In active trading, one of the most common strategies is to time an entry point near major moving averages after a clearly-defined breakout. More specifically, the theory of mean reversion, which is where a trader expects prices to return eventually toward the mean, has proven to be a profitable strategy during periods of strong trending markets. The mean-reversion camp follows regional banks since the strong run-up may have gotten ahead of itself and many are now looking for an entry point with a better risk/reward. In the article below we’ll take a look at the charts and try to determine where prices are headed from here. (For more, see: Active Traders Look To Regional Banks).
SPDR S&P Regional Banking ETF
One of the most common products used by active traders for monitoring the status of the regional banking sector is the SPDR S&P Regional Banking ETF (KRE). This fund is comprised of 100 holdings from across the U.S. and trades with a reasonable gross expense ratio of 0.35%. Taking a look at the chart, you can see that the surge in upward momentum that resulted from the presidential election has stalled out and the price is now drifting back toward the long-term support of its 200-day moving average. In technical analysis, the 200-day moving average is regarded as one of the strongest levels of support, so most traders will likely look to open a long position as close to $48.22 as possible. The dotted trendline will also likely be used as a guide for determining the placement of buy orders, and stop-losses will likely be set a couple of percentage points below the mentioned support in case the selling pressure continues. (For more, check out: Investing In Regional Banks)
Bank of the Ozarks
One of the most popular regional banking stocks amongst active traders is the Bank of the Ozarks (OZRK). Predictable price action combined with adequate levels of volatility make this a prime candidate for a trader’s watch list. Taking a look at the chart, you’ll notice that the price action is following a similar pattern to the KRE fund mentioned above. Active traders have been waiting patiently for the price to fall toward the support of the 200-day moving average and it looks as though the entry points that they’ve been aspiring for is quickly approaching. Based on the chart, we’d expect buy orders to be placed just above $45 to make the most of the lucrative risk/reward. Target prices will likely be set near the 2017-highs and then readjusted upward from there. (For more, see: 2 High-Growth Regional Banks).
CIT Group Inc.
With strong exposure to southern California, CIT Group, Inc. (CIT) is a regional bank worth keeping an eye on. Active traders will notice that the price has been trading within a defined range in 2017 and that the 50-day moving average has started to trend sideways. Based on technical analysis, this is an interesting chart because the recent crossover between the MACD and its signal line suggests that the bulls are readying for a break above the dotted resistance near $44. A close above the resistance will likely trigger a surge of buying pressure, and those who buy near the long-term averages could come out with a nice profit. Only time will tell how this will play out, but given the nearby support of the long-term moving averages, the risk/reward is currently clearly in the favor of the bulls. (For more, see: Regional, Community Bank Stocks the Next Big Thing)
The Bottom Line
Regional banks are often overlooked in favor of the majors, but based on the charts shown above; it looks as though spring 2017 could be the ideal time for investors to consider adding a position. (For more, see: 3 Best ETFs in a Rising Rate Environment).
At the time of writing, Casey Murphy did not own shares of any of the assets mentioned.