Trade of the Day: Citigroup (C)

by Ken Trester | February 7, 2014 9:21 am

The stock market continued its attempt to stabilize Thursday, with the Dow Industrials bouncing higher off key support. But some significant technical damage has been done over the past few weeks from which it will take some time to recover. Friday’s employment report will go far in determining near-term sentiment.

Our index indicators are giving bullish to neutral readings, unchanged from last week. But some further weakening has occurred, as the Nasdaq fell below its 50-day moving average and out of its primary bullish trend. Interestingly, the Dow traded down to its 200-day moving average and then bounced higher off of it. Or rather than an interesting development, perhaps it can be called an expected one given how much trading is dominated by computers these days.

By the numbers, key 200-day moving average support for the Dow is at 15,415, for the S&P 500, 1,710, and the Nasdaq, 3,790. But in light of the oversold stochastic conditions and negative sentiment currently dominating trading on the stock market, a rally might be more likely in store than a further decline. If that proves to be the case, the Dow can return to a primary bullish trend by rising back above 16,000. The S&P would do the same by breaking above 1,800, and the Nasdaq, 4,080.

Our internal indicators continue to reflect a bullish to neutral market stance. The Advance/Decline Index is bullish, the Cumulative Volume Index is bullish to neutral, and the 200-day Moving Averages Index is bearish. Also on the negative side, only two of the nine major S&P sector funds are bullish. Also, the Dow Transports have fallen out of a primary bullish trend, giving a less rosy picture from a Dow Theory standpoint than a week ago.

Until the past couple days, long-term Treasury bonds (TLT[1]) had been a bright spot as traders rushed into risk-off assets. But after briefly breaking above resistance at $108, TLT has pulled back and looks like it is headed for at least a slight correction. And weakness in TLT also would imply a rally in stocks. If TLT falls below $105.25, the risk-off trade has likely ended and stocks would be operating under a green light.

With our indicators continuing to weaken slightly, options traders should continue to buy puts as portfolio insurance, and also selectively buy calls to profit from a possible stock market bounce.

My system rates Citigroup (C[2]) as among the weakest stocks in the pool, getting an “F” grade in the short term and a “D” grade in the intermediate-term.

With its earnings scheduled for mid-April and analysts already starting to drop estimates, the next few weeks could be rocky for the stock, especially against the backdrop of intense scrutiny on the economy. My proprietary system shows general weakness among the banks with Bank of America (BAC[3]) doing some backing and filling and JPMorgan Chase (JPM[4]) simply drifting.

Buy the C Apr 45 Puts at $1.00 or lower. After entry, take profits if the stock price hits $44.80 or the option price hits $2.30. Exit if the stock price closes above $50.00 or the option price close below 60 cents.

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