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Is It Time To Buy Citigroup?

01/02/08 07:04:37 AM
by Koos van der Merwe

Start preparing your list of stocks you would like to own, then watch and wait.

Security:   C
Position:   Accumulate

Jim Cramer is host of the CNBC show Mad Money. His famous greeting is "Booyah," yet with all Jim's madness, he offers pearls of wisdom -- for example, his advice to "Buy broken stocks, not broken companies" is one of many pearls he freely throws to a hungry following. Another is "When you buy a stock, worry about how low it can go, not how high." In his view, protecting your capital is primary. So manage your losses and let your profits take care of themselves, using a trailing stop-loss.

FIGURE 1: CITI GROUP, MONTHLY. Here's the Elliott wave count in the process of completing a C-wave.
Graphic provided by: AdvancedGET.
The first company that comes to mind in this regard is Citigroup. With the recent subprime mortgage crisis, the company has written off billions of dollars, and the stock price to date has dropped by 45%. Is this a company that fits the parameter of "not broken," or is the company another Enron? Definitely not another Enron, because the company has not hidden losses in subcompanies created for this purpose. With new management, the company is admitting its losses, although many believe that the worst is still to come. Citi expects that orderly asset reductions will be sufficient to meet liquidity requirements through the end of 2008, which currently total $35 billion. Then of course, the company also agreed to sell equity units with mandatory conversion into common shares in a private placement to the Abu Dhabi Investment Authority in the amount of $7.5 billion. This investment from one of the world's leading and most sophisticated equity investors tells us that the company may be experiencing hardship, but it is not broken.

FIGURE 2: CITIGROUP, DAILY. Here's when to invest, and how to protect ourselves should we be premature in the investment.
Graphic provided by: MetaStock.
Figure 1 therefore is a monthly chart and shows the Elliott wave count in the process of completing a C-wave. The chart is suggesting a fourth wave up of wave C down, or should we prefer the a-b-c count for the C-wave, the near completion of wave C. This is confirmed by the stochastic indicator, which is at oversold levels.

So having decided that the company is worth investing in, let us look at a daily chart to decide when to invest and how to protect ourselves should we be premature in the investment.

In Figure 2, my daily chart has the following indicators:

a. A simple five-period moving average of the close (green) to the open (red). The indicator is close to giving a buy.
b. Fisher MACD of the highs. The indicator is still negative.
c. Rapid RSI, also showing that the current trend is down.
d. Stochastic RSI with SVAPO (see the January 2008 issue of STOCKS & COMMODITIES). This indicator gave a buy signal on December 19, and with the SVAPO indicator (yellow line) having bottomed on November 11, it could well be in an accumulation mode.
e. Volume has fallen as the price dropped, suggesting strength.

Although two of these indicators are suggesting accumulation, I would rather err on the cautious side and wait for the moving average of the close compared to the open gives a buy signal -- that is, when the green line crosses above the red line, or when the Fisher MACD of the highs gives a buy signal.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Date: 01/03/08Rank: 4Comment: 

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