It is the start of earnings season for US equities, with major banks reporting this week. Let’s see how bank earnings pair up with the much anticipated CPI data on Tuesday morning.

After last week’s sudden Thursday dip and subsequent rebound on Friday to close at all-time highs in the $SPX, I hope the weekend has you feeling relaxed and rejuvenated. I say that because this week could provide some elements of fireworks; given the economic data on tap and the beginning of the Q2 earnings season.

The Banks.

In the second half of last week, our analyses focused on interest rates and the banks. In case you missed it, we were specifically looking at interest rates via TLT and banks via KBE. Friday was a great day for the banks...could this be a harbinger of things to come for bank earnings?

Figure 1 - KBE S&P 500 Bank ETF January 18, 2021 - July 9, 2021, Daily Candles Source stockcharts.com

Please refer to the July 6th publication where we analyzed KBE in depth. I think there are so many reasons to like the banks here. If you are a premium subscriber, you received an alert email on Wednesday regarding some intraday trading activity and levels.

Note that the RSI(14) has not even crossed the 50 line yet. These levels could indicate that there is still time to get on board the banks ahead of earnings. Some folks are fundamentally predicting a big bank's earnings season this week.

For example, we have Sam Stovall, chief investment strategist at CFRA Research looking for the second-best YOY quarterly gain in the last 25 years for the banks.

KBE tacked on 3.83% on Friday. If you recall, part of the reason we initially started to love the banks (KBE) was that it had pulled back over 9% from its 2021 highs; as the S&P 500 had continued to make new highs.

Putting that together with the technical action late last week and heading into earnings, it could be a great place to continue to be. We will be looking for exit levels in the coming days and weeks, with Premium Subscribers receiving the intraday alerts.

Interest Rate Action and Reaction

As banks surged on Friday ahead of earnings, interest rates rose along with them. That is part of a goldilocks scenario for banks. Has the time for banks come and the turn in interest rates along with it?

Figure 2 - Ten-Year Treasury Note Yield January 7, 2020 - July 9, 2021, Daily Candles Source stockcharts.com

Ten-year note yields rose on Friday in tandem with bank stocks. Please see the July 7th and July 8th publications for more detail on $TNX.

So far this morning, it has been a quiet session in equities and bonds. Since we have CPI data on tap for tomorrow at 8:30 AM, it is to be expected.

Our interest rate analysis led us to TLT and a potential long-term head in shoulders pattern being created. As bond yields rose on Friday, TLT fell nicely.

Figure 3 - TLT iShares 20+ Year Bond ETF July 2, 2021 - July 12, 2021, 10:35 AM, 15-Minute Candles Source stooq.com

The 15-minute candles in TLT show an exhaustion gap up to levels we were watching on Thursday; and a gap lower on Friday. Notice what may be a short-term head and shoulders pattern forming here on the intraday charts that coincides with the long-term head and shoulders pattern that we identified. I like to call this the matching pattern within the pattern. More on that another time.

This morning, we do see the equities beginning to gain a bit of steam and the bond yields dropping slightly. We have CPI data tomorrow morning, so it could be a quiet session as traders look to tomorrow's CPI release.

Are you fading the CPI data fear? Is it possible that tomorrow’s inflation data release is not so bad, and that the inflation is indeed transitory, as the Fed has spoken about on multiple occasions? I think there is a possibility of this, and it has never been a good idea to fight the Fed.

I like the idea of being long the banks and short bonds (higher interest rates) heading into tomorrow’s CPI release and this week’s bank earnings releases.

As suggested last week, a stop loss to this short TLT trade is to a 2nd sequential daily close above $153.16. I am currently eyeing $139.50 - $141.25 as potential take-profit levels. I would like to see this last week, and the possibility exists. Always use a stop loss level that caters to your individual risk tolerance. These levels can fluctuate, so please stay tuned.

