by Greg Harmon | December 22, 2013 11:55 pm
Editor’s note: This column is part of our Best Stocks for 2014 contest. Greg Harmon’s pick for the contest is Citigroup (C).
Taper is the talk of the day as we head into 2014. Now that it has begun, even in just a small way, how quickly will it fall off, and what impact it will have on the markets and economy?
As one who trades based on technical analysis, frankly, none of this matters to me when I pick a stock investment. I only care about price and what that price data is telling me. However, this type of backdrop can play a role in where I might look for that investment.
The Federal Reserve will remove stimulus as it sees the economy strengthen and, specifically as job growth accelerates, expand at a robust level. When this is the case, interest rates will start to rise. Maybe not very short-term rates, but those of intermediate-term, two-to-five-year maturities. Mortgage rates also will favor the upside and will have seen their lows, possibly for a generation.
These reactions all bode well for financials, and particularly banks that collect deposits and lend.
With that in mind, I narrowed my choices to two banks that have been beaten up pretty hard since the financial crisis. Both Bank of America (BAC) and Citigroup (C) have started to recover and look like a great investment for the long haul. I chose Citigroup stock, however, because I favor its technical setup.
The monthly chart below (each vertical line is one month of price history) shows that Citigroup has been a very boring stock over its life when viewed from this long-term scale. Outside of the period from 1995 to 2009 when it made this crazy “M” pattern, it was flat before, and now Citigroup stock has just reverted to its old ways. Not exciting on first blush.
But to a technician, there is something happening under the surface. The box at the top contains the Relative Strength Index, a measure of momentum, and it has been building. In fact, just recently Citigroup stock moved over a reading of 50, turning the indicator bullish. This gets my attention.
From there, it is important to look on a smaller scale to see if there are catalysts that could break this sideways morass.
The weekly chart (each vertical single week’s price action) shows the box that has contained the price since 2009. Adjusted for splits, Citigroup has moved between $20 and $54. Notice that the range since the start of 2013 has been in the upper part of that box, between $37 and $54.
The rising arrow shows that the move off of the bottom around $25 in June 2012 has been consolidating in the low $50s since arriving there. A Measured Move formation would suggest that Citigroup stock could go as high at $75 before another consolidation. This view still is looking for a catalyst to get things started.
But a look to the daily chart gets a bit more interesting.
It shows that the “W” in the weekly box was a harmonic pattern known as a “Bat.” Upon completion of this Bat at point D, it is expected that the stock would retrace at least 38.2% of the move of the pattern. In fact, Citigroup stock never got that far, stopping about $3 north of it. This is the first sign of strength.
This view also shows that the recent consolidation is in fact an Ascending Triangle, where the resistance at the top rail rejects the price back lower, but the low on each leg is higher than the last. Eventually this pattern breaks as buyers overwhelm sellers and the price pushes higher. The target for a break of price above this technical pattern is to $63.
So there is a market backdrop that favors banks from a fundamental perspective, then on top of that, Citigroup stock has technical factors that on a short-term basis see it going to $63, which would trigger an intermediate-term target of $75. Once it gets going, a look back to that boring monthly chart shows that there is natural resistance from previous price action at $100 followed by $155 and $179, with very little price history at those levels.
Translation: If Citigroup stock climbs over $54, it could do multiples of its price and win the Best Stocks for 2014 contest.
Gregory W. Harmon, CMT, CFA, is founder and president of Dragonfly Capital Management. As of this writing, Harmon held a Jan 2016 bullish 47/60 Risk Reversal (long the Jan 60 Calls and short the Jan 47 Puts) on C. He also plans to add Citigroup stock on a move over $54 for clients and his personal portfolio.
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