This morning’s better-than-expected employment report led to widespread selling in virtually every market sector except one – financials. Regional banks in particular saw an influx of buying in early morning trading.
The SPDR KBW Regional Banking ETF (NYSEARCA:KRE) rallied as much as 2.2% while the rest of the market crumbled. Among the top performers in KRE were PNC Financial Services Group Inc (NYSE:PNC), Suntrust Banks, Inc. (NYSE:STI) and BB&T Corproration (NYSE:BBT).
Today’s relative strength from KRE is a good excuse to take a renewed look at banking stocks to see if their is a low risk trade to be had.
As the chart below reveals the KRE ETF has been locked in a trading range for over a year. Any and all attempts to break free have been rapidly denied.
Today’s pop was no exception. The buying frenzy was stopped dead in its tracks at the $41.30 resistance zone.
Bear in mind the overall market has been gradually climbing over the past year, which means KRE’s sideways trot has resulted in some serious underperformance. The relative strength line for regional bank stocks remains firmly in a downtrend.
The best trade coming down the pike for KRE will be a breakout of the previously impenetrable $41.30 resistance area. The ole’ technical analysis phrase, “the longer the base, the higher in space” certainly comes in to play here. Given how long banking stocks have been consolidating the eventual breakout could certainly have some mojo behind it.
Once the breakout materializes consider buying long calls to capitalize. Implied volatility for KRE options is low allowing traders to snatch them up on the cheap.
Buy the Jun $39 calls for around $2.60. The maximum loss is limited to the initial $2.60 debit and will be forfeited if KRE is below $39 at expiration. The maximum gain is unlimited.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
