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Can Citigroup Turn The Financials Around?

|Includes: C, JPM, Invesco QQQ ETF (QQQ), WFC, XLF

The rally Monday was consistent with Friday's late rally and the market internals were fairly strong. The daily studies on both the market leading PowerShares QQQ Trust (QQQ) and lagging iShares Russell 2000 (IWM) deteriorated last week (see chart).

These indicators turned higher Monday as the McClellan oscillator has risen from -140 to -73 but they have not yet confirmed the new closing highs in the QQQ. The market needs another day or two of equally strong days to reverse the recent deterioration.

The Philadelphia Oil Service index led the market higher as it was up 0.96% while the Dow Utilities lost 1.1%. The market clearly got a boost from the Citigroup, Inc. (C) 3% gain on double the average volume. Now the market is anticipating the pre-opening earnings from JPMorgan Chase & Co. (JPM) and Goldman Sachs (GS) as well as the Retail Sales report, which are out before the opening.

The Select Sector SPDR Financial (XLF) has lagged the Spyder Trust (SPY) by over 2.5% so far in 2014 and it has not been one of my favored sectors. The lagging sectors are being examined closely by many looking for new opportunities but are there any signs that the financial sector can become a new market leader?

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Chart Analysis: The daily chart of the Select Sector SPDR Financial (XLF) shows Monday's gap back above the 20-day EMA with the recent high at $23.07.

  • The daily starc+ band is at $23.16 with the monthly projected pivot resistance at $23.41.
  • There is trend line resistance, line a, in the $24 area.
  • The monthly pivot at $22.59 and starc- band were tested last week with the more important quarterly pivot at $22.26.
  • XLF has held above its quarterly pivot since May 23 and has gained 4% since then. (Click here for 3rd Quarter Pivots.)
  • The relative performance has been making lower lows, line d, all year.
  • The RS line is below its declining WMA and the steep downtrend, line c.
  • The daily OBV is trying to move back above its declining WMA with further resistance at line e.
  • The weekly OBV (not shown) is still slightly below its WMA.

Citigroup, Inc. (C) is still down over 7% despite Monday's 3% gain. The stock hit a high of $55 on January 8 and hit a low in early April of $45.17. The stock makes up just over 5% of XLF.

  • The starc+ band and the daily downtrend (line h) are now being tested.
  • There is quarterly pivot resistance at $49.40 with longer-term resistance, line g, at $52.30.
  • The 20-day EMA is now at $47.65 and stronger support at $46.55 was tested last week.
  • Friday's close was below the quarterly pivot at $47.29.
  • The lower lows all year in the relative performance, line k, has identified Citigroup as a market laggard.
  • The RS line did move above its WMA Monday but is well below resistance at line j.
  • The daily OBV has just barely moved above its WMA but is still well below stronger resistance at line l.
  • The weekly OBV (not shown) has been below its WMA since March 28.

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Wells Fargo & Company (WFC) reported a 3.8% increase in 2nd quarter profits last Friday and beat revenue forecasts yet investors sold the stock. It is the largest holding in XLF, making up almost 9%.

  • WFC peaked early in the month at $53.08 and had a low last Friday at $50.82 which was close to the quarterly pivot at $50.67.
  • The quarterly pivot is at $50.27 with the daily uptrend, line b, at $50.28.
  • The weekly starc- band is at $49.64.
  • The daily relative performance did make a new high in early June but dropped below support, line b, last week.
  • The weekly RS line (not shown) is also now below its WMA.
  • The volume on the downside over the past five days has been quite heavy.
  • The daily OBV violated support, line c, on July 9 and is now well below its declining WMA.
  • There is initial resistance in the $52-$52.40 area.

JP Morgan Chase (JPM), early this morning, reported their earnings of $1.46 per share well above estimates of $1.29. However earnings were lower than last year's 2nd quarter results.

  • The stock is up 2.4% in early trading and makes up 7.7% of XLF.
  • As of Monday's close, it was down 1.76% YTD.
  • The weekly uptrend, line d, was decisively broken in early May as JPM made a low of $52.60 later.
  • In late June JPM formed two weekly dojis and triggered a LCD sell signal last week.
  • The opening today should be close to the daily starc+ band with the recent high at $58.22.
  • The weekly relative divergence did not confirm the 2014 highs as indicated by the divergence, line e.
  • This divergence was confirmed by the drop in the RS line below support at line f.
  • The weekly OBV dropped below important support, line g, in early April.
  • It is still below its WMA and shows a pattern of lower lows.
  • The close last Friday was below the quarterly pivot at $56.82.

What it Means: A strong daily close today in JP Morgan Chase (JPM) should turn the daily studies positive and Goldman Sachs (GS) also beat earnings and is up 1.3% in early trading.

Still, it will take more to turn the outlook bullish for the financial sector and Select Sector SPDR Financial (XLF). This sector is likely to be touted by more after these earnings reports.

As I noted in Monday's Let the Late Buyers Take the Risk, my analysis suggests the market is currently in a high risk zone. In this type of environment, I favor selling longs into strength and lowering the overall portfolio risk.

If daily sell signals are confirmed then I will likely raise stops further.

How to Profit: No new recommendation.

Portfolio Updates: There are several corrections from yesterday's Charts in Play Portfolio.

For iShares Dow Jones Home Construction ETF (ITB) should be 50% long at $25.07 and 50% long at $24.72 with a sell stop at $23.67.

For Lennar Corp. (LEN), should be 50% long at $41.44 and 50% long at $40.81 with a stop at $39.44.

Also 50% long the PowerShares QQQ Trust (QQQ) from $86.88 with a stop at $91.19. Sell half at $96.44 or better.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.