The banking sector had a calamitous session as Citigroup (C), discussed below, came under attack following analyst downgrades. Questions were raised regarding capital adequacy and the sustainability of the dividend, both hot potato issues that caused waves of institutional selling and short sellers to pile further pressure onto the whole banking sector.

Reviewing the chart for the sector, there is clear evidence of failure at several points to move above the 200-day EMA, and yesterday’s close below 100 suggests that the October, 2005 low near to 93 could be the next target.

The mood in the credit markets has recently been characterized as being one of a flight to simplicity, as banks and other financial intermediaries have completely lost their appetite for complex debt instruments. The problems faced by many of the large banks and their SIV’s is that the financing that was contrived to be off balance sheet, has now been most clearly shifted on to the bank’s own books. Since there is no secondary market for much of this asset-backed paper, questions are legitimately being asked as to whether there is sufficient capital to finance all of their outstanding commitments. The Fed was forced to come to the rescue yesterday with a $41 billion injection of liquidity, and this underlines the fact that the problems in the credit markets will be far more enduring than some of the upbeat cheerleaders have been acknowledging.

It could be extremely unpleasant for global capital markets if there is even a sniff that a major US bank could be vulnerable to what happened to Northern Rock in September.



The Russell 2000 (^RUT) took yesterday’s woes on the chin as it dropped by four percent, broke down through a key trendline and closed below the pivotal 800 level.

In overseas trading the Hang Seng Index (^HSI) is down more than three percent as this is being written and could be ready to move back down below the 30000 level. The Nikkei 225 dropped by more than two percent and London’s FTSE following yesterday’s two percent decline is down another one percent in early trading after noticeably failing to make a new multi-period closing high earlier this week.



If the bears become more emboldened by yesterday’s tactical victory, the Nasdaq Composite (^IXIC) could be vulnerable to a retreat all the way back to the early October breakout near 2720 which also coincides with the 50-day EMA.



TRADE OPPORTUNITIES/SETUPS FOR FRIDAY NOVEMBER 2, 2007

The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions. None of these setups should be seen as specifically opportune for the current trading session.

Citigroup (C) dropped by almost seven percent and recorded a bearish looking candlestick that could best be described as an inverted hammer where all efforts to recover intraday met with rejection. Volume was more than twice the moving average and the stock looks to be headed down to the mid $30’s, last seen in the late summer of 2005.



No mercy is being shown for the insurers and guarantors of structured finance issuers and mortgage backed securities. MBIA (MBI), one of the largest in the sector, has almost been cut in half in just the last three weeks, and again very awkward questions have been raised as to their capital adequacy and ability to honour their obligations in the case of serious defaults.



Garmin (GRMN) continued its downward trajectory in yesterday’s trading and dropped a further seven percent. The stock has now violated a trend-line through the lows and, as discussed here yesterday, the company faces a critical challenge in its bidding battle for TeleAtlas, the map provider.



Alvarion (ALVR) has dropped more than twenty percent in the last two sessions, and it is instructive to observe the very subdued volume during the pullback phase that has been marked on the chart.



One needs to be cautious on the long side in current market conditions but Silicon Labs (SLAB) has a bullish flag formation.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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