8 Charts for Trading Financials

The stress test results came out after hours Thursday May 7 and bank stocks were immediately off to the races. The Fed is expecting the combined 19 banks will lose close to $600 Billion next year, and 10 of the nation's largest banks need to raise about $75 Billion more capital.

Many people think the banks are overvalued as they've had amazing runs in the last 8 weeks, others think they're still undervalued. The charts from 8 of these financial institutions are below, and major resistance and supports are labeled. In a nutshell these charts show that these banks can continue to run (at these % increases) with the help of the overall market. If you hold any of these stocks and are thinking about lightening up, but don't know a good price point, these charts may help. If you are stuck between being bullish and bearish you may find some of the covered call option strategies on my blog to be useful.

The top 5 banks out of the 19 which need the most capital from greatest to least are: Bank of America (BAC) $33.9 Billion, Wells Fargo (WFC) $13.7 Billion, GMAC (GMA) $11.5 Billion, Citigroup (C) $5.5 Billion, and Regions Financial (RF) $2.5 Billion.

The charts for 8 of the Major financial institutions that received TARP are below:

American Express (AXP)

Click to enlarge:

AXP is currently in between its support and resistance, and with an up market should easily get to (if not break through) resistance at $30. If it breaks through $30 a share it could easily get to $34, and ultimately $36 short term. This is a very bullish chart, especially being in the middle of support and resistance, my guess is it will certainly get above $30 with the help of the market! Although Visa (V) and Mastercard (MA) are not exactly the same type of business as American Express, look for them to do well if AXP does.

Bank of America

BAC broke above resistance and if it can hold, it should be able to get to the next resistance fairly easy. Next resistance for BAC comes in at $16 and then $18. If it breaks through $16, watch it closely as it may come back down quickly, if it bounces off support at $16 once though it is a very good sign, and could easily get to $18 short term.

Bank of NY Mellon (BK)

Click to enlarge:

BK has a very choppy chart (in terms of testing resistance/support). BK tested its short term resistance Thursday creating what looks to be a double top, before sliding back down and closing lower. BK could potentially rally up to the $38 range but first must get through resistance at $35, then $36.50.

Citigroup

Click to enlarge:

Citi closed above $4 Friday, which is in critical range. As you can see from the chart it has tried to break above it several times- I can count 5. However investors are still uncertain if the government will convert its preferred stock into common, staking almost 50% in the company. However the faster they fall the faster they rise, and Citi could potentially get to $7.50 before running into any resistance at all, then $9, and then even $14.50 before it settles down. Watch for C to run if it can get and hold above $4.50. However Citi getting that hot is very unlikely as stated.

Goldman Sachs (GS)

Click to enlarge:

GS is a chart I like to see (especially as a shareholder). GS looks as if only two resistance points are in its way of getting back to $170 a share. The two come in at $140 and $151. If GS breaks through $140 anytime soon look for a quick rally to $151, and then if it can fill that gap up at $151 and break above it, watch and see how fast it can get to $170. Remember if it breaks through resistance, resistance now becomes a support and if they break down through support they can easily get back down to where they came from.

JP Morgan Chase (JPM)

Click to enlarge:

JPM broke and closed above its resistance Friday. This is an extremely bullish sign, as it is through $36, it could easily get to $41 (there are a lot of minor resistance levels it may need to clear in between) and potentially to $42, before it could get above $45 a share (once again a lot of minor resistance levels in between the 42-45 range as well). JPM has a lot of minor and major resistance as it is said to be one of the stronger banks, and did not experience the downside many of the other financials did.

Morgan Stanley (MS)

Click to enlarge:

MS looks as if it tried getting to its resistance around $29.50 Friday which is a bullish sign if the uptrend can continue. A rather sloppy chart, MS looks like if it could clear $30 and fill the gap to $32, it could easily get to $34. If it fills the next gap and gets to $36 MS could be smooth sailing until $40 a share.

Wells Fargo

Click to enlarge:

WFC actually closed at its resistance which tends to be a bullish sign. WFC will need to clear $28.18 a share. If WFC can get above $28.18 a share, it could easily get to $29 before testing resistance at $31.25, then $32.50, and then $34.50. However there are plenty of minor resistance points between $31.25 and $34.50, which could make it tough for MS to achieve any of these higher levels.

I will be taking some profit, not by selling the stocks, but writing some covered calls on them possibly as much as 10% in the money. Some advice would be to take some profits if you're up, as any of these charts should be clear to you that the gains in the last month alone cannot keep going like this, and should be trimmed. However there is still a lot of money on the sidelines which could keep this rally going!

Disclosure: Long AXP, BAC, GS, V

Comments

[Erik78:]

Long financials here, AFTER the stress tests, are u serious?

glta

May 10 04:09 PM

[Marco Hickey:]

You may have missed the point of this article. Personally I am taking profits... However with the help of the market these stocks could keep running despite the bad news... What about companies that don't need anymore capital and want to pay TARP back like AXP and GS?


