Price and Volume Show Citi Nearing Bottom

When looking at a chart there are several things to look at. There's price and volume of course, and there are trendlines. But there is also the pattern itself.

The first thing I look at, when writing my columns or picking stocks for TheStreet.com Top Stocks is volume. The obvious first step is to see if it is expanding or contracting. If we look at the chart of Citigroup(C Quote) below, what we can see is that volume was quite high at Point A. Point B's low had almost as much volume as Point A had. Therefore the downtrend is still intact.

But when we get to point C we see volume actually contracted on that low relative to Point A and Point B. That is the first sign that the selling is drying up.

As it happens Citigroup not only saw lighter volume on that latest whoosh down, it also opened on a gap down followed by a gap up. This is not a perfect textbook example but when you have a gap down (or up) followed by a gap up (or down) it leaves what we call an island reversal in place (circled on the chart). Like an island there is nothing around it.

So now Citigroup has lighter volume on a whoosh down and a potential reversal pattern developing. It also has as much volume on the recent rally as it had on the whoosh (or island) down, so volume is picking up on the rally. The next step is to draw in a downtrend line to see what sort of momentum the stock has. You can see I've drawn in a red downtrend line.

My rule of thumb on trendlines comes from basic geometry: two points make a line and a third confirms it, therefore the more points on the line the better the line. In this case we have three points on the line. Unless and until Citigroup crosses that downtrend line we're only guessing at a bottom. However, based on the volume and chart pattern I would imagine Citigroup will begin to trace out a bottom such as I've drawn in on the chart below.

You can see the resistance around $25 which is also where the downtrend line comes in so I'd expect the stock to struggle when it gets there. Any move through that downtrend line (on good volume) would take the stock to the upper $20 area. Then I'd expect to see another push down giving us what could turn out to be the right shoulder of a head and shoulders bottom (I've drawn in the potential left shoulder (LS) and head (H)).

Therefore when I look at the chart of Citigroup I see a stock that has been in a downtrend for a long time and has shown the first signs of putting in a bottom.

Helene Meisler writes TheStreet.com Top Stocks newsletter each trading day. She also writes a daily technical analysis column for RealMoney. Recent issues of Top Stocks have included analysis of Monsanto(MON Quote), BJ Services(BJS Quote), Chesapeake(CHK Quote) and Valero(VLO Quote), for TheStreet.com.