The Two Worst Big Bank Stocks

11/30/2011 10:12 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

New credit downgrades to a number of banks by S&P and still-negative chart patterns mean Bank of America (BAC) and Citigroup (C) are still very much out of favor.

After the stock market close on Tuesday, S&P downgraded 15 big banks to reflect the results of their new credit criteria. Though many of the banks had been prepared for a downgrade, others immediately wondered what impact it might have on a fragile stock market.

The low-volume decline last week followed by Monday’s strong surge has kept the rally from the October lows intact, but it order to reverse the negative momentum, a strong weekly close is needed.

Even if the stock market’s intermediate-term uptrend has resumed, there are still sectors, and more importantly, individual stocks that should be avoided, and the relative performance, or RS analysis, on these two bank stocks in particular remains negative.

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Chart Analysis: The daily chart of the Spyder Trust (SPY) shows that Friday’s low of $116.34 was fairly close to the 61.8% Fibonacci retracement support at $115.83, which was calculated from the October lows.

  • There is next resistance for SPY at $122-$122.80 with much stronger resistance above $124. A close above $124.50 should signal the correction is over
  • The daily downtrend, line a, is now at $127.70
  • The NYSE Advance/Decline (A/D) line dropped last week to test the support from the early-September highs, line c. The A/D line has turned up sharply and has moved back above its weighted moving average (WMA)
  • Initial support for SPY now stands at Monday’s gap in the $117.70-$118.80 area

The Select Sector SPDR - Financial (XLF) violated its 61.8% support at $12.18 last week, but is so far holding above the October lows at $10.95.

  • RS analysis has been negative for most of the year, making a series of lower lows, including the new lows put in on Tuesday
  • The weak action of the RS line has forecasted lower prices in advance and continues to paint a negative picture
  • Daily OBV did manage to briefly overcome its downtrend, line f, in November, but has now dropped back below its weighted moving average, which has flattened out
  • There is first resistance for XLF at $12.50 with much stronger resistance above $13

NEXT: These Two Banks Still Look Sick

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Bank of America (BAC) dropped to new lows Tuesday at $5.03, which was just below the October 4 low of $5.13. BAC made a high at $15.31 on January 14 and is down 67% for the year. Though it is possible that the stock will respond positively to the S&P news, there is much work to be done before it can turn positive.

  • There is first strong resistance at $6.00-$6.50 with major resistance at $7.43, which was the late-October high
  • The RS line started a new downtrend in March and has continued to make new lows
  • The RS broke support (line b) on November 9, which preceded the new low in prices by almost two weeks
  • Daily OBV formed a positive divergence at the October lows, line c, but this support has now been broken
  • Weekly OBV (not shown) failed to move above its declining weighted moving average and has also made new lows

Citigroup Inc. (C) closed below its 61.8% Fibonacci support at $26.36 on November 17, which warned of the recent decline. So far, it is holding above the October lows at $21.40 (line d) and had a yearly high of $51.50.

  • The RS line broke support, line e, last week, which does project an eventual drop below the October lows
  • The daily RS line would now need to surpass the October high to turn positive
  • The OBV bottomed in August before forming higher lows in September. This bullish divergence support, line f, was also broken last week
  • There is first resistance now at $27 with much stronger resistance in the $28.50-$30 area

What It Means: The stock index futures are sharply higher in early-Wednesday trading on news of coordinated action by the world’s main central banks to lower the interest rate on dollar swaps. Therefore, the S&P downgrade should have little effect on the stock market today.

Since late February (see “Don’t Bank on Bank of America, Citigroup”), the technical outlook for these two big banks has been negative and they should continue to be avoided.

How to Profit: A strong weekly close in the Spyder Trust (SPY) should set the stage for a further rally into the end of the year. As I mentioned last week, I continue to favor small-cap stocks as we head into January.

See related: 5 Small-Caps with Growth Potential

The market is still vulnerable to further Euro-induced shocks, so be sure to have your stops in place and don’t let a profitable position turn into a loss.

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