A Technical Look at the Washington Mutual Brankruptcy

Could the Washington Mutual bankruptcy, the biggest bank to fail in US history, have been avoided for long term investors?

The answer is yes. Washington Mutual offered nine different sell signals for investors on the way down. This post will show them all.

The following stock chart of Washington Mutual (NYSE:WM) offers a great example of how technical analysis can be used identify potential buy and sell points on a stock chart.

Note: This chart of Washington Mutual is a 15 month daily stock chart:

washington mutual bankruptcy

1. The blue 1 shows where Washington Mutual had its first major price breakdown with a gap down below its key support at $32 a share. Volume was over 300% above its daily average meaning institutions were selling off.

2. The blue 2 shows where resistance was later found at around $22 a share and could not be broken. A sign the bulls could not regain control.

3. The blue 3 shows where the next key support line at $13 a share was broken.

4. The blue 4 shows how key support line #3 turned into resistance. This is very commonly seen and happens both ways, for example once a stock breaks above resistance the resistance line turns into support.

5. The blue 5 shows how Washington Mutual formed a horizontal channel also known as a flat base and eventually broke to the downside. This was yet another key sell signal for the stock.

6. The blue 6 shows how a wedge pattern formed as price volatility increased substantially through July and early August. Eventually in mid August this pattern also broke to the downside.

7. The blue 7 shows how a support line was established at $3 a share and on the 3rd sell off into it failed to hold up. WM stock quickly fell to $1.50 thereafter.

8. The blue 8 shows once again how support line #7 ended up turning into resistance. This was the last push for the bulls which failed to materialize into a rally.

9. The blue 9 shows where Washington Mutual closed under its lats key support line under $2, and today (not shown) the stock opened up trading for pennies after bankruptcy was officially announced.

---> Next Chart, 7 Great Lessons to Learn From Apple in the Last Year

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Comments

  1. Posted by The Stock Speculator on September 26, 2008 at 1:35 pm

    Very nice analysis.

    For 'Buy & Hold' investors this should be used as a lesson on how to spot a change in story and where (and why) to bail.

    For traders, its a good study on the behavior of a stock in its death spiral. Postmortems are such an important tool to a traders education.

    WM was screaming for investors to abandon ship. It was also telling traders not to touch it on the long side. Anyone who was long WM and lost their shirt, deserved it.

    TSSS

  2. Posted by Brandon on September 26, 2008 at 2:04 pm

    I agree TSSS, excellent analysis and anyone that could take 5 minutes to read the news every morning would have known to bail at some point.

  3. Posted by rhinodude47 on September 26, 2008 at 3:58 pm

    Very nice look here Blain, between this and Lehman you could start a category for just bankruptcy examples.

  4. Posted by RayJMan on September 26, 2008 at 9:10 pm

    Hey now! Well the truth comes out, admittedly I owned Lehman. Well I owned calls before and made out. It should work again. I'm NOT listening!!! I'm NOT listening!!! Lehman to the MOON! They have 4 different buyers out there!!!! Everyone wants them.
    :oops:
    I took it in stride and will probably hold the *now pink sheet* symbol of LEH in my portfolio and won't sell it for as long as possible as a constant REMINDER to self. If you don't hear anything positive about a company, probably shouldn't go there, but I looked at the $8.25 stock price and said to myself: WOW! This is incredibly cheap. I believe book is somewhere in the low teens and it's undervalue. Another reason is that I saw all the bad news and it just seemed to go away for a while. So I said to myself how much worse can I get and sold an upside call. The upside call helped me not lose "as much" I guess in the long run (it wasn't a huge, huge position, just 200 shares), but on speculative plays like this they do and sometimes can be promising.
    I would definitely recommend simply entering the position if you like the daily chart, but if you want to play "speculative" IMHO, you should buy protective puts to minimize your risk.
    I did a protected buy/write last month against another financial stock last month (Wachovia) and made out like a bandit when the monster short covering rally happened. Had it just sat at $14 into options expiration, I would probably be out a little, but definitely not as much.

    Shortly, I use a different strategy now, but Put options are great insurance against "casualties" like financials, but they are getting more expensive now because of the new rules. I guess I'll probably start using them for some of my "speculative plays".
    Sure a lot of you probably know, but just posting for those who have not traded options before:
    Basically, If ABC stock is trading $14, and you get a "put" at $14 strike price......the stock falls all the way to ZERO, then you out the premium on the put (the month it expires) and commission. Nothing less, nothing more (such as the complete decline in value of the stock).
    Happy Trading,
    RayJMan

  5. Posted by Lou on September 27, 2008 at 12:59 am

    Washington Mutual, Inc. Announces Conditional Exchange of Preferred Securities.

    SEATTLE--(BUSINESS WIRE)--Sept. 26, 2008--Washington Mutual, Inc. (NYSE:WM) announced today that an "Exchange Event" has occurred under the applicable documents.

    Source: Washington Mutual, Inc.

    Lou
    Private Equity Jobs

  6. Posted by SpungeBob on September 27, 2008 at 12:21 pm

    Two weeks ago the employees of WM also pulled a trick by spreading the rumor that the WM is going to be taken over by Morgan and Citi to sell their left overs. @*&$&%

  7. Posted by Alex - My Trader's Journal on September 28, 2008 at 1:16 pm

    Good chart - reminds us why buy and hold blindly isn't a smart strategy.

  8. Posted by filenguyen on September 29, 2008 at 6:50 pm

    B,

    your analysis is always excellent! i still like your long play QID--very good suggestion.

    late

  9. Posted by The World's Worst Stock Picker on October 5, 2008 at 11:17 am

    QID is very good suggestion since there are no margin requirements. Technical analysis works if you couple it fundamental analysis. :twisted:

  10. Posted by RR on October 17, 2008 at 7:56 pm

    So I bought a couple of stock from WAMU at pennies. Do you think it has any chance of going up to at least a dollar? or will it continue to go downhill from here due to the economy. Lastly what will happen to WAMU stock when WAMU no longer exsists and CHASE puts its name on every branch?

  11. Posted by Blain Reinkensmeyer on October 21, 2008 at 12:01 am

    absolutely no idea, your guess is as good as mine! :oops: