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Banks suffer worst week since financial crisis, but trader sees bottom

Banks are breaking down.

The KBE bank ETF, which holds top stocks such as JPMorgan and Bank of America, tumbled more than 14% in a week. That was its worst weekly decline since May 2009.

The group was hit hard by fears of an economic slowdown caused by the coronavirus outbreak and a flattening yield curve.

However, one trader sees a potential bottom forming in the KBE ETF.

"When talking about the banks and specifically the KBE, I cannot ignore this long-term trend line support and coinciding floor at $37," Bill Baruch, president at Blue Line Capital, told CNBC's "Trading Nation" in an email on Friday. "This is where you got to be looking at the banks."

The KBE ETF would need to fall nearly 5% to reach Baruch's $37 target. It has not traded at that level since the beginning of 2019.

Baruch is looking at the 3-month/10-year yield spread, in particular, which went negative earlier this month. He notes it went negative last year before rebounding when the Federal Reserve initiated a series of rate cuts over the summer and into fall.

"Right now it is not a matter of if the Fed cuts rates; it's a matter of when and by how much. I like the idea of positioning in banks heading into these next cuts. I expect to see this curve react the same way," said Baruch. "This spread went positive into the third cut and that was when the banks broke out."

A steeper yield curve — which measures the difference between shorter- and longer-term bonds — benefits banks' net interest margins. Banks borrow on the short end of the yield curve and lend on the long end.