Citigroup Inc. (C) stock has lost ground since posting an all-time high at $76.14 on Oct. 12, even though the broad-based SPDR S&P Bank ETF (KBE) hit an eight-month high more than two weeks later. This bearish divergence has attracted the unwelcome attention of sector bears, but the stock may have turned the corner this week and could now engage in a substantial year-end rally that could post new highs.
The stock ripped higher on Wednesday following an intraday breakdown through range support at $71, signaling a short-term selling climax ahead of bullish seasonality that continues through December triple-witching options expiation. The Federal Reserve is likely to raise interest rates for the first time since June that week as fund managers tidy up their 2017 portfolios, locking in profits through options protection.
Pullbacks in Citigroup stock will now hold $70 if this bullish scenario unfolds as expected, suggesting that long-side entries taken at or near that level will generate quick profits. More conservative players can wait until a breakout above the 60-minute 50-bar exponential moving average (EMA), currently above $72, because the level has acted as resistance four times since Nov. 3. In both schemes, it makes sense to take aggressive profits because early 2018 tax selling could trigger a more substantial decline. (See also: Why JPMorgan, Bank of America, Citigroup Can Rise 10%.)
C Long-Term Chart (2005 – 2017)
Citigroup stock topped out at a reverse split-adjusted $570 in December 2006 and pulled back into October 2007, when it turned sharply lower ahead of a 2008 collapse that reached the lowest low since 1990. It bounced strongly into August 2009, stalling in the mid-$50s, with that level generating resistance for more than seven years. A decline starting in January 2011 posted two higher lows, carving a double bottom reversal that preceded a strong bounce into 2013.
The shares hovered near long-term resistance into a 2015 decline that carved the third higher low since the bear market in February 2016. The subsequent upturn signaled a historic buying opportunity, ahead of a major breakout following the 2016 presidential election. The stock based on top of new support for six months and completed the long-term breakout with a rally that posted a series of eight-year highs before topping out and pulling back in October. (For more, see: How Citigroup Makes Its Money.)
C Short-Term Chart (2015 – 2017)
The trend wave that started in early 2016 reached resistance at the July 2015 high in December while the ascending triangle into June 2017 completed a 23-month cup and handle breakout, projecting a measured move into the $90s. Price action over 10 months has carved a rising lows trendline, with the decline into November bouncing at that level earlier this week. Along with bullish seasonality, this turnaround suggests that the stock will now head to new highs.
On-balance volume (OBV) topped out in July 2015 along with price and entered a major distribution wave that ended in the first quarter of 2016. The indictor stalled at the prior high in December and pulled back, posting a higher low ahead of bullish action that reversed once again at 2015 resistance in October. An upturn here would add reliability to the bullish prediction, while a breakout to new highs would set off a fresh round of buying signals.
Market players with a longer-term time horizon may choose to hold through expected volatility in the first quarter of 2018, looking to sell or trim positions when the rally reaches channel resistance now centered near $79. Stop-losses in the upper $60s make sense if pursuing that strategy because a channel breakdown will expose the stock to continued downside that could reach cup and handle support at $61. (See also: Citi to Double by 2022: Wells Fargo.)
The Bottom Line
Citigroup shares pulled back for six weeks and bounced strongly on Wednesday, raising the odds for an end-of-year rally that could post new highs. Skilled risk management will be needed to profit from this scenario because Washington could act as a spoiler if tax legislation fails to pass Congress or the Fed fails to raise rates. (For additional reading, check out: The Impact of a Fed Interest Rate Hike.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>