If Accredited Home Drops Further, Short It

With the subprime mortgage issue brought front and center by recent revelations from Bear Stearns(BSC Quote) that two of its hedge funds are just a bit underwater on some collateralized debt obligations, or CDOs, one stock that comes to mind as the poster child for subprime mortgage problems is Accredited Home Lenders(LEND Quote).

This stock fell from a high of above $60 to a low of $3.77 in just 10 months. But after rallying back to $15 over the past few months, the stock is once again rolling over.

So what often happens with these stocks that roll down the "Street of Broken Dreams"? They can climax in a crescendo bottom where the last of the bulls are cleaned out, and then advance on a vacuum of selling pressure.

As the stock advances, value investors start believing that they might have found a gem buried in all that mud. They'll take a chance on a distressed stock on the possibility that the company might right itself, or be acquired by a white knight.

But if the stock starts faltering at all, then the recent buyers become sellers. That's what's happening with Accredited Home Lenders.

On the weekly chart below, we see that the stock ran back to test $15. That rally ended at the middle Bollinger Band and the stock rolled over. RSI has advanced to the top of the current channel, but is also rolling over and confirming Accredited Home Lenders' reversal.

I just don't see a lot that's bullish about this chart. The recent short-interest ratio is close to six (meaning six days to cover). That's a bit high, but the truth is that sometimes the bears are right. With the stock right at $13, consider shorting it on any break below that level.

But also consider putting a protective stop at about $14.50 -- just above the current middle Bollinger Band. In light of the current environment, I'd suggest looking for a downside price target of about $8.

Accredited Home Lenders (LEND) -- Weekly