Citigroup — The Beginning Of The Beginning?

06/17/08 08:13:37 AM

by Koos van der Merwe

Is a buy signal given by Citigroup the start of a recovery for financial institutions?

Security: C
Position: Buy

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.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.