I don’t know about you, but I can’t wait for Mondays to arrive.
A new week means a fresh set of days that we can use to trade the new Weekly Watchlist ideas that I send to your inbox each Sunday night, the latest version of which can be found here.
For today, though, I want to follow-up with you on Lion Group Holding Ltd (LGHL), which was one of the stocks from last week’s list, for two reasons: First, the trade is still working. Second, there is an important lesson to be learned about why the recent interest rate movement caused me to favor diversified financial services stocks like LGHL.
Traders must always be looking to gain an edge
Trading is a competition. A competition against both the market and ourselves.
Like any competition, traders need to find ways to gain an edge.
One of the most effective ways professional traders gain an edge is by buying stocks that are in leading sectors and selling stocks that are in lagging sectors.
Right now, the financials sector is an area I’m looking to gain bullish exposure to because the recent rise in interest rates is helping to boost the bottom line of these companies.
Here’s how interest rate movements affect bank earnings
To put it simply, profits across the banking industry are closely tied to the movement in interest rates.
Why is this?
Because retail banks, commercial banks, and brokerages hold large cash deposits in the form of customer balances.
Profitability at these institutions increases when interest rates rise because it increases the yield on this cash.
As a result, the proceeds go directly to earnings.
Conversely, the opposite occurs when interest rates are falling.
Stocks that are outperforming offer bulls better odds of success
Obviously, finding a stock that is showing strong technicals in absolute terms (i.e., its own price action) is an important part of developing a bullish trade plan.
But, if you can combine that with evidence that the stock is outperforming both the S&P 500 and its sector, and the sector that the stock is in is outperforming the S&P 500, then you’ve got the kind of evidence you need to establish a high-probability bullish trade plan.
The top panel of Figure 1 below shows how the financials sector outperforms the S&P 500 when the yield on the benchmark 10-Year US Treasury contract is rising.
Armed with this knowledge, I make it a point to focus on any financial stocks that pop up when running my Weekend Watchlist screen.
Now that I’ve shown you that LGHL is outperforming both the S&P 500 and the S&P 500 Financials Sector, and the S&P 500 Financials Sector is outperforming the S&P 500, let’s take a closer look at the stock’s absolute price action.
You guys and gals know I love to use Keltner Channels on my charts, particularly on the weekly charts.
Figure 2 below is a weekly chart that shows that LGHL’s rally peaked this past week when the stock rallied to the +1x weekly Keltner Channel band.
I first brought this to your attention last week, with my target being the high $2 area.
You’ll notice from Figure 2 above that the high $2 area equates to the +2x Keltner Channel band, and I still think the stock can work in that direction.
As Figure 3 below reveals, the high $2 area is also where the 200-day moving average and heavy overhead price congestion (i.e., price resistance) currently reside.
Don’t forget, the 200-day moving average is very important and often acts as a psychological magnet.
Therefore, I like that the market may still want to fill the gap up to that level.
Since I am a huge follower of momentum stocks, I do not want to see this stock fall back below the $1.89 area shown on Figure 3 below, since that level represents the most recent acceleration point that developed at the 10/04 to 10/05 overnight price gap.