For KBE, our entry levels are looking good thus far as we enter earnings season for the banks. My instinct says that bank earnings are going to be bullish and I love how we have the technicals going for us, and a pullback from highs in the banks earlier this year. Suggested stop-loss is a 2nd sequential daily close below $47.90. I think the possibility exists to test the top of the 2021 range above $55 for a take-profit area. Our entries were between $48.11 - $50.00, so we are sitting pretty heading into bank earnings.

To sum up the current viewpoint and opinion:

I have BUY opinions for:

• SPDR S&P Bank ETF (KBE) between $48.11 - $49.39/$50.00. Update 07/12: See above and get ready for earning’s releases. Always use a stop loss level that caters to your individual risk tolerance.
• Defiance Quantum ETF (QTUM) between $44.00 - $49.50. Update 07/12: We had a great pullback last week to get on board here. The last time I checked, we were trading at $49.08. One of these days we will wake up to a breakout above the recent range and clear $50.47 IMO. This is a play in automation, robotics, and AI. Once this range is broken to the upside, I think we could see $55 - $60 rather quickly. Always use a stop loss level that caters to your individual risk tolerance.
• Amplify Transformational Data Sharing ETF (BLOK) between the 200-day moving average and $40.00 200-Day Moving Average is currently $41.56 Update 07/12: I’ve kept this one on the board, so I can keep monitoring it. It is getting closer and closer to the 200-day moving average. Crypto has consolidated for a long time now, and there could be another downside try. Wait for the pullback. Always use a stop loss level that caters to your individual risk tolerance.
• Invesco MSCI Sustainable Future ETF (ERTH) between $65 and $66. Update 07/12: I really hope you got on board here. When looking at the chart, keep in mind there was an unusually large dividend paid on June 21st ($9.95 per share). So, the price had to adjust for it. Another way to look at it is by adding $9.95 to the current price to see the pre-dividend stock price. This has been good to us. This is a good play with the current administration and has been good to us so far. Always use a stop loss level that caters to your individual risk tolerance.
• Invesco Exchange-Traded Fund Trust - S&P SmallCap 600 Pure Value ETF (RZV) on pullbacks. Update 07/12: Loving the price action of late last week. Targeting $100 here. Always use a stop loss level that caters to your individual risk tolerance.
• iShares Global Timber & Forestry ETF (WOOD) Update 7/12: This has been good to us. Premium Subscribers were notified in the June 16th publication to consider the first tranche of buying between $86.50 and $87.50. Look to add the 2nd tranche between $81.62 (200-day SMA) and $80.00. We are trading at $89.39 (last time I checked). Always use a stop loss level that caters to your individual risk tolerance.
• Invesco Solar ETF (TAN) Update 07/12:. If you have been following along, this is a favorite for a long-term holding in the current environment. It has been good to us and consider buying pullbacks if not already on board. We have the 200-day SMA at $87.90 and the 50-day SMA @80.11. TAN has been very good to us. If not on board, wait for a pullback; this one can move erratically in both directions. Targeting $100 - $125. Always use a stop loss level that caters to your individual risk tolerance.

I have SELL opinions for:

• iShares 20 Plus Year Treasury Bond ETF (TLT) when $TNX trades 1.291% or at the 200-day moving average of TLT ($148.47) / $147.75 - $148.47. Update 07/12: We are looking good here and see above for TP and SL levels. Always use a stop loss level that caters to your individual risk tolerance.

I have a HOLD opinion for:

• First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID). Update 07/12: This has been a favorite. I have moved it to hold, as I do not suggest chasing it here. This has been a buy opinion from the May 6th publication between $86.91 - $88.17 Hold longs. I have liked this one for a longer-term-swing trade or longer-term holding, and am looking for signs to ring the register. Today, we are trading $94.41 the last time I checked, and I think it has a little more gas in the tank. Stay tuned. Always use a stop loss level that caters to your individual risk tolerance.

Thanks for reading today’s Stock Trading Alert. Let’s stay unemotional and disciplined heading into CPI and earnings. Your readership is appreciated. Have a great day!

Thank you,

Rafael Zorabedian
Stock Trading Strategist