Traders always look for Good News, or anything that passes for Good News, to justify buying into the market. Certainly, early in September 2009 there had been nothing but a flood of bad news – the housing market continued to deteriorate; employment numbers were down; the American automobile industry could not catch a breath of fresh air, and the banks continued to hemorrhage money. It had been generally recognized for a long time that Fannie Mae and Freddie Mac were operationally insolvent. The temperature was rising, and the ice in the pond would soon crack. It was only a matter of time.

So, when the Federal government announced on a Saturday morning that it was bending to reality and would take over both institutions and operate them under a conservatorship, traders took this as “good news” and promptly bid up the Dow Industrials about 226 points, open to close, on the following trading day.

In Japanese Candlestick analysis, the price pattern of that day plus the two previous days produced a near-classic “Morning Star” pattern. It had arisen after a (short, to be sure) downtrend, and – to cap it off – the “Star” was itself a “Hammer,” which is a bullish predictor. On the face of it, one could have expected that a sustained price rise was in the cards.

However, traders who were familiar with the “Fibonacci retracement” principle also knew that the price rise following the Fannie Mae announcement was also a 62% retracement of the previous days’ decline, and that a retracement of such degree is very often the limit of the rebound.

And it happened just that way. It turned out that the “Fannie Mae rebound high” was, within a very few points, as high as prices were going to rise; and the very next day nearly all of the rise simply disappeared as reality set in and prices fell back to the point at which they had begun. http://www.candlewave.com

Tags: bad news, saturday morning, flood, breath of fresh air, matter of time, hemorrhage, housing market, rebound, fannie mae, fannie mae and freddie mac, freddie mac