Cleaning Up After Citigroup
11/25/2008 12:33 pm EST
Most traders have spent at least some time today reviewing the Citi bailout. The US government has agreed to inject $20 billion in cash and to cover losses associated with a $306 billion dollar pool of toxic assets. The rally in equities is largely being attributed to the bailout, but is this a fakeout?
I think there are fundamental and technical reasons to believe that this rally has no legs. First, from a fundamental perspective, the money injected into the company plus an extremely conservative projection of the likely outlay of cash to cover losses is much more than Citi's (C) total market cap. That dichotomy is unstable and clearly shows investor's biases to the downside.
From a technical perspective, the rally today is relatively weak compared to the decline since the highs of late October and early November. Prices jumped to last Thursday's open and have paused there. This is not an unexpected level for a consolidation. As you can see in the chart below, C has paused at the 23.6% Fibonacci retracement level.
I have applied the Fibonacci retracement study to the top of the market on November 4th, and the extreme low from November 21st. During a fast downtrend, bullish corrections can present nice short opportunities. The 23.6% retracement level is a key resistance level during very fast downtrends.
Prices also paused at the gap between prices from the close on November 20th and the open on November 21st. Gaps to the downside during a fast trend are typically important resistance levels. Click the video link below if you need some help understanding how Fibonacci analysis can help you find support and resistance levels.
Technically speaking, this is more likely to be a level that will lead to a renewed decline than a breakout to the upside. Traders are probably going to do better with speculative shorts to the downside than on a rally.