Back on August 13th I wrote an article on Citigroup (C) as it had built a nice strong base. I observed what was going on in the markets as well as the technical information on the stock. I made a choice to look at a short term income play on the bearish side, even though the RSI indicator was showing strength in the movement of the stock. This is what I wrote in my observations at that point:
"As it moves sideways, the stock appears to be gaining strength. Usually when a stock consolidates, it tends to lose strength, not gain it. This could indicate that it might be getting ready to move up, but I do not have enough information from on the chart."
Needless to say, the stock went up right after that and I would have been better off listening to my own instincts instead of relying on chart patterns themselves.
In today's market, UBS downgraded it from Buy to Neutral on Wednesday, citing a valuation call with a price target of $36. Why at $36? This level was the last high that the stock had tried to push through but was unsuccessful. It appears the reason behind the downgrade is because of growing caution for the financial sector as a whole. Goldman Sachs was also downgraded to Neutral.
This is understandable in a mixed sector where some U.S. banks remain on the mend, while others continue to struggle. Some Latin American banks are slowing down, while Canadian banks continue to make nice profits. U.S. banks are continuing to show signs of recovery on the capital and credit fronts. Volatility is still very much present though in the financial markets. This ongoing volatility has affected investors' behavior, causing them to rapidly alter their risk tolerances and asset preferences, moving in and out of financial and service stocks in response to the short term news of the week.
Because of this cautionary outlook, I am also going to take a cautionary approach to trading Citigroup.
From August through mid September, the bank stock continued to move up until it ran into very important old resistance from April 2012. At the $35.5 level, the stock could not break through and pulled back. Since then, it has backed up to the middle Bollinger bands. Now the question arises: is the stock going to remain strong and continue up after the pullback, or will it start to move down? The trend itself still looks strong. The stock has moved up in a bullish stepping pattern and the recent drop could be another step (even though it is leaning bearishly) as the stock gets ready to move back up. Are the indicators revealing anything? While the RSI has continually followed the stock up, this last peak was grossly overbought so the stock was apt to move down anyway. But it shows no reversal signs. The MACD also is bullish, showing no signs of a reversal coming.
The Options play
The stock is presently trading at $32.51 and my druthers would be to stick with the trend the stock is moving in but trade it cautiously. This means buying the stock in the money.
- Buy the November call with a strike of '32' (priced at $2.09)
- Sell the November call with a strike of '33' (priced at $1.54)
- Net Debit to Start: $0.55
- Maximum Profit: $0.45
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning behind the trade
- Trading with the trend since no signs of a turn around yet.
- Analysts cautious on the financial sector means playing a tight trade buying in the money.
- Trade is well within moving parameters