Don’t Bank on Bank of America, Citigroup

02/28/2011 11:05 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

Banking giants Bank of America (BAC) and Citigroup (C) continue to lag, and with important technical levels nearby, current and prospective investors should use caution.

Since last fall, I have been concerned about the relatively poor performance of the financial sector, especially the big banks. Though many of the smaller, regional banks completed a significant bottom formation in early 2011, the recent actions of two widely held bank stocks suggest that shareholders should be monitoring their positions and definitely have protective stops in place.

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Chart Analysis: Bank of America (BAC) formed a very nice short-term bottom the first week of December (point 1), dropping to a new correction low of $10.91 and then reversing to close the week higher. Positive volume action created an excellent buying opportunity the following week, but the rally now appears to be stalling.

  • The 50% retracement resistance at $15.40 seems to have stopped the rally with the 61.8% resistance now at $16.42

  • After the recent drop, there is now short-term resistance at $14.38-$14.67

  • The sharp drop at the end of January took BAC back to $13.40, which is now important support
  • Two weeks ago, BAC formed a strong candle chart reversal formation called a "doji" (point 2), which was a strong warning. The gap lower and the break of the weekly uptrend (line a) last week has further weakened the trend
     
  • Key resistance is now at $14.95
     
  • The weekly on-balance volume (OBV) is still above its weighted moving average (WMA) but has turned lower after testing its downtrend (line b). The daily OBV is negative
     
  • One of the few positives from last week is that BAC was able to close well above the lows at $13.79

Citigroup Inc. (C) got the market's attention in the middle of December as it completed the weekly triangle formation, lines c and e. The triangle formation has upside targets at $6.30-$7.60, but was this a false breakout?

  • The volume on the breakout was decent, but the setback after the breakout has lasted longer than I would normally expect
     
  • A weekly close back above $5.00 would reassert the uptrend and project a move to the $5.50 area

  • Last week's lows at $4.57 correspond to a retest of the breakout level (line c) as well as a test of the uptrend, line d, and the 38.2% support level
     
  • The $4.57 level now becomes the first support with more important support at $4.40-$4.42 and the 50% support level. If these levels are broken, a decline to the weekly uptrend at $4.00-$4.10 (line e) is likely
     
  • The weekly OBV is still positive as it is rising and above its weighted moving average, but it is not acting stronger than prices. A move of the OBV above resistance at line f would be positive
     
  • The daily OBV is currently neutral, at best

What It Means: For a healthy stock market, the financial sector should be participating, and while some of the regional banks look good technically, these two big banks continue to lag the major averages. They appear to be reaching an important short-term juncture. For good portfolio performance, it is very important to avoid the big losers. I have looked at countless portfolios where the use of a well-chosen technical stop would have limited the losses on one or two stocks, and that would have significantly improved the overall performance.

How to Profit: There seems to be quite a bit of investor attraction to these two bank stocks, but the technical outlook suggests that both are vulnerable to further declines. This week's action should be important. If you are not long these two stocks, I would avoid new positions for the time being, and if you are already long, here are key levels to watch:

For BAC, the suggested stop depends on where your longs were established. If you have secured profits already, use a stop at $13.33, but if you bought BAC in 2011, I would suggest a stop at $13.61.

Citigroup does look better technically, but the $4.36 level should hold on further weakness. I would only consider buying C if it is able to prove itself on the upside and volume is heavy.

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