Shares of banking stock Capital One Financial Corp. (COF) lagged in performance versus the broader financial sector last week, sure. However, COF stock is trading in a very technically attractive, bullish pattern that has the stock coiling up below a defined line of resistance.
If you’re an active trader or investor, you should look to buy COF stock on what could appears to be an imminent break higher.
Since Capital One reported its third-quarter earnings on Oct. 16, company-specific news has been slim. In the first half of December, however, several analysts updated their calls for COF stock. On Nov. 13, for example, Deutsche Bank initiated coverage on Capital One with a “buy” rating and a price target of $92, partially based on prospects for better loan growth.
From a price-action point of view, the stock market in recent weeks has showed good sector/group rotation whereby one group after another continues to get a good bid, which in turn holds up the broader stock market.
To wit, last week it was the financial sector that received the nod from investors, as the Financial SPDR (XLF) rose about 1.7% on the week, and many single-name stocks (particularly in the broker group) broke higher much more significantly.
On the long-term weekly chart, COF stock by June — after a strong push higher in recent years — nearly reached its all-time highs from 2006 and has been consolidating in a defined trading range ever since. This allows us to draw a cleanly defined line of resistance by connecting the 2006 top with the top of the trading range since June of this year.
In other words, the longer COF stock snuggles up against this resistance line and doesn’t falter lower, the better the chances of a resolution higher (i.e., a breakout rally).
On the daily chart, the combination of Capital One’s third-quarter earnings report as well as the broader market selloff briefly pushed COF stock below its rising 200-day simple moving average (red line) in mid-October. But the broader market rally didn’t allow the stock to stay down there for long, and just two weeks later pushed it back to the upper end of the trading range.
During the month of November, COF stock then consolidated below a diagonal line of resistance that stretches back to the July highs and is made up of the closing highs from July and September.
With last week’s rally in the broader financial sector, COF stock now looks primed to join the party sooner rather than later and resolve higher. Active investors could look to buy the stock on a push past the $83.50 area for a move toward $87, while any move back below $81 would negate the setup.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
