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Best is Yet to Come for Bank Stocks: Stockton

After gaining 25% year to date, stocks in the financial sector have only just now become interesting to technical analysts.

Yes, the chartists are late the party but their skepticism is not without merit. Stocks making up the Financial Select Sector SPDR (XLF) have been the whipping boys of the popular press and investors for the last 5 years; eliciting absolutely no sympathy whatsoever on the way. Even with 2012's move, the XLF is still nearly 60% off the highs of 2007.

So why bother with the group now? According to Katie Stockton, chief market technician of MKM Partners, the reason is simple: the stocks just broke out, "not just on an actual basis but on a relative basis." That means the financials are outperforming the broad tape, most tech, and certainly the defensive sector names.

Better still, the XLF is being driven not by one or two names but across most of the constituent members. "When you see a lot of breakouts over the 200 day, that's when you can believe the move as being somewhat sustainable," says Stockton.

"I know how difficult it can be to buy breakouts, but sometimes it is the right thing to do," she adds. Especially when you have clearly defined levels to get you out of the trade if it should happen that getting long here doesn't turn out to be a well-timed move.

"Set a tight stop loss," says Stockton. She says likely candidates for levels at which traders should abandon hope on an XLF long position are the 200 and 50 day moving averages, currently sitting at $13.66 and $14.52, respectively.

Stockton's method for separating a real breakdown from a brief dip to be bought is simple. "Consecutive daily closes below support. That, to me, would be enough of a reason to stop out of your position," she says.

Traders set your levels: if the XLF closes below $13.66 two days in a row Stockton's trade will have undeniably failed. The lines have been drawn and Mr. Market determines the winner. Gentlemen and Women, place your buys or sells.