Lehman Brothers (LEH) – July 22, 2007
Prior to last Friday, the major indexes were looking pretty strong. While we got the obligatory nasty day during options expiration week, the uptrends remain on all the major averages. But one sector that is conspicuously absent from the running of the bulls is the financial sector.From a technical perspective, the major banking firms are really in trouble. Let’s take Lehman Brothers Holdings (LEH) as an example.
Except for the breakout above $80 earlier this year, LEH has really been trapped in a sideways trading range since April of last year. The 40-week moving average is the equivalent of the 200-day moving average, and you can see how LEH has broken well below that benchmark moving average. Volume on the breakdown of support is very high, indicating substantial distribution. Simply put, there is a rush to the exits.
Let’s look at the daily chart.
This daily chart shows the break of support a bit more clearly. Now, a $1 breakdown on a $70 stock isn’t that big a deal. If you draw very strict, tight trend lines as support and resistance, you’ll quickly learn that trend lines, like rules, are made to be broken.
But when considering the current tenor of the market, there is just no compelling reason for buyers to rush in and take advantage of this pullback to the April low. The stock may be ripe for an oversold bounce. But an oversold bounce does not make a reversal. This is a different environment and there are more unknowns than existed in April. And the key question to ask when bottom feeding on a stock is whether things are as bad as they can get. If so, then you’ve gotta buy! When things can’t get worse, they can only get better.
Is that the case with Lehman? I don’t know the answer to that question because I don’t know their sub prime exposure. And without knowing that, then we don’t know whether things can get worsewe’re just left with a bunch of uncertainty. The market hates that.
If you’ve got money to put to work, I’d suggest looking elsewhere.
Dan Fitzpatrick
www.stockmarketmentor.com
If you have any questions about this, you can email me at Dan@StockMarketMentor.com
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