The financial sector popped to a new 52-week high last week. But instead of attracting big-league buyers, the rally spurred a flurry of profit-taking in bank stocks.
It appears traders in the Financials Select Sector SPDR (NYSEARCA:XLF) are a cautious bunch, but at least they’re consistent. Though quick to ring the register, bank bulls never abandon their posts for long. Following a few down days, they always return with pockets full of cash in search of a discount.
Such are the dynamics undergirding XLF and bank stocks of late. Last week’s retracement is setting up another in a long line of buy-the-dip setups in financials. XLF rests right at its rising 20-day moving average and boasts one of the better setups across all sectors heading into the week ahead.
I’ve taken a stroll through the components of the financial sector and discovered a few standouts. Check out these three profit-giving bank stocks that are perfect for bullish trades.
3 Bank Stocks to Buy: Morgan Stanley (MS)
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First up we have Morgan Stanley (NYSE:MS). The global financial services firm is offering one of the better uptrends in the space. It certainly has more mojo than Goldman Sachs Group Inc (NYSE:GS), which has been dead money for months now.
MS stock sits atop rising 200-day, 50-day, and 20-day moving averages, so bulls have wrested control of all time frames. Volume patterns over the past month are favoring buyers with a spate of accumulation days. Plus, low-volume days have accompanied Morgan Stanley’s current retracement, so we’re not seeing any major aggression by sellers.
Implied volatility is relatively low in MS options, but I like selling puts regardless. You’re still getting paid enough to make it interesting, and the worst-case scenario is you get to buy shares at a discount.
The Trade: Sell the MS Sep $44 puts for 50 cents or better.
3 Bank Stocks to Buy: Citigroup (C)
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Citigroup Inc (NYSE:C) boasts one of the better-looking charts on a weekly time frame. And its daily chart isn’t too shabby either. Like its predecessor, C stock sits atop all its major moving averages. It wasn’t able to rally to a higher pivot high during last week’s upswing, but until support is breached, buyers remain in control.
I think the stock may just need more time to digest recent gains before breaking out of the $69 resistance zone. Accumulation days accompanied the last three upswings, confirming Citigroup is in favor of institutions right now.
Throw it all together, and this price dip is a buy. To minimize the cost, let’s go with a bull put spread instead of a naked put.
The Trade: Sell the Sep $65/$60 bull put spread for 60 cents.
3 Bank Stocks to Buy: Bank of New York Mellon (BK)
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Bank of New York Mellon Corp (NYSE:BK) rounds us out with arguably the best setup of the bunch. Its trend has more momentum, its pullback was cleaner, and its risk-reward is more attractive.
Since June, BK stock has been on a tear. The series of higher pivot highs and higher pivot lows taking root is a thing of beauty. Last week’s drop ended in a doji candle on Friday, suggesting a turn higher was imminent. This morning’s pop seems to be confirming the reversal.
The Trade: The liquidity and strike availability of BK options leaves much to be desired. Let’s go with a straight stock trade. Consider buying Bank of New York Mellon’s shares outright with a stop-loss below $52.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
