KeyCorp (NYSE:KEY) shares have been holding in a bullish pattern for the better part of the past couple of months, and with this large regional bank supported by the broader financial sector, KEY stock looks ready to push higher — and sooner rather than later.
But before we delve further into a trade idea for KeyCorp, let’s look at the larger powers at play:
The story for 2015 continues to be more macro in nature than what we saw in recent years, which is to say that surprises in both the U.S. dollar and interest rates have resulted in a choppy stock market. As such, the better play this year isn’t buying the broader indices, but instead getting selective on the sector front.
On that front, we revisit a notable trend (one that all readers of this column should be familiar with by now): the awakening in financial stocks.
The first chart below shows the KBW Bank Index versus long-term bonds as represented by the iShares Barclays 20+ Yr Treas.Bond ETF (NYSEARCA:TLT). Note the divergence as of late, with bonds selling off and financials rallying. The drop in bond prices (and rise in bond yields) has helped widen the net interest-rate margin that is so important to bank earnings, which in turn explains the rally in financials.
On the second chart, we see the relative strength of the banks versus the S&P 500 using a ratio chart. The relative strength of banks is clearly banging up against the black diagonal resistance line, and thanks to the recent higher low in late April, it increasingly looks like it’ll soon overcome this line of resistance.
In the bigger picture, while I continue to expect choppiness in the broader U.S. stock market through the first half of this year, I also think the recent strength in financials will hold up the market into the summer, at which point a deeper correction may arrive. However, much of this depends on how interest rates hold up; a big reversal in bond prices could call off financials’ bullish structure in a hurry.
Now, back to KeyCorp.
KEY Stock Charts
Looking at the multiyear weekly chart of KeyCorp, we see that KEY stock has spent the past 14 months or so consolidating below a major line of resistance. In the process, this line has been tested/provoked several times and increasingly looks ready to capitulate, which would allow KEY to rise above it.
We see this even better on the daily chart. Notice the two V-shaped bullish reversals from last October and again this past January. The swiftness in which KEY stock got back on its feet after being sold down is a sign of strength. On Tuesday, KeyCorp had a failed intraday try to overcome above the $14.70 area of resistance, but structurally remains well-positioned to overcome resistance sometime in the next few weeks.
Active investors could look to buy KEY stock on a break and hold above $14.70 for an initial move into the $15.50 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
