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Traders are betting big on these stocks ahead of an expected Fed rate hike next week

The big rally in financial stocks is just beginning, according to two market watchers.

While the financials slipped a bit on Monday, the sector has seen a huge move over the past year, rising 37 percent thanks to Federal Reserve rate hikes as well as the promise of deregulation following Donald Trump's presidential win.

"Crossing Wall Street" blog editor Eddy Elfenbein described the Monday slip as a "short-term pullback," and predicts another rally on the horizon thanks to the potential of higher interest rates, which would benefit the banks.

"The financials have been very strong," Elfenbein said on Monday on CNBC's "Power Lunch." "And with an interest rate hike almost certainly coming next week" when the Fed releases its latest policy announcement, as well as the potential for "another one in six months, I think this is a minor pullback for the financials."

From a technical standpoint, the chart of the financials looks promising to Evercore ISI's Rich Ross. According to Ross' chart of the financials-tracking ETF (XLF), a "bullish flag formation" has formed at the end of the chart, a pattern suggesting that XLF could be headed higher. "[The chart] projects an upside to as high as $27, $28 on that XLF ETF."

In other words, XLF could be headed for a stunning 13 percent rally. What's more, Ross also sees a "similar flag" forming on the chart of the 10-year Treasury yield, which Ross says is ready to break through "resistance" at around the 2.5 percent level, a breakout that would drive the bank rally.

"Ultimately, you're going north of 3 percent, that's going to continue to drive the reflationary narrative and the financials," said the technician.


XLF did regain some of its losses by Monday's close, and is up 6.6 percent this year, which is in line with the overall S&P 500.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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