|After making a major multicycle low on June 4, 2012, Capital One Financial (COF) proceeded to recoup all of its springtime 2012 losses before going on to make a new multiyear high -- the highest price achieved since September 2008. Clearly, the bulls are happy with the performance of this financial sector heavyweight since March 2009, but a proportional pullback into combined 40- and 80-day cycle lows is becoming more likely for COF with each passing day. Here's a closer look now.|
|FIGURE 1: COF, DAILY. After enjoying such a long-running uptrend for the past four and a half months, Capital One bulls might be getting a bit too optimistic about further gains in this key financial sector stock.|
|Graphic provided by: Sentient Trader.|
|After the final washout low of March 9, 2009, brought shares of the once-mighty Capital One Financial (COF) down to 7.80 per share, things looked bleak for nearly all of the big bank and mortgage lending firms, and it's doubtful that anyone could have predicted that COF would eventually rise by over 680% in a little more than three and a half years. Yet here we are, looking at a chart of COF that says that as of October 19, 2012, and we realize that sometimes a stock can stage a reversal so dramatic that it has to be seen to be believed. See Figures 1 and 2.|
Now, of course, after such a dramatic multimonth and/or multiyear bullish run, it's possible that the bulls have become a bit too complacent (or even overly aggressive, as last Friday's powerful price/volume breakout in the stock suggests). The daily cycles chart depicts where COF's next 40-day cycle low (green box) and 40-day cycle high (red box) are anticipated to find their respective termination points in the weeks ahead. In the case of the cycle low, the projected time window extends from October 28 to December 6, 2012, and has a price target range of 53.30 to 56.67, quite a bit below the stock's recent close of 60.89.
Note that there are two important support lines to watch once COF begins to reverse lower. The top trendline is calculated from a formula related to COF's nominal 40-day cycle, while the lower trendline is derived from the stock's 80-day cycle; a break of the top line will confirm that COF's nominal 40-day cycle has topped and might be a great place to consider a short-term long put option play, one that uses the lower trendline as a price target.
In case you're wondering why anyone would set a modest price target like that when the 40-day and 80-day cycles for COF are in agreement on the upcoming slide in the stock during November and/or December, the reason is that COF's long-term money flow is extremely bullish, trading well above its zero line. The 100-day Chaikin money flow histogram (CMF)(100) is also at its highest level since 2000, which is telling us two important things:
1. Be nimble if short selling, using a confirmed support level break to go short, setting a modest profit target at the next near-term support level.
2. Extreme high readings in the money flow histogram are unsustainable, greatly increasing the likelihood of a near-term pullback in the stock.
While no one knows if COF will eventually descend into the lower regions of the green time/price projection zone, at least we have a good idea of where to make a low-risk short trade by means of wise money flow and support level analysis.
|FIGURE 2: OEX COMPONENTS. The .OEX component stocks making price/volume breakouts for Friday, October 19, 2012.|
|Graphic provided by: MetaStock.|
|Graphic provided by: MetaStock Explorer.|
|Playing a potential COF short entry on a break below the upper trendline might be best done with slightly in-the-money puts. The January '13 COF $57.50 puts might be a good trading instrument to use on this simple trendline to trendline trade setup, as time decay will be modest for puts for the next six weeks or so, allowing plenty of time for a corrective move to materialize (but don't buy the puts til you see a daily close below the upper trendline, in any case). Risk no more than 2% of your account equity on this or any other trade, and as always, trade wisely until we meet here again.|
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