Financials are starting to see a resurgence, and investors could bet on one big bank in particular to lead the charge.
Todd Gordon of TradingAnalysis.com sees Wells Fargo breaking to highs unseen since the start of the year. The bank, as was the case with other big names in the financials sector, has struggled to break out this year. But Wells Fargo has been rising since its post-Brexit slump, and has now reached its highest levels in nearly three months.
According to Gordon's charts, the bank still has room to move up, allowing him to set up a bullish trade in Wells Fargo.
He points out that Wells Fargo has broken through a support level at $49, fueled by the prospects for a Fed rate hike in December or even September. That $49 will serve as the floor of Gordon's trade.
"Risk needs to be just underneath that, and if the trade is going to work, we really need to hold that $49 region," he said Tuesday on CNBC's "Trading Nation."
Next, Gordon looks at how high he thinks Wells Fargo can go. He determines that the stock can actually jump above $51, a mark he got from looking at highs from the past few months. While Wells Fargo could rally even more, Gordon encourages investors to get in on the trade even before the bank hits $51 per share.
"In this kind of market, which is low volatility, I don't think it's a good idea to wait to get to the breakout point and then try to play the push through," he said. "I think it's a good idea to trade up to the decision point, and if the market continues to break out, maybe we can take profits and hold onto a piece for the ride."
For his trade, Gordon wants to buy the September 50-strike calls and sell the September 52-strike calls for about 65 cents, or $65 per options contract. He would be risking $65 to make the trade, but could potentially see a profit of $135 should Wells Fargo close at or above $52 at expiration.
This means that Gordon would be more than tripling his money with the Wells Fargo trade should it succeed. But if the bank takes another plunge, Gordon may need to get out of the trade.
"If Wells Fargo breaks back below that $49 mark, which was that key breakout, I want to get out of the trade, protect my capital, and move on to the next trade," Gordon said.
Wells Fargo is currently down more than 7 percent year to date, though it has risen about 5 percent in August.
