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Pattern Predicts E-Trade Could Plunge Almost 30%

Falling yields and a head-and-shoulders formation do not bode well


E-Trade Financial Corp. (ETFC) –In the past 20 years, the race to offer the lowest commissions has left brokerages very reliant on interest rate spreads. A significant percentage of their profits come from the difference between the interest they earn on deposits and the interest they pay to account holders. As you can imagine, discount brokerages are especially sensitive to changes in interest rates.

The yield on the 10-year Treasury note dropped below support at 2.6% on May 14, and a choppy market isn’t helping it recover. At this point, it seems reasonable to conclude that former support is now resistance, which is bad news for brokers.

Names like TD Ameritrade (AMTD) and Schwab (SCHW) are likely to feel the pinch, but it’s the laggards of the group that could really see some downside over the next few weeks.

This makes the emerging head-and-shoulders pattern on ETFC’s chart even more interesting. Unlike its peers, ETFC hasn’t been able to fully turn it around since the financial crisis, and is likely to start attracting more short sellers following a break of the neckline.

ETFC Stock Chart
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A pattern isn’t a pattern until it’s completed, and in a bull market it pays to be conservative when shorting. Entry orders set below February’s lows would be triggered once the pattern has been completed.

We have had good luck basing the price target for head-and-shoulders patterns on a 161.8% ratio of the height of the right shoulder. That puts the initial downside target just under $18 per share. That level would be a good place to tighten stop losses. A break below $18 would likely send ETFC down to the traditional target based on the height of the pattern, near $14.

John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today. New to options and need more personal guidance – try our online options course: Strategic Investing and receive your first two weeks free by clicking here.

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