FNMA: A case for +250%

March 11, 2014 08:39 AM

Fannie Mae (FNMA) trades above $6 today, fulfilling the prediction I made 8 trading days ago when FNMA traded to $5 for the first time since May of last year. Since the more recent $5 trade on Feb. 27, the Government controlled GSE has firmed to levels not seen since September of 2008.

Our expectation for FNMA to advance 20% to $6 instead of falling 20% to $4 was, in hindsight rather easy to make given the volume jump on that Feb. 27 session and the strong three session advance that preceded it. At this juncture, it is time to consider something more far-reaching than the recent 20% gain achieved. There is only one instance using candlestick charting that I am comfortable with where a price projection or objective can be made. Normally, candlestick analysis simply helps us to understand the strength of price trends and to spot potential reversals.

However, the ‘three window theory’ I subscribe to suggests that once the last in a series of 3 windows (gaps) is closed, the market will attempt to close (fill) the second (middle) window (gap) and may move on to fill the first in the series.

There is a window that remains open from Sept. 8, 2008. A settlement above $6.19 will close that window and project a move toward an earlier opened window from open from July 10. This window would be closed with a settlement above the July 9 close of $15.31. If the middle window is closed, we might then look to the initial window in the series of three which lies at $28.95 from May 19, 2008.

I want to be clear that we should recognize windows above as strong resistance. Until the window from Sept. 8, 2008 is closed with a settle $6.20 or greater, we should recognize this level as resistance. A $6.20 settle or higher would project an objective of $15.31 or 247%.

Importantly, that settle has not happened yet.

About the Author

Martin McGuire, managing director at TJM Institutional Services