The baddest banks of 2008, Citigroup (C) - Get Report and Bank of America (BAC) - Get Report, report second-quarter earnings on Friday morning, just in time for historic reform that will affect industry practices and profitability for years to come. Despite the huge changes, these companies are setting up to regain many points of lost ground between now and 2012.
Citigroup is getting most of the attention these days, due to the government's partial ownership and its near-death experience during the credit crisis. The company has been making all the right moves since that time, including massive reliquification, while it waits for the government to sell the balance of its stake to private shareholders.
Bank of America attracted more interest than Citigroup in 2009, rising sharply off a deep bear market low and then moving in lockstep with a resurgent banking sector. However, the stock has been a major disappointment to shareholders in 2010, running in place while its blue-chip competition ticked up to two-year highs in April.
Given their divergent performance so far this year, will one or both of these companies offer a good buying opportunity after Friday's confessionals? Let's see what their charts have to say.
Citigroup fell from the mid-$50s to under a buck during the bear market, finally bottoming out at 97 cents and lifting sharply off the low. The two-legged rally thrust reached $5.43 in August 2009 and gave way to a pullback that ended in December, near $3, when the company's $17 billion equity offering paid off its TARP obligations.
The stock tested that level for three months (red line) and rallied above $5 in April, where sellers returned in force. The subsequent decline carved the next leg in a broad triangle that found buying interest above the old low. It consolidated at triangle support (green line) for six weeks and broke out earlier this week. This uptick should eventually yield a test near triangle resistance at $5.
Citigroup won't rally into double digits anytime soon, but there's plenty of opportunity between the base breakout at $4 and the April high at $5.07. This might look like small change, but the huge crowd that trades this stock knows that a single point yields a 25% move. More importantly, it's finally on the move, with strong earnings on Friday having the power to accelerate the upside.
The rally closed above the 200-day moving average at $4.21 on Tuesday. The next obstacle lies at an unfilled gap (red circle) at $4.40, posted back on May 4. The price zone between these charting elements could trigger a series of whipsaws until the stock finally heads toward $5, where triangle resistance is lying in wait.
Accumulation, as noted on the on-balance volume (OBV), has taken a hit since April. It's now rising off a deep low, but it will take time, and an army of shareholders, before it returns to the level posted at the 2009 and early 2010 price peaks (red line). For the longer term, Citigroup is unlikely to break the triangle until that indicator finally surges to a new high.
This rangebound action supports new entries for traders and market-timers who are willing to exit when the current rally nears triangle resistance. It isn't as favorable for investors, who should just wait for a breakout or start to build positions the next time the stock sells off and drops back under $4.
Bank of America plummeted 52 points and finally bottomed out at $2.53 in February 2009. It then went vertical, rising fivefold over the next three months. Upward progress continued, albeit at a slower pace, into October, when the stock topped out at $19.10 and dropped into a rectangle pattern, with support near $14.
It tested pattern resistance in April, exceeded it by less than a point and sold off sharply, hitting support earlier this month. The stock has risen 2 points off that level in the last week but still hasn't confirmed a notable reversal. As a result, a poorly received earnings report could break the range and trigger a decline toward the next support level at $11.50.
The decline that started in April yielded persistent selling pressure that broke 50-day and 200-day moving-average support during the May flash crash. The downswing finally ended after price undercut the November 2009 and February 2010 lows (red line), but the current bounce faces considerable resistance between $15 and $16.50.
Accumulation barely shows an uptick in the last week, pointing to lower-than-average volume on this bounce. Taken together with resistance at the 50- and 200-day moving averages, this stock needs to "prove itself" before it deserves a place in our portfolios or trading accounts. That won't happen until it finally rallies up to $18.
It will take a highly positive earnings report on Friday morning to lift the stock toward that key level. More likely, it will remain rangebound this summer, with $13.50 on the downside and $17.50 on the upside. The real action might start around Election Day, with a breakout through yearlong resistance near $20, followed by a strong 2011 uptrend.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley was long Citigroup, although holdings can change at any time.
Alan Farley is a private trader and publisher of
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