Warning: Downside Ahead For This Major Financial Stock
Stocks have been unable to gain any real upside traction and remain stuck below critical resistance areas. On Tuesday, the market once again tumbled, led by the consumer discretionary and financial sectors.
#-ad_banner-#Year to date, financials are flat, lagging behind utilities, basic materials and health care stocks, but outperforming technology. As the largest industry in the economy, the financial sector -- which includes brokers, banks and insurance companies -- matters a great deal to the tone of the overall U.S. stock market. Taking note of how big financial stocks trade is important to understanding the trend in the broader stock market.
On top of my watch list, Morgan Stanley (NYSE: MS ) has a permanent spot on one of my eight monitors. It is one of my go-to stocks because it often gives me clues as to the broader market's near- to medium-term direction. I check the trading action in MS at least three to four times a day, because more often than not, any sharp reversal or relative strength or weakness in the stock can quickly infect the broader market.
On an intraday basis, it rarely pays to short stocks when financials are strong, nor does it make much sense to buy stocks when financials are weak. Additionally, institutional investors often play in the financial sector given its size and liquidity, and they can do so with enough conviction to hold the market up or down.
The news specific to Morgan Stanley has been somewhat muted in recent weeks since the company reported earnings. But last week, the Financial Industry Regulatory Authority said it had fined the company $5 million related to its handling of sales of initial public offerings in Yelp (NYSE: YELP ) , Facebook (Nasdaq: FB ) and others to its retail customers.
The multi-year chart shows a clear but relatively wide band of resistance that dates to 2009, spanning from around $31 to $35.80. So, when the stock topped out in the middle of this range near $33.50 in January, it shouldn't have been a big surprise.
On the daily chart below is where I am seeing a potential short selling opportunity. MS trended nicely higher from the summer of 2012 through the end of 2013. But things got choppy as 2014 arrived, and in early April, MS broke below its trendline (red) for the first time.
Shortly thereafter it pierced its 200-day moving average (lower blue line) for the first time since November. After retesting the broken support line from underneath, MS again found resistance this week and pushed lower, bringing it right back to the 200-day moving average.
Action to Take -->
-- Sell MS short on a daily close below $29.25
-- Set stop-loss at $30.20
-- Set initial price target at $27.30 for a potential 7% gain in 2-4 weeks
This article was originally published at ProfitableTrading.com:
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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