Why was CFC up? Not sure. There was a complete bull**** article on SeekingAlpha that claimed that "more than 90% of their business is prime" - you have to wonder how SeekingAlpha, which I've had some respect for, allowed that total crap to be published on their blog when just two weeks ago Samuels said that sixty percent of his customers could not have qualified on the indexed rate while under freaking OATH on the Hill - but there you have it.

(Hint: PRIME mortgages all qual on the indexed rate. Duh.)

Anyway, this, plus the price action, has brought out the "$40 tomorrow!" cheerleaders.

To coin a word, bull - and I'm not talking about BULL MARKET either.

Here's the chart, updated to today:

(By the way, these cute charts - in fact, amazing real-time charting capability - is from ThinkorSwim's trading tools. I'd be there with my account if I could figure out everything I need to do with their stuff - so far I haven't, but I'm getting there..... damn their tools are nice!)

Let's take a look.

We have here the price action through today, from roughly the beginning of December.

Note that the stock rolled over in the first part of February, establishing a top. Just prior to that, it established a channel bottom. This is typical when a top is made.

Ok, so we have our trendlines, which I have drawn on the chart. I have also superimposed the 200DMA, 50 DMA and 20DMA as well.

The 50 and 200 are important because a cross of the 50 over the 200 on a decline is known to chartists as the "Death Cross" - it usually means what you think it does. Note that this "Death Cross" has not happened yet, but that given the price action of the last couple of months if the stock stays in the channel this event is imminent.

The 20DMA is a short-term momentum indicator; a break above it is bullish.

The channel markers on the top and bottom show the direction of the major trend at the present time (slope), whether the channel is contracting or opening (that is, whether a break is likely to be imminent) and where important trend reversal markers are.

Notice that today we had a gap down followed by strong price action with a slight fade into the close (bar chart has the closing tick below the high of the day.) Also note that an attempt was made to take out BOTH the 20DMA and the top channel line, but that the rally ran out of steam.

Thus, the channel remains intact, at least for today. There is no intermediate term (couple of months) change in the expectation for this stock - the trend is downward.

Now if the channel is violated tomorrow on the upside (which happens around $34.50) then we have to be thinking trend reversal. THEN we would likely cover a short position and consider a long one. But - notice that the 20DMA was violated during this downtrend once before and so was the trendline. In fact the stock spent four days above trend, but the rally did not hold.

As such a break above the trendline ($34.50 tomorrow) would indicate to me that it would be wise to cover but I would not initiate a long position until and unless the gap between the 50 or 200 DMA and the trendline was filled halfway. This would happen somewhere around the $36 range.

Why? Because the stock has already headfaked traders once on this trendline and then returned to trend.

Headfakes can cost you a great deal of money in a hurry; if you covered a short when you popped up to the $37 range and went long you have had your head cut off and handed to you on a plate in the last two weeks!

So here's my read on this particular stock, assuming you are either short or on the sidelines right now (If you're long, the obvious question is - why? Wasn't the break below both 50 and 200 DMA enough for you to get out?) would be this:

• If the stock breaks above $34.50 tomorrow and either shows strong volume or is over the that price going into the close, cover any short positions and wait for confirmation. DO NOT immediately go long - it may be another headfake!
• Confirmation of the trend change consists of either (1) more than four days above the previous trendline AND 20DMA OR (2) a fill of half or more of the gap between trendline and the 50 or 200DMA.
• If the trend downward resumes (you got headfaked out of your short), re-initiate your short position. Life sucks and so do trading costs, but this is the price of diligence in trading.
• If confirmation is obtained, then consider a long - but beware, because so long as the stock remains below the 50 and 200DMA, any "bull advance" is tenuous at best.

If you prematurely cover a short on this stock and the "Death Cross" happens, the probability that you will find yourself looking at a $30 stock wondering why in the hell you did that two or three days ago is extremely high.

Note carefully - none of this has anything to do with the fundamentals of this company. It is an exploration only of the price action over the last few months - as such it is only one indicator that you should use when deciding what to do with this security. Making trades solely based on technical analysis is a no-net high-wire act and, in my opinion, unwise. In addition there are other indicators that I'm intentionally not using - not because they aren't worth anything, but because in this case the trend channel is so clear that I choose to focus my attention there rather than on indications like the MACD, Stochastics, EMAs, etc. YMMV.

Labels: CFC, Countrywide, Technical Analysis