E-Trade Financial Corp - An Interesting Situation

12/09/2008 11:29 am EST


Nick Perry

Equity Options Trader, Schaeffer's Investment Research

I was just looking through some charts and it looks like E-Trade Financial Corp (ETFC) is showing an interesting short-term set up. But before we get to that, let's quickly review some history, starting with the weekly chart.

Chart Courtesy of Thomson Financial

Here we see the carnage that began last summer. Shares of E-Trade spent the last five months of 2007 in a virtual free fall. They finally found their footing in January of this year when they bottomed near $2. The stock then drifted sideways for the next ten months before another round of selling pressure hit.

The woes in the financial sector are old news at this point, so none of this may be a surprise to anyone. However, the problems do have to be acknowledged when we discuss the sentiment profile. A look to both analyst rankings and short interest shows heavy skepticism. According to Zacks, not one out of ten analysts rank the stock with a "buy" rating. Meanwhile, data collected by our Quantified Analysis group shows that 16% of the stock's float is sold short. Both of these would register as pessimistic readings, but the contrarian implications are mitigated by the weak price action. In other words, the skepticism doesn't run contrary to the price action.

So, while I admit that the overall contrarian case might not be as strong as it would if we had a strong stock, there is still an interesting situation here. As I have noted in the past, looking to intraday charts can help us identify levels to watch on some of these beaten up stocks. Below we have the 30-minute intraday chart for the last 20 days.

Chart Courtesy of Thomson Financial

Here we see the bottom that was put in on November 24. After tagging a low near 80 cents, the stock immediately spiked to a high near 1.30. Or, said another way, the shares gained around 60% in the course of about two days. That is the appeal, and the danger, of these beaten up names that show tremendous volatility.

However, while extremely volatile, these stocks do still appear to show "respect" to support and resistance zones. The gray and red lines highlight the recent range that followed the bounce off the late-November low. With today's gain, the stock is showing a bit of a breakout.

I suspect it will take more than this to spur analysts to change their minds and issue upgrades, so I wouldn't necessarily view that as a catalyst here. Short interest is a different story. The short sellers have been correct in their stance for some time, but with the stock bouncing from sub-$1 lows, I wonder if some aren't looking to take profits. This could create short-term buying and help fuel a short-term bounce.

By Nick Perry of Schaeffer's Trading Floor Blog

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