Financials: Short-Term Momentum vs. Long-Term Resistance

Financials came into the week as the worst performing sector in the market. As Followers to this blog know I came into the week bearish and had opened a couple Short positions in the XLF's top laggards AXP and C.

As we now know that didn't work out so well; the plodding AXP rallied 5%, while C ripped 11%. Fortunately I use options when I trade Short and the damage to my capital was well contained. Bear in mind the percent moves are higher in options but my overall risk was quite low. 

Both C and AXP traded above our initial stops yet I feel some perspective is needed in determining our future positioning. My Put option positions are capped at a maximum .5% capital risk; in the event of a total failure, downside risk is limited to .5% of our portfolio. This allows us some leeway after having more information than we did prior to last week. 

AXP WeeklyAXP was one member of the XLF that did not report earnings this week. They will report this coming week which leaves additional risk in play. Due to that added earnings risk and the fact that it did close above our stop level, we closed our AXP Short. 

C Weekly

C reported earnings Friday morning and despite an early surge, shares were sold into major resistance and finished lower on the day.

C Daily

 Because of where the sellers stepped in and due to the "sell the news" type reaction, I feel it's most prudent to continue to hold our Put position and use Friday's high as our new exit point. Again our maximum loss for the trade is capped at .5% so we are not taking excessive risk by remaining short here. 

BAC Weekly

BAC also reported earnings this week and it too was met with sellers at its key resistance level. 

We have been watching BAC and waiting patiently for a retest opportunity of the range breakdown near $15. With this week's surge in the Financials we got that retest. Now that earnings are behind us we can comfortably trade it Short using this week's reaction high as a reference point. 

Should we see BAC resume higher through this week's high and return to its prior trading range it will be no problem admitting we are wrong and stepping aside. 

The move in the Financials this week was notable. Whether that move was genuine "risk on" rotation or the final purge of stubborn short sellers I don't know. What I do know is the long-term trend remains lower for the group. With the SP500 moving into its 18-month resistance zone coinciding with many major Financial stocks moving back into overhead supply, I still feel the risk/reward favors the short side for the time being.