On May 10 04:09 PM Erik78 wrote:

> Long financials here, AFTER the stress tests, are u serious?
>
> glta
>

May 10 04:22 PM

[Erik78:]

Maybe, but that is assuming they will allowed to easily pay back tarp, which imo is already baked in the stock price mostly. Yet I don't think should be assumed just yet.

May 10 04:27 PM

[Marco Hickey:]

Good point.

May 10 04:30 PM

[Erik78:]

Who know's what puppet master (washington dc) is going to do next.....

They sure lined up TALK, M2M and the "Reassurance Tests" is a row here, pretty well. Will they have a 4th bullet?

I avoid trading the govt relief index long or short either way for now.

finance.yahoo.com/q/cp...

Yes the "govt relief index" lol

May 10 04:41 PM

[Erik78:]

On May 10 04:41 PM Erik78 wrote:

> Who know's what puppet master (washington dc) is going to do next.....
>
>
> They sure lined up TALF, M2M and the "Reassurance Tests" is a row
> here, pretty well. Will they have a 4th bullet?
>
> I avoid trading the govt relief index long or short either way for
> now.
>
> finance.yahoo.com/q/cp...;alpha=C
>
> Yes the "govt relief index" lol
>

May 10 04:41 PM

[irisatrx:]

Goldman Sachs has done extremely well in the rebound category; then again the First National Bank of Zimbabwe could have done the same thing if the Fed had quietly pumped a trillion dollars through its coffers as it did for GS and AIG.

As I recall, it was GS that created the rumor mill that created the run on Bear Stearns and Lehman Bros, driving them out of business and creating the financial panic on Wall Street.

That's not to say any of these "banks" is operating above board; but I find the connection between the psychological collapse of the financial community, with its connections to the Fed [.e.g,, Paulson] and its unexplained Fed deposits worth a second look, and maybe a few indictments.

May 10 07:48 PM

[Alan Young:]

I expected an article like this to use some discernment in evaluating the charts; I'm disappointed. You interpret every chart as bullish, even while pointing out repeated failure to break resistance. IMHE, closing at or below resistance is a clear warning that the next move could be a downward reversal. Why don't you talk about how far these suckers have to fall before finding support, if they fail to break resistance?

May 10 08:32 PM

[twotraps:]

Freya...well put. "Normal' is questionable. There has been so much crap with the banks I forgot who's on first! They were out of money, then worried about a national 'run' on themselves, then the govt pays back the counterparties to AIG's bad trades...giving the banks money...then rates are at zero, then 'responsible lending' sets in....then they report a profit? For all that was in the balance a few months ago, there seems to be more posturing than anything. Who really knows where the banks stand....1/2 of them didn't even understand their own positions and exposure since they were legally allowed to declare the valure of their own crap. So, bank stock prices are rising, fine. Go with the move until there is some way to deternine failure or rejection of higher prices. I cannot argue with the trend, but when people are pinning the move on proper valuations that is way too far.

Banks are a for profit business.
They have built in 'edge' in that they can borrow for cheap.
They get to use creative accounting.
Everyone needs the bank at some point in their lives.
They are an integral part of the system, and are involved with the public and therefore deserve all the scrutiny a company that sells food or drugs gets, its only fair you can't sell tainted aspirin etc.

How can you not make profits running a bank?

May 10 09:53 PM

[moron:]

So am I to assume you are taking the stress tests at face value? That our worst case losses will be only 600 billion? That unemployment will not continue to ramp up. Don't get me started on the latest jobs report (revised figures, census inflation...). I suspect you don't predict the credit crisis will deepen despite far worse numbers than expected out on consumer credit last week. I guess you are buying what the banks are selling "However there is still a lot of money on the sidelines which could keep this rally going!" I suppose you bought what AIG, Freddie and Fannie told us. Remember the 50% increase in AIG from 20-30 at the end of this past summer? What happened next? These banks are not well capitalized; housing is getting worse, far worse than banks expectations (check Fannie's latest information); unemployment is not precipitously falling as CNBC might want you to believe; credit is worsening, GDP did not show any progress last quarter, despite an increase in consumer spending; and the latest inventory numbers were less than stellar. Other than that the banks will be just fine!

May 10 10:14 PM

[Marco Hickey:]

Alan you're right I failed to draw in the support lines, but I clearly stated that they need to break above with the help of the market, and nobody knows what could happen in the next days to come. I never intended the charts to be bullish, nor am I bullish as stated I am taking profits (sold nearly 60% of my financial positions Friday). I agree with twotraps, it's a momentum game now and until these stocks indicate the trend is down, I'll hold onto some of my position in financials.

And to answer moron's question about taking the stress test results at face value... No, I simply stated what the Fed is "expecting". I certainly have no idea of what these banks will lose as most of the banks don't even know what to expect! The rally could continue IMO based on: how much money is on the side lines, and the fact there is absolutely no clarity.

