C Is For Shorting - pavelpg

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C Is For Shorting
Dec 27, 2007 09:46 PM UTC

pavelpg

Return	Risk
-25.97%	MID

Sr. Analyst

Profile & Performance

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Symbol	Sentiment	Start	Return	Closed
WM	n/a
GS	n/a
C	n/a
LEH	n/a
BAC	n/a
MER	n/a
MS	n/a
JPM	n/a
BSC	n/a
WFC	n/a

Via The Pivot Point:

More write-downs for Citigroup (C) today, due to underestimation. C is talking of cutting dividends by 40% which is scaring fixed income investors away. C is also commenting that perhaps the other big banks, like JP Morgan Chase and Merrill Lynch, are on a similar path of further write-downs. So keep Morgan Stanley (MS), Bear Stearns (BSC), Washington Mutual (WM), Wells Fargo (WFC), JP Morgan Chase (JPM), Merrill Lynch (MER), and Bank of America (BAC) on your watch lists for shorting opportunities if further break-downs of those stocks happen. All of those companies have been covered in my "Making Money On The Way Down" article (with charts of course), so feel free to compare the progress of these companies since then.

The write-downs obviously have a fundamental effect on C as their investment portfolios containing MBS's (mortgage-backed securities) and other bad debt vehicles take further hits due to devaluation and have an effect on the already-deteriorating company balance sheet. This decreases the company's profitability and their cash flows devalue, making it less attractive to any sane investor, which shows by today's 2.92% sell-off.

Explanation of technicals from my chart:

C had a nice trading channel built up but broke down below it during more financial trouble and the market correction.
Now it seems it might be in a descending channel (although not confirmed cause it needs more time) or it's in the process of building another trading channel, out of which it broke down today.
This break down below that support line means lower prices to come.
Also note the RSI experiencing higher lows (RSI divergence) and that pattern gets broken when the stock experiences a heavy sell off on the 11th and 12th of December. That signified lower prices to come, as we see on the chart.
MACD is unsure at the moment and could turn lower if tomorrow is met with more selling.

I recommend entering C as a short if there is further confirmation of selling tomorrow, on good volume (signifying distribution), taking the price further below this trend line, which would confirm the break down.

A recap of today's financial sector on my watch list:

C: -2.92%
WM: -3.15%
WFC: -3.07%
LEH: -1.76%
MS: -3.05%
GS: -2.19%
BSC: -1.77%
MER: -2.46%
JPM: -2.89%

Lehman Brothers Holdings (LEH) and Goldman Sachs Group (GS) are special cases, since they have been hit the least by the devaluation of mortgage-backed securities and other colladeralized debt vehicles. In fact, GS was the only company to pull out without a losing quarter this year. So I would only short those two companies based on a general financial sector sell-off.

WM has hit another consecutive record low today (as it has been for the last five trading sessions or so), which simply underlines the stock's weakness and a large possibility of lower prices to come. Careful of any bouncing off the lower descending channel boundary, however. That may o may not happen. The stock seems to be spending a lot of time bouncing off the lower boundary, so I wouldn't be surprised to see it break down below it to form a sharper decline. Chart is below:

Of course, if pre-market volume looks positive and there is a rally tomorrow, shorting would be very risky. Always watch pre-market and after-hours action, along with what your stock is doing within the first 30 to 60 minutes of the trading day.

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