How to trade the banks ahead of the big Fed decision

Banks are holding steady on Tuesday ahead of three key central bank meetings. The charts have two market watchers split on how best to trade the financials in a busy week of monetary policy decisions.

The regional banks look like the best play to Chris Verrone, head of technical analysis at Strategas Research Partners. Verrone says recent activity in the KBW regional banking index suggests a bigger breakout ahead.

"When you look at the group especially over the last number of weeks, while the bigger ones have struggled, the smaller ones have actually acted fantastic here," Verrone told CNBC's "Trading Nation" on Monday. "This group has essentially been consolidating for the better part of the last year-and-a-half, just coming out of this base and, most importantly, it's doing it in relative terms as well so these are six-month relative highs for regionals."

The KBW index is up 8 percent in the year to date with gains picking up speed since April. The broader XLF financial SPDR ETF is flat in 2018.

"We think that sends a positive message for names like KeyCorp, SunTrust. All good charts. We think you own them here," said Verrone.

How the banks and broader markets move next depends on how those central banks swing this week, starting with the Federal Reserve on Wednesday, says Bill Baruch, president of Blue Line Futures.

"When the Fed hikes rates on Wednesday, if they are more hawkish than expected we could see some of the other parts of the market, some of the other sectors, stumble and the banking sector could be a pillar," Baruch said on Monday's "Trading Nation."

The Federal Open Market Committee is expected to announce a 25-basis-point rate hike on Wednesday afternoon following its two-day meeting. Fed chairman Jerome Powell's statements after the meeting hold more weight as investors dissect how hawkish or dovish the new central bank leader might be in coming months.

The European Central Bank and Bank of Japan release their own policy decisions on Thursday and Friday, respectively.

"I'm watching J.P. Morgan and Bank of America," said Verrone. "When they closed before the Italian crisis over Memorial [Day] weekend, that closing level on May 25 has been a tough one to get out above and stay out above, so watch those levels."

J.P. Morgan and Bank of America are up 3 percent so far this month.


Trades to Watch

Trader Bios


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

Read more