Citigroup: How The Bullish Channel Might Play Out

Summary

• Citigroup Inc. is trading in a bullish channel that puts resistance at $64.50 (mid-term) and $67.80 for the top of the channel.
• Citigroup broke out of a 4.5% range and has traveled the length of that range. The next range is currently taking shape.
• If Citigroup stays within the bullish channel, the stock could retrace as low as $59.40 and bounce possibly as high as $67.80 while remaining in its bullish trend.

There have been many factors driving banks stocks lately including higher yields, the expectation of economic growth, resulting in better earnings, and the possible watering-down of the Dodd-Frank Act.

Thanks to President Trump, since November, we've seen a bump in bank stocks like those listed in the SPDR S&P Bank ETF (NYSEARCA:KBE), the Financial Select Sector SPDR ETF (NYSEARCA:XLF), and Citigroup Inc (NYSE:C).

Although the fundamentals are driving financial stocks, in this analysis we'll look at key price levels and the channel in which Citigroup is currently trading within. With the recent gains, it's important to have a risk management strategy in place in case the market turns south. And it's at these key levels that sell and buy orders may kick-in exacerbating the move.

In full disclosure, this analysis is not a recommendation to buy or sell at a specific level. I'm not a financial advisor. My goal is to help you identify areas of risk in your portfolio, identify areas of resistance and support, and areas where volatility is likely to rise.

Analysis of Citigroup range breaks:

• Citigroup got stuck in a 4.5% range twice; from November to December, and from Mid-January to mid-February of this year. A break of a range (or range-break) can sometimes, (not always) propel the stock to travel the length of the range.

• Following the two range-breaks, Citi moved higher by at least 4.5%.

• With each move higher, Citigroup came up against resistance. This resistance is the bullish channel that Citi is currently trading within.

• The trendlines represent the bullish channel; the bottom pink trendline connects the lows of the move higher while the top blue trendline connects the highs of the move.

• The red line represents the medium-term resistance.

How I drew the line: I took the trendline from the lows, and "cloned" it (so to create the exact-same angle). Next, I moved the newly cloned pink line to the top of the price action to create the top blue trendline. The pink and blue lines create the bullish channel. By having both trendlines at the same angle, it gives us a more accurate picture of price action and therefore, more accurate top and bottom levels of the bullish channel.

Next, I cloned the pink trendline from the lows again to create the medium-term resistance and lined the newly created red line with medium-term price action tops dating back to last year.

It's important to note, from my experience, and some folks might disagree, that price action determines the bullish channel top and bottom trendlines. Technical analysis doesn't create the price action. Instead, it's merely a visual representation of the price action that's driven by fundamentals or other factors.

The markets are analogous to a ladder; price moves up and down the ladder driven by fundamentals. Technicals and indicators are simply the rungs of the ladder or steps the market takes to get where the trend is taking it.

However, some of these levels if broken by the market can oftentimes contain numerous buy and sell orders (stop-loss or take-profit orders). As a result, volatility can increase in these key resistance and support zones, and investors are at risk of being stopped-out.

Bullish channel with upside resistance or targets:

• The red line (cloned from the bottom pink trendline) represents a near-term resistance in the $64.50 area.

• Citi has been trading sideways in a 4.5% range since mid-February (green rectangle). Assuming the stock doesn't break immediately, a break higher might take the price up against the redline or medium-term resistance at roughly the $64.50 area (which would be a 4.5% move).

• Ideally, for the bulls, you want to see Citi break medium-term resistance and close above the red line for a few days, for the stock to move higher towards the channel top (blue line).

Bullish channel longer-term resistance targets:

• If Citi breaks above the red line, the next resistance comes in approximately at $67.80 or the top of the channel.

• If you notice the orange rectangle represents the 10% range Citi was trading within during November to February. A break of that 10% range might propel the stock to the $67.80 area which would coincide to the channel top.

• Again please note, these levels are merely forecasts of how price action might play out, if the fundamentals stated earlier, drive the stock higher.

By measuring the trading ranges within the channel, we can get a sense of where price might stall or break out during the trend move.

In other words, Citi could retrace down to $59.40, bounce off the channel bottom, and propel to $67.80 while remaining within the bullish channel the entire time.

By utilizing range-breaks and channel lines together, we can achieve confluence or confirmation from more than once source that the stock might be approaching a key level where volatility or opportunity might reside.

Bearish break of the channel:

• We may see a few days or weeks of sideways trading or even a pullback back to the lows of the channel ($59.40); especially if the 10-year yield falls. Check out the way Citi has behaved in the past along the bottom blue line to give you a sense of the level of support.

• Watch a break below $57 which would be outside the channel bottom. This would be bearish in the short-term, and if the stock stays outside the channel for a few days, it would likely push lower.

• Watch a break below $55 as it would likely increase bearish momentum further possibly forcing the stock to retest the $48 area where the Trump rally started.

Final thought on risk management: The $55 level may contain numerous sell orders for those investors who have been long Citigroup since the start of the Trump rally (roughly $48). It's quite possible these traders might unwind their long position below $55, for fear the stock might go back to their break-even level of the Trump trade (red circle on the chart).

More to follow on financials like Citigroup & Bank of America, equities, the dollar, and yields in the coming days and weeks.

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Good luck.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.