|The subprime crisis was the result of financial institutions exceeding their responsibility by chasing profits and ignoring the potential risks created. Today, we all know the consequences of that greed: the subprime crisis and the United States flirting with recession. "The worst is over for the credit crisis, or will be soon, and there is now a reduced possibility of a deep recession," said former Federal Reserve chairman Alan Greenspan on June 13. He was possibly looking at the chart of Citigroup (Figure 1).|
|Citigroup was one of the worst-hit banks by the credit crisis, causing the ousting of Charles Prince, its chief executive, on November 4, 2007. Figure 1 suggests that the end may be in sight.|
|Figure 1 shows how the stock price fell after having reached a high in December 2006 of $57. On March 17, it hit a low of $18. The stock price started to recover, reaching a high of $27.35 on April 28, before falling back to a low of $19.08 on June 11 and forming what I believe is a double bottom.|
At this price, the indicator I have chosen as my preferred indicator, the rapid relative strength index (RSI), gave a divergence buy signal. Looking back at previous divergent signals given, we can see that they were all successful.
|FIGURE 1: CITIGROUP, DAILY. This chart shows the double bottom that has formed.|
|Graphic provided by: MetaStock.|
|Does this mean that we should take the plunge and buy Citigroup stock? My answer is yes. With the rapid RSI giving a buy signal and with a double bottom definitely in place, we could buy the stock and hold. The more conservative investor could wait for the stock price to break above the trendline at $21.44. I do not believe that there will be fireworks, looking rather for a long-term recovery than a short-term flip. My suggested target is $35.62 (27.35 - 19.08 = 8.27 + 27.35 = 35.62).|
The credit crisis appears to be bottoming as suggested by Alan Greenspan. It could be time to selectively buy financial stocks, for a long-term hold.
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