PACW daily July 17th

PACW daily July 17th

PACW (PacWest Bancorp) is another regional banking stock that looks to offer an objective short entry on a break below the blue primary uptrend line. An add-on to that position or a new short entry will also be triggered on a break below the neckline, should the right shoulder of this potential Head & Shoulders topping pattern become fully formed in the upcoming weeks.

To expand on my recent comments, several short trade ideas for the regional banking center have been posted over the last few days and a few more names in the sector may follow. When swing trading, whether very actively & short-term (days to weeks) or intermediate/longer-term (weeks to months while typically targeting the final target levels), the same rules of portfolio diversification that apply to investing hold true, one of the most important being: Never put all of your eggs in one basket. For example, if one were to decide to initial short exposure on the regional banking sector, they should then consider what percentage of their total portfolio or trading capital to commit to that sector. As previously discussed, a single short trade on KRE will provide complete & diversified exposure to the sector while mitigating the overnight risk associated with trading individual stocks, such as a large gap against your position on an earnings report or some other unforeseen news related event.

Should one opt to trade individual stocks with the most attractive chart patterns in the sector, possibly even including a position in the KRE to add some additional diversification, just keep in mind that birds of a feather flock together meaning that most of the stocks within a sector will tend to move up or down in tandem. This “flocking” phenomenon is evidenced by the striking similarities in several of the regional banking stock & ETF charts recently posted (nearly identical primary uptrend lines plus potential H&S topping pattern formations).

Therefore, even if you are diversified amongst several names, if your short bet on the sector is wrong, then most or possibly all of the trades will be stopped out for a loss. The important thing is to determine how much capital you plan to commit to each sector that you are considering trading, even if your strategy is to gradually scale into your position(s). Next, determine how many positions you will likely have once fully invested in that sector & finally, use those totals to determine how much capital to commit to each individual position.

Expanding on this current example, I will probably post another 1 – 3 individual regional banking stock trading candidates, in addition to the one ETF (KRE) and three individual names so far (BXS, PNC, & FRC) as I will typically hold anywhere from 4 to 6 of the most promising individual stocks in a sector, sometimes even more such as the “shotgun” approach that I’ve taken when scaling in & out of the gold & silver mining stocks several times over the last year.

Click here to view the live, annotated chart of PACW