Charting Freddie FRE and Fannie FNM Perhaps for the Last Time

Sep 8, 2008: 10:20 AM CST

With virtually all news focused on Fannie Mae (FNM) and Freddie Mac (FRE) and their government take-over, let’s look at their charts while they still exist to learn any trading lessons from these companies.

Freddie Mac (FRE) Daily:

The take-away from this chart is that it’s generally unwise to bet against a prevailing or primary trend.  Although there were massive retracement (and two 100% rallies), ultimately price gave back all those gains and more, and in one day price has fallen almost 80%.

Notice that simple technical (chart) sell signals came each time FRE retraced back to its falling 20 day EMA (green line), and notice the ‘dojis of indecision’ that formed at this critical barrier to overcome in a down-trend.  At a minimum, you should exit any long (counter-trend) trade at these zones, but they also can serve as excellent short-sell entries with low-risk stops.

Though you cannot predict government announcements or reports, you can trade high probability, low risk opportunities when they set-up in the basic price structure.

Fannie Mae (FNM) shows a virtually identical price structure, but I added the price from the start of 2008.

Fannie Mae (FNM) Daily:

Identifying a downtrend can be as easy as viewing moving average orientation (that the 20 is consistently beneath the 50 (blue) period EMA) or by comparing price swings (looking for lower lows and lower highs) or as complex as linear regression, autoregression, or other statistical measures.  I find some combination of the “swing high and low” method and the moving average method as being fine for quick trend assessment.

Again, whether or not you can spot ideal trade location set-ups on this chart, what’s important is to grasp the big picture.  A lot of people got excited and purchased shares in these companies (and others that are trending down) and decide to be aggressive buyers when price swings lower.

While this may work for the long-term (studies often show it does, provided the company does not go bankrupt!), short-term, it can be a trying strategy psychologically, and you always run the risk of a company being taken over or bankrupting or ceasing to be listed, particularly when we get beneath $5 per share.

People really do compare it to ‘catching a falling knife’ and if you’re successful at catching it, you can make immense profits… however I find it’s superior mentally and financially (as a trader) to identify the predominant trend and then find low-risk retracement entries in the direction of that prevailing trend, particularly as price retraces to a moving average or Fibonacci number.

Finally, let’s look briefly at Fannie Mae’s (FNM) weekly chart to see how fast and far this stock has fallen.

Fannie Mae (FNM) Weekly:

I’ll let the chart speak mainly for itself.  Notice that even on this timeframe, the 20 week EMA (exponential moving average) provides formidable resistance and sets up entry opportunities.

Study these charts (and print off your own and annotate your understanding of price behavior on them) for further insights, and use these companies as a lesson not to trade aggressively against the predominant price structure (trend) and to understand risk and reward characteristics.

For further fundamental (news) information on these companies, there are many resources to check out today, the easiest way to view many of them would be to use the NewsFlasher Business News and Business Blogs section.

I also wanted to highlight Barry Ritholtz’s “The Big Picture” site which has recently written over 6 articles on Freddie and Fannie (including multiple links as well) that you might find interesting.

Comments Off on Charting Freddie FRE and Fannie FNM Perhaps for the Last Time

Comments are closed.