The End of Washington Mutual WM – A Look Back

Sep 26, 2008: 10:40 AM CST

First, we never know when a company will declare bankruptcy or cease trading – charts can’t tell us that.  What they can do is warn us to a deteriorating situation and allow risk-management procedures to take place, as well as warning us that we should probably avoid or reduce exposure to a given stock.  Let’s look back at Washington Mutual (WM) on multiple time frames for such clues – and let’s try and find the optimal moment when we could have known something was wrong.  Let’s start at the top!

Washington Mutual Monthly:

If you put up a momentum oscillator, you’ll find that as price swings narrowed, a massive negative momentum divergence developed on the monthly chart and a ‘Triple Top” chart formation became the dominant structure into 2007.  Still, those are not necessarily reasons to exit – only hints.

The largest warning sign – a dramatically significant one – came when price violated the 50 month exponential moving average in mid-2007 – a simple lookback on the chart shows that this has never happened since 2000.  In fact, each time the “50” was tested, it represented an excellent investment opportunity.  Price broke the average, which would have been a conservative exit point for long-term investors.

When did things get ‘really’ bad on the montly time frame?  Price closed two months beneath the 20 and 50 month EMAs but the most significant development – and the source of last resort for the bulls – was the negative crossunder of the moving averages on the monthly time-frame.  At this point, there was absolutely no justification from the charts (basic technical analysis) to be ‘long’ or owning this stock – best to move on to others in more favorable technical (chart) positions.  This occurred around $32.50 per share.  Though there was no way to forsee the impending decline, the odds did clearly shift to warn of lower prices ahead.  Technical analysis forecasts probabilities – not magnitudes.

Let’s drop to the weekly chart to see this and the subsequent development closer.

Washington Mutual Weekly:

There was another significant clue that the structure had turned overwhelmingly bearish in mid-2007.  What was it?

Price supported at the 200 week moving average, but broke in in late July ’07, but even that wasn’t the significant bearish development.  It was actually that price closed multiple weeks beneath all three key weekly MAs and then found resistance and formed an ‘shooting star’ candle at the confluence of the three key moving averages (I’ve circled this point).  This was the absolute ‘last resort’ for buyers and was a clear and evident signal to exit this stock on a position trade or investment basis – it was also a very high probability ‘short sell’ with a stop around $40 (and entry around $35 or so).

Ultimately, the moving averages had crossed over, formed a confluence, were tested, and were found to be resistance.  What happened next was awful for buyers, but the signs were building and the dark clouds were gathering.

I point out a 100% rally in early 2008 which was ultimately brutal for short-sellers and confusing for buyers who may have thought this was the bottom.  All it did was draw price back to the 20 week EMA which formed an “impulse sell” trade that ultimately achieved its target and far more – this was another high probability short sell entry.

Price met its target, formed a bear flag (actually a wedge) back into its 20 week EMA in May and then continued its plunge almost unstopped.  The stock is now worthless.

Washington Mutual Daily:

Just to show how confusing and how difficult ‘calling bottoms’ can be, notice the massive, multi-swing divergence that set-up for the better part of 2008.  It looked like the $3 per share level might just be a bottom, and we had multiple tests and a momentum divergence to back up this case.  However, the moving averages were still in the most bearish orientation possible on the daily chart and price still was unable to gain traction at all above these averages.

It looked like the divergence was working in early September as price rose quickly, fell even quicker (knocking out stops from any divergence or support trade) and then rallying more than 100% yet again in mid-September, drawing in many new investors and signalling a possible “all clear here” sentiment.

That was ultimately not to be.  Investors punished the stock this week, sending it cascading lower, destroying all bullish hopes and as of this morning, the Goverment seized Washington Mutual’s assets and were sold to JP Morgan Chase.

There’s many lessons to be learned here, from the notion “Identify the downside and always guard against risk” to “never catch a falling knife” to “never bet against the trend” to “never buy a ‘cheap’ stock” and many others.  Take time to learn more from this development, and add it to your growing arsenal of knowledge.

3 Comments

3 Responses to “The End of Washington Mutual WM – A Look Back”

  1. Anonymous Says:

    Cool. You’ve been doing these post-crash analysis. How about an occasional real-time analysis?

  2. Corey Rosenbloom Says:

    Please keep in mind the information I give on this blog is free. My assertion is that you learn from the past to act in the future. All is educational, and nothing is a recommendation to buy or sell a security.

  3. Anonymous Says:

    & now what should i do with my WM shares ?