In early June we alerted put traders to a bearish play in shares of Citigroup (NYSE:C) $28.20 -11.98% in our 01:00 PM EST update on June 5th , after the stock gave a glaring sign of weakness at the $41.55 level when it triggered the "bearish triangle" pattern on its point and figure chart.
Today, the stock shows further weakness after The New York Times reported that records and interviews with investigators demonstrate for the first time that senior credit officers at Citigroup (C) misrepresented the full nature of a 1999 transaction with Enron in the records of the deal so that Enron could ignore accounting requirements and hide its true condition.
Citigroup Chart - Daily Interval
Yesterday, shares of C achieved their bearish vertical count of $32 just prior to the close and this morning's declines have the stock achieving a bearish target from Professor Davis' chart pattern probabilities study. With little opportunity to further build in a bearish target, I've used the "rolled down" retracement technique I've discussed in the past to establish a profit stop above $29.22 and a further potential target to the downside at $23.48.
In today's market monitor at OptionInvestor.com, I've suggested that traders lock in at least 1/2 position bearish gains at current levels and follow the rest with a stop just above $29.22.
With option premiums spiking, an option trader that holds the stock short, could also sell some covered puts in the Citigroup August $30 (CTF) which are bid $3.50. This would OBLIGATE the trader holding a short position to buy the stock at $30, less the $3.50 premium of the put option. At the same time, such a strategy would "increase" the traders cost level if short at $41.50 to $45 ($41.50 + $3.50). If assigned the stock at $30, the trader short the underlying stock would then cover their short position. Not a bad assignment if net short is $45!
J.P. Morgan also under pressure
J.P. Morgan (NYSE:JPM) $22.10 -9.66% is also under selling pressure as it relates to "Enron misguidance." Not unlike Citigroup's (C) point and figure chart, JP Morgan (JPM) achieved its bearish vertical count of $25 yesterday, and extends lower today.
One stock that looks to have some downside room to a bearish vertical count in the brokerage group is Merrill Lynch (NYSE:MER) $35.40 -1.03%. Its point and figure chart remains bearish with a vertical count of $23. With investor confidence suffering and market conditions as they are, I'm thinking trade revenue and investment banking deals aren't healthy. Looks short here, stop $40 and targeting $23. For options, would look out 3-months, but they won't be cheap with the higher market volatility.