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Lessons From The E*Trade Disaster at Trader’s Narrative

Lessons From The E*Trade Disaster

I didn’t lose any money in the implosion of E*Trade, but I still wanted to take a look at what happened from a technical analysis perspective to see if I could pick out any warning signs.

Here is the chart of E*Trade Financial (ETFC) prior to any nasty stuff:

ETrade Financial ETFC sideways

Meandering with a mazy motion and rangebound - as the moving averages show by flat lining.

Moving Averages Legend
The green line is the simple 50 daily moving average, the blue the 150 daily moving average, the red line the 250 moving average.

The next important event was on July 24th, 2007 when price approached, yet again, the floor of the trading range:

ETrade Financial ETFC approach support

Ranges occur because people come to believe that above a certain price, a stock is too “expensive” and below one, too “cheap”. The longer a trading range remains, the more investors and traders become active participants. And the more participants, the more stop-losses which accumulate near the same obvious price points.

Lesson #1
When a range is pierced to either direction, the stop losses of one side are triggered and as the “wrong” side investors and traders scramble to limit the hemorrhage to their accounts, they in effect fuel the move… creating a strong trend.

Which is exactly what happened:

ETrade Financial ETFC pierce support

Lesson #2
The rest of the market wasn’t doing that well either at this time, so E*Trade wasn’t the only stock suffering - especially in the financial sector. But the important point is that E*Trade had no relative strength compared to the market:

ETrade Financial ETFC weak relative strength

Lesson #3
The warning signs were there: the “death cross” on the moving averages, the lower lows and the lower highs being carved on the chart as market swatted the shares around.

So it wasn’t surprising when the insult was added to injury and a massive gap down took the shares to the low single digits and talk of bankruptcy started to float about E*Trade like vultures:

ETrade Financial ETFC implosion

According to technical analysis, the price itself was telling you to stay away from this (at least, from the long side!). The best thing you can do if you did lose money on E*Trade (ETFC) is to learn from the experience and apply it to the next trade.

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5 Responses to “Lessons From The E*Trade Disaster”  

  1. 1 ben

    Applying your experience, how would this compare to the charts for two of the bond insurers, ABK and MBI? Just curious..

  2. 2 Aaron

    I lost a decent amount in ETrade months ago when I bought in at around $28 and sold around $23, but it could have been much much worse. I really think that ETrade is more of a fundamental breakdown than a technical breakdown, though this chart is a classic falling knife.

  3. 3 Babak

    ben: very similar, though both of those stocks had higher RS than ETFC, especially MBI.

    Aaron: sing with me, “stop losses and low margin rates… these are a few of my faaavourite thiiings…”.

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