Freddie Closes the Gap… Almost

Dec 3, 2007: 10:28 PM CST

Freddie Mac (FRE), chartered by Congress to increase the supply of money that mortgage lenders can make available to homebuyers, recently suffered an astounding price decline and horrific downtrend that culminated in a potential exhaustion gap which has now been virtually eradicated.

The stock represents a unique company that is at the center of the “Mortgage Meltdown” or “Sub-Prime Crisis” or whatever term you wish to describe the recent tightening on financial lending which has resulted in catastrophic losses to many financial institutions across the board.

The technical picture of Freddie Mac (FRE) seems to be at its darkest, but as we know from technical analysis, prices can often turn around at their darkest point on the chart.

Recently, price carved out a large volatility gap in which Freddie Mac plummeted overnight from $37.50 to $25, losing 33% of its value instantly.

However dark the picture seems, we know that most gaps on price charts do eventually get filled, often right away. It seems that Freddie Mac is filling its gap from its fateful day last November:

Volume is flooding into and out of the stock as price may have ‘overshot’ all fundamental logistics and created an immense buying opportunity for those who wish to hold the stock long-term, and are not afraid to be “buying when others are crying.”

We cannot know for sure whether this will be the bottom in the stock, but we must observe that a primary downtrend is in effect on the daily chart, the moving averages are in their most bearish orientation (20 below the 50 which is below the 200, and price beneath them all), and price recently made a significant new momentum low (momentum precedes price). Also, price seems to be finding resistance at the declining 20 period moving average.

Tread with caution, ye who wish to own this stock, and know that things are not always what they seem.

2 Comments

2 Responses to “Freddie Closes the Gap… Almost”

  1. TheFinancialNinja Says:

    On 11/28/07 I put up charts of both Freddie Mac and Fannie Mae pointing out the possiblity of the ‘Close the Gap Trade’. (http://benbittrolff.blogspot.com/2007/11/just-another-short-covering-rally.html)

    For today’s post I’ve also I’ve put up both charts again. I would wait for a re-test of the lows to hold before considering going long either of these guys for the longer run. In the short run, I believe a short, with the recent lows as the target, would be the safest and most lucrative play right now.

    Happy trading.

    TheFinancialNinja

  2. Corey Rosenbloom Says:

    Excellent call!

    I agree with a potential retest play to add for a higher probability trade, but it seems many of our investor brethren couldn’t wait to buy at such a perceived value price to them.

    As of this comment, FRE is trading at $31.50 which is lower than it is indicated on the chart above. We’ll see if we can get a retest which is seeming more likely each moment.

    Thanks!