Trade of the Day: Don’t Let COF Stock Fool You

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Capital One Financial Corp. (NYSE:COF)While shares of this specialty finance company are nearly unchanged so far this year, don’t let that fool you. From a multi-month perspective, COF stock is coiling up for a move higher.

Capital One reported its first-quarter results on April 23. Earnings from continuing operations of $1.97 per share beat Zacks consensus estimate of $1.88. However, while revenue of $5.65 billion was up 5% year over year, it was slightly below expectations.

The initial reaction to the earnings report was negative, but COF stock managed to quickly shake it off and has since pushed to fresh multi-month highs. This is another sign of its resiliency, which has been apparent since October.

While I am bullish on the financial sector as a whole for the second half of 2015 from a cyclical and secular perspective, the charts show Capital One is lining up nicely, allowing for a well-defined risk/reward trade setup.

Looking at COF stock from a multiyear perspective, we see that it has nearly fully recovered from the financial crisis lows. This is the case with many financial stocks — they are just now reaching their pre-crisis highs while the broader stock market is dabbling with all-time highs. In other words, there’s a lot of catching up to do.

COF stock has been consolidating for around 10 months below the horizontal resistance line from 2006, which should ultimately lead to a significant breakout to new all-time highs.

COF Stock Chart
Click to Enlarge

Zooming in on the daily chart below, we see that the consolidation has taken the shape of an inverse head-and-shoulders pattern with its neckline around $85 and the head at the February lows. This type of technical pattern shows price resiliency, i.e., bullish forces at work regardless of whether it occurs at a bottom or as a bigger picture consolidation pattern, which is the case for COF stock.

The setup is straightforward: A break above the $85 area should resolve higher with a move to the $90-$100 area. While investors with a 6-12-month time frame could buy the stock at current levels, a correction in the broader stock market this summer or fall would likely offer a more attractive entry price.

COF Stock Chart
Click to Enlarge

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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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/capital-one-financial-corp-cof-stock-trade-of-the-day/.

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