Second quarter earnings season kicks off today with global investment banks among the first to report this. Their results could set the tone for both investor sentiment and whether companies can benefit in the current untested environment.
Market confidence and the broader view of an economic recovery wavered, toggling between whether inflation will be transient or persistent, as well as concerns about escalating cases of COVID globally as the Delta variant continues its highly contagious run.
That puts an intense spotlight directly on banks' earnings, as profitability can be a leading indicator of inflation. The fortunes of lenders are closely related to how much interest they can charge, based on the Federal Reserve's own rates.
Basically, the banks had a good year. They are full of cash thanks to record deposits during the pandemic lockdowns. This allowed the major US lenders to easily pass government stress tests, allowing many to increase dividends and start share buybacks.
While the financial sector is expected to recover, Citigroup (NYSE:) is lagging behind its competitors. The country's fourth-largest bank reports before the bell on Wednesday, July 14. Consensus expects the financial institution to expand the consumer market.
The megabank is already underperforming the sector, rising just 11%, while the Financial Select Sector SPDR® Fund (NYSE:), the ETF that is a proxy for the broader financial sector, more than doubled, with an increase of 24.5% in the same period.
Investors are already cautious with Citi. It is the only major bank of the six in its category that has not increased its dividend following the Fed's stress tests. In addition, the bank admitted that its required capital reserve will increase this year, making an increase in the payout even less likely.
Based on the stock's trading pattern, investors seem to anticipate disappointment.
First, since the October low, the stock has fallen below its upward trendline. The price tried to climb back over the line, but failed.
Worse, the price then fell below its previous low, revealing a lack of integrity in the trend structure. The attempted rally that followed sputtered quickly and then peaked not only below the previous high, but even below the previous one, to follow with yet another lower low.
These dynamics were not just your average H&S summit, but one that ran downwards, demonstrating deep structural weakness. This happens when bulls are so tired that they can't even form a right shoulder that is symmetrical with the left shoulder, which can create a drooping pattern.
Note that yesterday's price was stopped by the left shoulder lows, which happened to be right on the high of January 14, exposing a technical pressure point. Whichever force – supply or demand – ultimately takes this line is likely to dominate the battle. A look at the volume easily shows where the strength is, among sellers on red days.
Meanwhile, the price fell through both the 50 and 100 DMAs. The 50-DMA already bowed down and threatened to cut through the 100-DMA in a display of weakness. The 200-DMA is rising to support the neckline, which will likely be the last test before the price hits its peak.
The broader picture is even more suggestive:
This view makes it easy to understand why the price fell from its $80 peak in May. It had reached the top of its rising channel since the bottom of 2020. That was a good run within the narrower (green) rising channel since the October low, which was visible on the daily chart.
But profit taking reduced demand and supply increased, pushing price below the faster rising channel, putting it now on track to return to its technical average, the lower end of the wider, slower (orange) rising channel since the 2020 low.
This dynamic, in which prices rise with increasing demand, then fall as demand declines and supply takes over from taking profits, is what creates a rising channel. So if the H&S completes, with a downward breakout, it would form a short to medium term downtrend. However, the long term would remain up.
Trading Strategies
Conservative traders should wait for the price to fall and retest the long-term rising channel, or break above it in the event of an H&S outburst – before risking a long position.
Moderate traders would fall short of a decisive downward breach from the H&S summit.
Aggressive traders could short at will, counting on the bearish pennant, which the price is now returning to, provided they trade on a trading plan that justifies the risk. Here's an example:
Trade example
Entry: $69
Stop Loss: $72
Risk: $3
Target: $60
Reward: $9
Risk: Reward Ratio: 1:3
