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Trade of the Day: A Bullish Trade on Regional Banks

Serge Berger

Active investors and traders playing the financial sector of stocks often look to the regional banks as a source of alpha, or above-average return. The regional bank exchange-traded fund (ETF), i.e. the SPDR S&P Regional Banking ETF (NYSEARCA:KRE), at its current juncture sets up for a good reward-to-risk trade just as the broader financial sector over recent weeks began to show signs of life again.

This is a good spot to remind readers that over time, a so-called top-down approach to the markets is a significantly more straightforward way to make money than using bottom-up analysis. A top-down approach first looks at the direction of the broader stock market, then digs into the  bullish or bearish trends in the different sectors and industries until finally arriving at single-name stocks worth buying/selling according to those trends.

While trading single-name stocks certainly makes sense much of the time, over the years I have found great success making bets and playing trends and breakouts on sectors and industries using ETFs such as the KRE ETF. Mathematically speaking, trading ETFs has given me almost equally positive returns as trading stocks, but with much less volatility. That is simply the result of making bets on a basket of “related” stocks and thus eliminating, or at least reducing, the idiosyncratic risk from single-name stocks.

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KRE ETF Charts


Click to Enlarge

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

Digging into the charts and starting off with a bigger picture look, we see that the KRE ETF continues to trade above, i.e. hold the support line from the early 2016 lows. Also note that this trend line now clearly coincides with the yellow 50-week simple moving average as well as horizontal support, i.e. previous resistance as marked by the blue horizontal box.

All of this comes in around the $58-$60 area, which in my eye thus is critical technical support in the intermediate to longer term.


Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

Moving on to the daily chart we see that the red 200-day moving average has acted as good support in recent weeks, around the $60-$61 area. Over the past few months, regional stocks as a group have largely consolidated but now with the recent awakening of large cap banking stocks in my eye this group of stocks may have some support.

Active investors and traders could look to buy the KRE ETF around the $62 mark with next upside targets at $64 and $65. Any strong one-day bearish  reversal (and at worst case a push below $61 on a daily closing basis) would be a stop-loss trigger for now.

Access Serge’s Free SSO Strategy eBook HERE — find high-probability trades like a Wall Street professional.

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