Shares of banking company SunTrust Banks (STI) jumped last Friday after the company reported a strong rise in its third-quarter profit. However, the rally looks like a mere oversold bounce as it occurred within the context of an otherwise broken intermediate-term chart. Active investors and traders could thus look to short the stock.
Specifically, SunTrust earnings for Q3 came to 81 cents per share on an adjusted basis, slightly missing analyst expectations but up significantly from 66 cents per share in the year-ago quarter. Meanwhile, revenues rose nearly 6% to $2.03 billion, though that figure also fell under analyst expectations.
Shares of regional banking stocks as a whole — represented by the SPDR Regional Banking ETF (KRE) — also bounced in the second half of last week, and by so doing moved back up to a band of resistance (blue box) that previously acted as support. Until the ETF can re-establish itself above this layer of resistance, the onus is on the bulls.
On the weekly logarithmic chart, STI stock earlier in the year broke its 2009 uptrend line, and with the recent weakness it also broke below lateral support. In the bigger picture, SunTrust has been moving sideways since fall 2013, while upside momentum topped in late 2013 and has been forming a series of lower highs since. This created visually obvious negative divergence for all of 2014, and with the recent break below lateral support, STI stock finally seems to have respected the weakening upside momentum.
On the daily chart, STI stock’s price action has also been flashing some concerning signs as it created a series of marginally lower highs versus its March high. The stock’s rally into mid-September finally created a third lower high, from where it reversed lower in rather violent fashion, finally breaking below lateral support around the $36.50 area in early October. The stock then literally flushed lower as stops got triggered and panic set in.
By the middle of last week, STI stock finally reached extreme near-term oversold readings and with stops triggered there was only one way left to go for the stock, and that was higher, at least for a sharp oversold bounce. However, the bounce ended just below the previous support area of $36.50, and the stock closed Friday’s trading session off the highs.
Active investors and traders could now use the broken medium-term chart and the upside resistance on the near-term chart as a defined risk/reward setup to lean short on STI stock. A break back below $35.40 could get this stock moving toward $33, while any rally back above the $37 area would nullify the short-side setup for the time being.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
