After a monster rally, shares of Citigroup Inc (NYSE:C) finally ran into some stiff resistance post earnings. C stock actually opened higher following last Thursday’s earnings report, only to reverse course and close sharply lower on the day.
![How to Trade Citigroup Inc (C) After It Has Seen the Top](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Friday saw even more selling as shares continued lower yet again. I think the intermediate-term top is in for Citigroup and look for the stock to head even lower over the coming weeks.
The latest earnings report from Citigroup was a beat on both the top- and bottom-lines. Earnings of $1.42 exceeded expectations of $1.32-per-share and revenues of $18.2 billion also beat estimates of $17.8 billion.
While all seemed good on the surface, a deeper drill down shows some serious weaknesses. Revenues did beat lowered estimates, but grew by only 2% year-over-year, while C stock has risen over 50% from a year ago.
Accordingly, the gain in Citigroup stock certainly outpaced growth by a wide margin. Trading revenues were down sharply once again, dropping 16%. The lack of volatility across all markets-equities, bonds and FX will continue to present a challenging trading environment.
C stock has been on of the biggest beneficiaries of the “Trump Bump”. After making a low of $47.70 right before the Presidential election last November, the stock had risen 53%, so a pullback of some magnitude was overdue.
The MACD had reached extreme readings before generating a sell signal crossover following last Thursday’s huge reversal.
Previous instances when the MACD reached an extreme and subsequently weakened have been a reliable indicator of further weakness on the horizon. A move back towards the trend line at the $68-level would appear likely.
Implied volatility (IV) is now at the lowest level of the year, as the current IV percentile of 0% will attest. Certainly, IV tends to drop following earnings, as the unknown becomes known. IV at the lowest level of the year, however, smacks of over-complacency, especially given that C stock had the worst two-day drubbing of the year.
Over-complacency is yet another hallmark of a top in the stock.
Click to EnlargeLow levels of implied volatility also mean option prices are cheap. So with Citigroup looking toppy and tired, a straight-forward put purchase makes sense.
Trade Idea for C Stock
Buy the C Nov $72.50 put at $1.90.
Maximum risk on the trade is the premium paid of a $190-per-put option. A move back towards the $68-trend-line by November expiration would result in a gain of over 100% on the option.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com