And, yea I certainly bought what AIG said, that's how I've paid off my car loans, and 100% of my college bills with the money I made in September and October buying PUTS on all the major banks...

Simply a momentum game for now... I'll be buying more put protection when the momentum changes.. But in the last 8 weeks, being a bear wouldn't have worked too well.

On May 10 08:32 PM Alan Young wrote:

> I expected an article like this to use some discernment in evaluating
> the charts; I'm disappointed. You interpret every chart as bullish,
> even while pointing out repeated failure to break resistance. IMHE,
> closing at or below resistance is a clear warning that the next move
> could be a downward reversal. Why don't you talk about how far these
> suckers have to fall before finding support, if they fail to break
> resistance?

May 10 11:29 PM

[Chris Shenf...:]

I agree with Marco that there could be a lot more upside to financials, including these banks charted. There seems to be a lot of skepticism and criticism, bordering on anger, among the commentators, mostly centered on general distrust of the bank's financial statements and disagreement with the government's role in propping up these institutions. My response is that after years of successful investing, I've learned one thing--don't fight the tape. There is a huge amount of momentum here. Failure to break UPSIDE resistance doesn't indicate anything more than a pause. It's only breaking resistance on the downside that would indicate reversal. I have ridden Citigroup from $1.25 and Bank of America from $5 up to their present prices, and its been a great ride because I've learned to never sell a losing stock. Just raise your trailing stop losses and enjoy the momentum while it lasts. It could continue for quite awhile.


On May 10 11:29 PM Marco Hickey wrote:

> Alan you're right I failed to draw in the support lines, but I clearly
> stated that they need to break above with the help of the market,
> and nobody knows what could happen in the next days to come. I never
> intended the charts to be bullish, nor am I bullish as stated I am
> taking profits (sold nearly 60% of my financial positions Friday).
> I agree with twotraps, it's a momentum game now and until these stocks
> indicate the trend is down, I'll hold onto some of my position in
> financials.
>
> And to answer moron's question about taking the stress test results
> at face value... No, I simply stated what the Fed is "expecting".
> I certainly have no idea of what these banks will lose as most of
> the banks don't even know what to expect! The rally could continue
> IMO based on: how much money is on the side lines, and the fact there
> is absolutely no clarity.
>
> And, yea I certainly bought what AIG said, that's how I've paid off
> my car loans, and 100% of my college bills with the money I made
> in September and October buying PUTS on all the major banks...<br/>
>
> Simply a momentum game for now... I'll be buying more put protection
> when the momentum changes.. But in the last 8 weeks, being a bear
> wouldn't have worked too well.
>
> On May 10 08:32 PM Alan Young wrote:

May 10 11:51 PM

[Chris Shenf...:]

Correction: I meant never sell a WINNING stock.


On May 10 11:51 PM Squares7 wrote:

> I agree with Marco that there could be a lot more upside to financials,
> including these banks charted. There seems to be a lot of skepticism
> and criticism, bordering on anger, among the commentators, mostly
> centered on general distrust of the bank's financial statements and
> disagreement with the government's role in propping up these institutions.
> My response is that after years of successful investing, I've learned
> one thing--don't fight the tape. There is a huge amount of momentum
> here. Failure to break UPSIDE resistance doesn't indicate anything
> more than a pause. It's only breaking resistance on the downside
> that would indicate reversal. I have ridden Citigroup from $1.25
> and Bank of America from $5 up to their present prices, and its been
> a great ride because I've learned to never sell a losing stock. Just
> raise your trailing stop losses and enjoy the momentum while it lasts.
> It could continue for quite awhile.

May 10 11:53 PM

[anarchist:]

OK, I bought BAC with my "play doe" and I wish every stock I own had done as well. I knew that $3 a share was ridiculous so I got in. The author of this article suggest using covered calls and while that is probably a good idea the last time I looked the premiums were zip. I sold a third of my BAC at $15 and change for a nice profit but if the premiums on options look any better in the next options cycle I probably will sell some calls. These stock are going to be the financial leaders of the future, just depends on your investment time frame. I am retired so I an not going to wait for BAC to become the financial powerhouse I think is in it's future.

May 11 02:06 AM

[johnmorrison9:]

Like the swine flu, I think we have been duped.
Banks and the economy are stronger than the state media let on.
It is all a power grab, by the unethical politicians.

May 11 10:18 AM

[roger.wan:]

stupid guys. only technical analysis is not enough. Can you see they are issue new share there? How can you just make a decision on technicals?

don't tell me you are only from the technical point of view. If you are long those shares, I guess you try to cheat someone inside it so you can runaway....

May 11 01:26 PM

[31October:]

No, Washington, DC is the puppet.

GS is the master.

Disclosure - up 40% on financials just by knowing who was paying Barney Frank's salary. I feel dirty.


On May 10 04:41 PM Erik78 wrote:

> Who know's what puppet master (washington dc) is going to do next..... ...

May 11 03:29 PM