Buying the Fear in Bank Stocks

I last posted about the SPX here and here. Since then the market has dropped quite strongly in 5-waves, but I think we are near a short term bottom. I will try to play off this bottom and the highly bearish attitude against financial stocks by buying some Citigroup (C).

The chart above is the 60-day, 2h chart for the SPX. You can see a pretty clear 5-wave pattern that is near completion (as MACD divergence is confirming). Wave5=Wave1 around 1300, and and drop below 1314 would complete Wave-v of Wave5. I think 1300-1310 should prove to be good short term support.

The chart above is the 20 year chart for C. After having completed a 5-wave bullish cycle which ended in 2000, it has since been correcting in a Flat 3-wave pattern. This pattern is what attracted me to C instead of other financial stocks (well, it also pays 6%+ dividend, which is nice, and being one of the biggest banks, it's unlikely to perish).

Why would I want to buy a financial stock? Well, the immense bearishness and media attention means that these stocks are being incredibly scrutinized. They are probably being priced for worst case scenarios, which should lead to a strong pop if the market turns up for several days/weeks.

The 5-year daily chart above shows WaveC from the monthly chart. In a 3-wave flat correction, WaveC forms in 5-waves, as has C's price action over the past year. The stock is now becoming extremely oversold, as indicated by MACD divergence.

My plan is to buy C when the SPX enters the 1300-1310 range. I will have a stop at $13 (which is below Wave4 and the 78.6% fib level on the Monthly chart). If, and when, C bottoms in the next few days, I will move up the stop to below that low point. Then, if C has a 5-wave rally, I will hold longer term. Otherwise, if there is a shallow 3-wave correction, I will sell and look to buy later on (perhaps a few weeks/months later).

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