The Financial Sector is usually regarded as a favorite among investors and active traders alike because the underlying companies tend to have extremely strong fundamentals due to the cash-generating nature of the business, most pay out relatively large dividend yields, and the group often trades within clearly established trends for prolonged periods. In this article, we take a look at the charts of three key assets related to the financial sector to get a sense of why now could be the ideal time to buy. (For a quick refresher, check out: Bulls Take Aim at Financials.)
Financial Select Sector SPDR Fund (XLF)
One of the most popular exchange-traded funds used for gaining exposure to the financial sector is the Financial Select Sector SPDR Fund. As the name suggests, this fund comprises companies from across the financial sector. More specifically, the fund seeks to provide precise exposure to companies in diversified financial services, insurance, banks, capital markets, real estate investment trusts, consumer financial and mortgage industry finance.
Taking a look at the chart below, you can see that the fund is trading near the combined support of the 200-day moving average and a long-term ascending trendline. These support levels have consistently propped up the price on each attempted sell-off since 2016, and traders would expect this behavior to continue into the future. The close proximity to the major support levels is currently presenting lucrative risk-to-reward scenarios that haven’t been possible since early September 2017. Traders will likely watch for a bounce toward the 2018 highs and set their stop-loss orders below $26.60 in case of a continued sell-off. (For more, see: The 4 Largest Financials ETFs.)
Berkshire Hathaway Inc. (BRK.B)
Given the notoriety of founder Warren Buffett, Berkshire Hathaway has grown into one of the largest and well-known companies in the financial sector. With such large holdings in insurance and banking, it is interesting to see how the chart pattern mirrors that of the XLF fund shown above. Notice how the stock has been trading along a clearly defined uptrend and how each pullback has offered traders an ideal entry point. As discussed above, traders will likely use the proximity to the major long-term support levels as a reason to buy. (For further reading, check out: These Charts Suggest It Is Time to Buy Financials.)
[Learn to develop a trading strategy based on support and resistance levels in Chapter 3 of the Technical Analysis course on the Investopedia Academy]
JPMorgan Chase & Co. (JPM)
When it comes to companies in the financial sector, there are few with the economies of scale offered by JPMorgan Chase. With such a long and storied history, there are few companies able to compete, and given the strong uptrend, it is clear that investors feel the same. From the perspective of technical analysis, the recent pullback toward the long-term support of the ascending trendline suggests that traders will be looking to buy in anticipation of a bounce. Stop-loss orders will likely be placed below either the trendline or the 200-day moving average, depending on risk tolerance and investment horizon. (For further reading, check out: Active Traders Are Turning Bullish on Financials.)
The Bottom Line
During periods of uncertainty and volatility, capital tends to flock to relatively stable sectors such as the financials. Based on the charts shown above, the pullback toward key long-term support levels amid extremely strong long-term uptrends suggests that now could be the time to buy. (For further reading, see: This ETF Suggests Now Is the Time to Buy Financials.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.
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