Bank stocks are breaking out and could take the sector to uncharted territory in 2018

Financials have surged 7 percent in the last month, and Todd Gordon of says they'll continue to rally into 2018.

According to Gordon, the current economic outlook seems to be in favor of bank stocks, thanks to recent moves in one area of the market: bonds.

"Bonds are pressing lower, and yields are in a pretty constructive pattern here on the back of the tax cuts," he said Thursday on CNBC's "Trading Nation." "That indicates economic growth, and expansion should continue."

Higher yields are seen as a positive for banks based on their business models, and Gordon says charts of the 10-year Treasury yield are suggesting that it's about to bounce. More specifically, the 10-year has bounced from a key resistance level at 2.5 percent, and Gordon sees it running higher to above 3 percent.

"We have broken resistance, and when that happens in the world of technicals, it flips the script and goes from resistance into support," he explained.

Looking at a chart of the financials-tracking ETF, the XLF, Gordon noted that it is running up against resistance at the top end of its trend channel. As a result, he expects that we could see a small pullback to support around $27, but any dip should be bought.

"If we can get a pullback to around $27, it's going to be a value long on the back of a sell-the-fact post-tax cut and that should eventually get you up to around the $30 mark in 2018," he said. That would put the ETF a hair below its 2007 all-time high.

The XLF is currently up 21 percent year to date, thanks to the rally in bank stocks over the past month.


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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 CNBC and 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.

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