The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

FOR WHOM THE BELL TOLLS OR THE HOUND BARKS TWICE

A mortgage from Freddie Mac (FRE) used to be an American icon, right up there with apple pie. These days poor Freddie sits disgraced, its former executives canned, its share a despised penny stock. If the implosion of the credit bubble was at the core of the 2007-2009 bear market, then FRE was at the epicenter of that disaster.

Figure 9.14 reflects its slow-motion crash, as the stock rolled down from above $70 in 2006 to a measly 76 cents at the right edge. Let’s review its technical signals to see what we can learn from this wreck.

At the point marked “A,” the fast EMA crossed below the slow EMA, confirming the bear market. FRE still traded above $60 at the time. This signal remained in effect for the duration of the slide. This is one of the key lessons of this chart—do not hold long positions in a bear market! Whenever you see this EMA crossover on a weekly chart, get out of your long position. Any trader who followed this essential rule would have sidestepped the great majority of disasters so lustily profiled in mass media over the past decade—not just FRE but also Enron, Global Crossing, and the rest of the pernicious bunch.

In 2007, weekly MACD-Histogram twice attempted to rally above its zero line. Each time it ticked down from its top above that line, it reinforced the bearish message—this is a bear market, get short and stay short. These MACD downturns are marked by vertical red lines.

Figure 9.14 The Failure of ...