Advanced Technical Analysis - FNM
Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.
With Fannie Mae's (FNM:NYSE) breakdown in September to the October 1st low at 62.95, there is enough technical evidence now to present traders with a good risk/reward setup for the bearish case.
The long term weekly chart of FNM shows a very overlapped and corrective looking bounce off the $58 lows registered in 2002. This overlapped bounce suggests that the move off these lows is mean-reverting and could eventually be retraced in its entirety. The question becomes one of determining if that corrective looking bounce has indeed completed at the peaks in February 2004 at $80.82. Though it remains a possibility that the recent 10/1 low represents a 3 wave zigzag off the February 2004 peak (and thus projects to a slight new high above $81 before a larger failure), the momentum and technicals of the move down from February suggests in fact that a larger degree impulsive wave down is underway in FNM from the 2004 peaks.
The short term presents us with a trade setup that will allow us to differentiate rather quickly which of these scenarios is playing out. Specifically, the bounce off the lows set on 10/1 (after a clear "5" down from the peaks on 9/7/04) has so far been a well defined ABC zigzag back to important Fibonacci resistance and with two equal legs. As the hourly chart shows, if the larger bearish interpretation is correct, then FNM's rise should largely be capped by the $71 - 72.75 price range in the next handful of sessions. This price range represents several important resistance points: its range is defined by the 50%-61.8% Fibonacci retracements level (of the decline from 9/7 to 10/1) as well as where wave c of the ABC zigzag bounce would equal the size of wave a ($6.05).
A worry point for us is the open gap left at $75.50 from 9/21/04. This gap lies above the 78.6% retracements point for the September decline; closing it would stretch the bearish case to uncomfortable lengths for us. Should FNM advance into the 71-72.75 range in the next week or so and show hourly Demark exhaustion signals and hourly momentum divergences, a good risk/reward scenario could present itself for the bearish case (with trade powering through $73/76 negating this near term bearish view).
If the bearish scenario is correct, FNM should break down with momentum once this corrective bounce is complete. The only question that is difficult to answer in the bearish scenario is whether this corrective bounce of the 10/1 lows ends around $72 or around $75/76. Coming under $66 at anytime will strongly suggest a bearish corrective peak has been put in and new annual lows beneath $58 are targeted.
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