This chart that shows more pain is ahead for the banks, trader says

  • Trader sees a bond rally in the charts.
  • A subsequent rally could hurt the already underperforming financials sector.

A close analysis of the bond market suggests more pain ahead for the already beaten-down financials.

That's according to TradingAnalysis.com trader Todd Gordon. While the ETF tracking long-term Treasury bonds (TLT) had fallen in recent weeks, Tuesday's move up leads Gordon to believe that a recovery for TLT is just ahead as it is remaining above a key level.

"We have support around the $120.50 area here in TLT," the trader said Tuesday on CNBC's "Trading Nation." "If bonds in fact are finding support, that means bonds move up, and yields will push down."

Should yields slide, that could spell trouble for the financials, as banks generally benefit from higher long-term yields.

To make matters worse, Gordon points out that the financials (XLF) have dropped over the past week while the S&P has remained "sideways," meaning that the sector is underperforming.

But the group of banks that would be hit the hardest are the regional banks, which according to Gordon are "very interest rate-sensitive."

What's more, the technicals for the regional bank-tracking ETF (KRE) suggest that the ETF could head lower.

"The KRE, which is one of your regional banks ETFs, is showing pretty good resistance up around this $55.50 region," said Gordon, pointing out the key level. "So it looks like we have failed [to break through $55.50], and it looks like the regionals want to go back and retest the $51 region."

In other words, KRE looks set to fall right back to mid-April lows.

After a big rally following Donald Trump's election, the banks have been essentially flat in 2017.

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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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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