The stocks of Federal National Mortgage Assctn Fnni Me (OTCMKTS: FNMA) and Federal Home Loan Mortgage Corp (OTCMKTS: FMCC) came alive in a big way recently when Donald Trump’s newly-appointed Treasury Secretary Steven Mnuchin discussed Fannie Mae and Freddie Mac by name. When Mnuchin told CNBC the Trump administration has “got to get them out of government control,” Fannie and Freddie’s stocks spiked more than 50% in a matter of days.
In the days following the initial move, however, the stocks gave up most of their gains. While some traders may have been convinced the spike was a false technical breakout, there may be a much more bullish explanation for the drop.
One reason traders were so excited about the initial jump in Fannie and Freddie is because the move appeared to signal a major technical breakout. Both stocks had been forming a flag technical pattern over the past several years. A flag is formed when a stock delivers a large, steep upward move followed by an extended consolidation period in a downward-sloping channel. The channel forms the banner of the flag.
When a stock breaks out of the banner, it typically follows through by delivering the next leg of the uptrend.
Here’s a look at the flag breakout in Fannie Mae’s chart.
And here’s a look at the flag breakout in Freddie Mac’s chart.
Unfortunately for traders that bought shares on the breakout, Fannie and Freddie promptly make a 180-degree turn. After initially jumping up to around the $5 range, Fannie and Freddie both quickly retreated back down to the $3 range. Oftentimes, a quick retreat following what appears to be a breakout indicates a false breakout. False technical breakouts sometimes happen when ordinary market noise temporarily drives a stock’s share price outside of a technical pattern, but the stock soon retreats back into the pattern.
However, for Fannie and Freddie, the pullback to the $3 range actually filled the gaps created in the stocks’ charts when Mnuchin originally spoke. Technical analysts know that stocks tend to go back and fill in gaps in their charts before resuming a trend, and that may be exactly what Fannie and Freddie did. Now that the gap has been filled, the stocks are “free” to resume the uptrend.
Fannie and Freddie have both bounced since they each filled gaps in their charts. If the flag breakout is legitimate, both stocks will continue upward above $5. Eventually, carry-over from the breakout should take the stocks above 2014 highs of $6.35 for Fannie and $6.00 for Freddie.
If instead the stocks turn downward once again, look for support in the $2 area that served as resistance prior to the breakout.
Disclosure: the author holds no position in the stocks mentioned.
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