Goldman Sachs at times such as now, when everyone else is offside, is what traders can only dream of.
This can also be seen in the fact that the very recent re-engagement of the 50-day/200-day moving average coincided with a bullish crossover between the two of them (see the blue circle beneath), a crossover scenario that active traders tend to salivate over since it is one of the more reliable signals of an imminent major trend upswing. Given current levels, the risk/reward profile for the bulls is pretty much the envy of the bears for now, and many will likely choose to place their stop-loss either below $196.80 or $182, depending on risk tolerance.
The Bottom Line
In recent market weakness, major U.S. financials have now reached levels of technical support considered crucial to the fights of the overall charts.As you can see on the two charts above, the recent weakness is clearly being eyed by the active trader as an opportunity to buy: whether it’s the general weakness, a trade war breakout or just some ulterior selling, I suppose it doesn’t matter as long as you can make your risk/reward setups work in your favour as the recent lows may present.
Traders will likely want to make a minimal effort, however, and place a compromise to their downside risk with a stop placed a level or two beneath the mentioned support or, at a minimum, right above the latest lows in case the trade war gains further momentum than predicted.