Freddie Mac FRE Doubles in a Week

Aug 28, 2008: 3:15 PM CST

Who would have thought it – Freddie Mac (FRE), which has been battered by almost endless selling, has actually doubled in value since the end of last week.  Let’s take a closer look at this remarkable accomplishment that may have shocked a lot of market participants.

Let’s look at a logarithmic scale of Freddie Mac’s Daily Chart:

I don’t normally use log charts because it distorts higher prices in exchange for clarity at lower prices – and allows us to compare moves in terms of percentages, rather than prices.

The last four trading sessions resulted in a doubling of value for Freddie Mac – a clear example and evidence bottom fishers will use for playing low-value stocks and how amazing gains can be made quickly.  While true, the corresponding risk is so much higher and odds are so much decreased for multiple stocks at similar prices to complete such an accomplishment.  Freddie Mac (FRE) and Fannie Mae (FNM) might be grand exceptions to the general rule “what is cheap tends to get cheaper.”

That being said, we cannot ignore the significance or remarkable accomplishment buyers have been able to push in this stock.  It’s also a testament that “You shouldn’t get short just because news is bad” or the like.  Making money is not as easy as “Watch TV, Make Money.”  Odds are you would have gotten short possibly with a long position and then been sadly awakened with massive losses.

Freddie now rests just beneath its key 20 day EMA, and has formed a semi-doji, which could be a possible reversal signal (a more risk-adjusted potential short-sell entry with risk management… a stop just above the EMA).

I just wanted to point this stock out as an interesting example of fascinating short-term action.

Now, let’s look at the 30 minute chart to see how this structure developed and what trading opportunities might have arisen.

First, we had a lengthy (multiple) swing positive divergence (which was also evident on the daily chart as I had mentioned in a previous post).  When you have a positive divergence on the daily chart and then have a positive divergence also on a smaller timeframe, odds are the signals will ‘converge’ and can result in a powerful move or positive price reversal.  At any rate, it can offer a significant potential for profit and provide edge.

Although you could have tried to call the exact bottom (not usually a profitable exercise), the highest probability play (trade) came where I’ve drawn the two green arrows.  Price has formed a lengthy divergence, broken above both key 20 and 50 period EMAs, formed a new momentum high, retraced this move, and found support and formed a doji at the confluence of the 20 and 50 period EMA (test).  That would be your highest probability, lowest risk entry.

We now have multiple (three) swing negative momentum divergence as price reaches potential resistance on the daily chart.  It might not be a good idea here to get aggressively long, given the stock has doubled in less than a week.  That would clearly be considered ‘chasing’ which is a practice most investors discourage.

See if you can learn additional lessons from this stock regarding price structure and high probability trades.

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