Citigroup Stock (C) Under Pressure Despite Beating Estimates

Citigroup Inc. (C) is trading lower by 1% in Tuesday's pre-market session, despite the financial giant beating top- and bottom-line second quarter 2020 estimates by healthy margins. Earnings per share (EPS) of $0.50 beat consensus by $0.23, while revenues rose 5.4% to $19.77 billion vs. expectations of $19.06 billion. Credit losses rose during the quarter due to the challenging U.S economic environment, rising to 3.89% of loans compared to just 1.82% in the second quarter of 2019.

Key Takeaways

  • Citigroup Inc. (C) reported second quarter 2020 financial results that beat consensus estimates by healthy margins.
  • Wall Street is bullish on shares of the financial giant, with a "Strong Buy" consensus, but this optimism depends on a successful reopening of economies in the United States and around the globe.
  • With Citigroup stock losing ground despite the earnings beat, a rally above $60 would improve the technical outlook, while a decline through $48 would raise the odds for a selloff into the March low.

Wall Street currently rates Citigroup stock as a "Strong Buy," with 13 "Buy" and just 2 "Hold" recommendations. No analyst is recommending that shareholders sell their positions at this time. The lopsided optimism reflects revaluation as a result of the first quarter's steep decline to an eight-year low. However, those metrics assume a successful reopening of world economies and no second coronavirus wave this winter. Both assumptions appear unrealistic given the COVID-19 surge in the majority of U.S. states.

Citigroup Long-Term Chart (1990 – 2020)

Long-term chart showing the share price performance of Citigroup Inc. (C)

<Adjustment for a 1-for-10 reverse stock split in May 2011 yields historical values that are much higher than those traded in real time.>

Price action completed a double bottom reversal at the end of 1990, giving way to a powerful trend that posted seven splits into the 2000 high at $551.48. That marked the highest high for the next seven years, ahead of a steep bear market decline that found support in the $220s in the fourth quarter of 2002.

A bounce into 2004 stalled less than 25 points below the 2000 peak, yielding narrow sideways action, followed by a 2006 breakout that failed after posting an all-time high at $570 in early 2007. Selling pressure increased in the fourth quarter and accelerated during the 2008 economic crisis, dropping the stock to a multi-decade low in the single digits. It bounced into the mid-$50s in the third quarter of 2009, establishing a resistance level that wasn't mounted until 2017.

Resistance, or a resistance level, is the price at which the the price of an asset meets pressure on its way up by the emergence of a growing number of sellers who wish to sell at that price.

Higher lows in 2011 and 2016 absorbed the last vestiges of selling pressure from the bear market, giving way to a breakout after the presidential election. The rally made limited progress, given the massive size of the breakout, topping out just above $80 in January 2018. A fourth quarter selloff into the upper $40s completed a trading range that held firm into a January 2020 breakout that failed after adding just three points, reinforcing resistance above $80.

Citigroup Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of Citigroup Inc. (C) 

The pandemic-driven decline broke range support before the stock found support in the low $20s, while the bounce into the second quarter stalled about five weeks ago in the low $60s. Price action since that time has been testing the remounted 2018 low, but the stock is now compressed between that level and major resistance at the 50-month and 200-day exponential moving averages (EMAs). A move out of this range would set off strong buy or sell signals, telling market players to go with the flow, higher or lower.

The on-balance volume (OBV) accumulation-distribution indicator gives bears a strong edge in this bilateral set-up, dropping back into March's 14-month low in May and carving minor upside into July. This reflects strong investor pessimism, which makes sense because commercial banks are highly cyclical, gaining ground during economic expansions and selling off during recessions and downturns.

On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book Granville's New Key to Stock Market Profits.

The Bottom Line

Citigroup is losing ground despite beating second quarter 2020 consensus estimates, but the stock is still trading above support near the 2018 low and below resistance at the 200-day EMA. This establishes a "rock and a hard place" scenario in which a rally above $60 should improve the technical outlook while a decline through $48 would raise the odds for a selloff into the March low. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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