Some subscribers reported not receiving the weekly newsletter so we are resending it. We apologize if this is a duplicate in your case. - Mike Gibbons.

There were a flurry of breakouts on Friday from ETF's that short financial and industrial stocks. This followed the probable dilution of Citigroup shares and a much worse than expected fall in fourth quarter GDP. We say 'probable dilution' because the plan requires that other holders of preferred shares also agree to conversion to common stock, which seems a foregone conclusion. This improves the balance sheet of Citigroup because it removes the obligation to pay dividends to preferred shareholders, but is likely just another finger in the leaky dyke.

The markets are telling us that they expect the economic situation to worsen and that other financial institutions such as B of A will also suffer shareholder dilution. Despite reassurance from the Administration that nationalization of the banks is not their goal, it seems that the major banks are undergoing creeping nationalization and that as each successive injection of capital fails to resuscitate the system then the 'creep' will approach 100%. Until the toxic assets are removed from the bank's balance sheets their health will remain in question and it would be better to bite the nationalization bullet now rather than later so the bad assets can be forcibly removed from the books and the cleaned-up bank sold back to private investors. For a well reasoned analysis we recommend The Case For and Against Bank Nationalization.

Because we think the market has not yet bottomed we draw attention again to our two short position watchlists. These are based on the Head and Shoulders Top pattern and stocks breaking down after failing support at the 50 day moving average level. Over the last 90 days, stocks that broke down from these patterns have averaged a profit of 35.7% from their breakdown price to their following intra-day low. The individual stocks are shown in this weeks tip below.

We offer two watchlists of stocks that are possible short sale candidates.

The '50 DMA Breakdown' list is compiled by selecting stocks that meet a specific set of criteria based on the guidelines offered in How to Make Money Selling Stocks Short by William O'Neil with Gil Morales, with additional requirements and constraints of our own. (see the methodology description). Over the last 90 days, breakdowns from this pattern have delivered an average return of 38.5% from the 50 day moving average to their subsequent intra-day low.

The Head and Shoulders Top pattern is also a reliable guide to potential short sales. The methodology is described here. Over the last 90 days, breakdowns from this pattern have delivered an average return of 32.3% from breakdown to their subsequent intra-day low.

When shorting a stock on one of these lists, consider the following guidelines:

1. Short selling is risky because your potential loss is unlimited. When going long, the maximum amount you can lose is your initial investment, when shorting there is no limit to how high the stock can go from your entry level, so cover quickly when the stock moves against you.
2. Review the watchlists prior to the market open to select stocks you would consider shorting if an alert is issued.
3. Set a target cover price before you go short, using either a fixed percentage or an expected support level, and take profits at that level.
4. If you go short on an alert and the stock recovers above the support level by the close, consider covering your position immediately.
5. If you go short on an alert and the stock closes below the support price but volume doesn't meet the 1.5 times adv requirement, don't cover but wait for the action on the following day.
6. After a confirmed breakdown a stock may recover to test the 50 dma resistance level - allow 2% overshoot before covering as the stock may breakdown again after testing resistance. If it holds at more than 2% above resistance, consider covering.
7. Cover when a support level is tested and found to hold.
8. Don't bet against the market.

Here is a list of stocks that broke down in the last 90 days.