The Technicians Playbook: Fannie Mae And Freddie Mac Just Broke Out Of A Pattern 4 Years In The Making

This week, shares of Federal National Mortgage Assctn Fnni Me FNMA and Federal Home Loan Mortgage Corp FMCC spiked more than 50 percent following comments by President-elect Donald Trump’s newly-appointed Treasury Secretary Steven Mnuchin.

On CNBC Wednesday, Mnuchin confirmed his appointment to the position and said that Fannie Mae and Freddie Mac can’t continue to be owned by the government.

“We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again,” Mnuchin said. “But we’ve got to get them out of government control.”

While investors mull the fundamental and legal implications of Mnuchin’s words, technical traders are eyeing when a huge long-term breakout in Fannie and Freddie’s common stocks roughly four years in the making could be.

Flag Formation

Since early 2013, the charts of both stocks have been forming a technical analysis pattern called a flag formation. Flags tend to form when a stock is temporarily trapped inside a channel that is sloped counter to the direction of the primary trend. For a stock in an uptrend, a strong spike higher forms the “pole” of the flag, then an extended drift lower forms the banner of the flag. Eventually, after enough consolidation, the stock breaks out above the resistance line and resumes the uptrend.

Here’s a look at what a typical flag pattern breakout looks like.

Now here’s a look at Fannie Mae’s eight-year chart.

And here’s Freddie Mac’s chart.

While news out of Washington will certainly be more important than technical analysis for Fannie and Freddie in the long term, the recent breakout suggests the two stocks could maintain their upward momentum in the medium term.

Once traders finish taking profits on the massive two-day spike, Fannie and Freddie could soon see a renewed round of technical buying pressure.