Last night on premierinvestor.net and then again this morning on IndexSkybox.com and OptionInvestor.com I profiled what I feel is a decent looking bearish play with some interesting dynamics that play into the hands of home mortgage financing and Treasury bond action.
"Stage 1" of the trade is underway as shares of Fannie Mae (NYSE:FNM) have broken the "inside day" trade setup to the downside on the break below $81.93.
Fannie Mae Chart -
I've added a retracement bracket to the chart of FNM from the 08/02/00 low of $47.93 to the 12/29/00 high of $89.43. The first levels of support a bearish trader will be monitoring are $81.50 (19.1% retracement) then the 50 and 200-day MA's near $80.50. Should those levels get violated to the downside, the we're looking for a near-term target of $73.57. First sign of trouble for a bear is a trade above the recent high of $84.01.
Treasury YIELDS in the 10-year ($TNX.X) and 30-year ($TYX.X) were the center-point of the bearish trade scenario for Fannie Mae (FNM). In brief, a higher YIELD in the 30-year and/or 10-year might have mortgage rates rising and putting a squeeze on Fannie Mae. Today, we've seen the 30-year YIELD start to tick higher in YIELD and the 10-year is hovering right at yesterday's surprise auction YIELD of 4.50%. In yesterday's market wrap on premierinvestor.net, we made note that "bearish YIELD objective" for 10-year had been achieved and might expect a reversal higher.
Stocks have firmed quite nicely, but there's still some trading to be done before the weekend. Software (GSO.X) and Networking (NWX.X) have actually turned green. One stock we're eyeballing on the bullish side near-term is shares of PeopleSoft (NASDAQ:PSFT).
Yes, PSFT. Subscribers are familiar with past profiling of PSFT up at the $40 level and what took place from there. Recently we had profiled PSFT short on premierinvestor.net again and got stopped out. Sometimes going back to the well for a second drink isn't such a good idea.
PeopleSoft Chart -
It's interesting to go back and review prior observations. In early August, we felt there were some "risks" that would develop in shares of PeopleSoft (NASDAQ:PSFT). The technicals were starting to weaken and a competitor SAP Aktiengesell (NYSE:SAP) had just reported earnings. One of the comments in their earning report was that "aggressive price competition" from PSFT and others was putting pressure on earnings. In August, the MARKET also caught onto those comments and removed some risk out of PSFT in the form of price as the stock got crushed back to the March lows and 100% retracement.
Now we see the stock rallying back to 80.9% retracement and starting to firm. Those sill short/put are starting to have to assess risk to 61.8% retracement of $30.37 and downside to $17.62 (they had their chance once to cover.) It's very early to be thinking bull, so I'd only ease in with 1/2 or 1/4 position at this point, but look for a pullback to the $20 level as more ideal. In the next couple of days, we need to check the relative strength chart too for PSFT vs. the SPX and GSO.X. Out of time for now, but we've taught subscribers how to measure relative strength on the point/figure charts and that's a great place to start.