The selling in bank stocks reached a fever pitch Thursday, and that has shares of Citigroup Inc (NYSE:C) looking mighty vulnerable. Indeed, C stock is on the cusp of completing a classic head-and-shoulders pattern that could send shares of the behemoth bank tumbling.
For a broad survey of the damage, look no further than the Financial Select Sector SPDR Fund (NYSEARCA:XLF). With yesterday’s slide, XLF has now fallen 6.3% from its 52-week high.
This downdraft has occurred, mind you, while the S&P 500 remains pinned near record levels. What has chart watchers particularly vexed is Thursday’s breach of the 200-day moving average. It has been over a year since XLF has probed beneath this oft-watched smoothing mechanism.
Volume patterns certainly aren’t helping either. Heavy distribution days are on the rise bringing both urgency and legitimacy to the selling pressure.
With financials on the ropes, it’s no wonder sentiment for C has soured. What interests me about Citigroup stock as opposed to the host of other banks is that potential head-and-shoulders topping pattern shown below. The famous reversal formation shows a gradual passing of the baton from bulls to bears.
Yesterday’s high-volume plunge completed the right shoulder of the pattern by ushering shares below the 50-day and 20-day moving averages. And now we’re knocking on the door of the neckline.
Like many price patterns, this one comes with a projected target. By subtracting the height of the formation ($4) from the neckline ($65.85), we discover just how far bears may push prices in the weeks ahead. Throw it all together, and the target coincides nicely with the 200-day moving average.
Bank on C Stock Bears
One of the more aggressive ways to exploit further downside in C is a bear put spread. Buy the Nov $67.50/$62.50 put spread for $2.06. The risk is capped at your initial investment, and the reward stands at an impressive $2.94. That means if Citigroup can fall below $62.50 you’re looking at a potential return of 143%. If you want further confirmation, then consider waiting until the stock breaks the neckline at $65.85.
As of this writing, Tyler Craig didn’t hold any positions in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
