The Dow Jones is the most watched index, it is also the most manipulated. It is now threatening to make a new high as it is only a hundred points away from the may highs of last year. Much of this thanks to the Fed. that announced an additional year to late 2014 of these very low rates and expressed a more open mindset towards other stimulative measures to help growth. The Dow is now close to its all time high of 14000+ in late 2007. No other index has accomplished this miracle. Is the Fed targeting the stock market and creating the next bubble? It is hard to judge what all this means, but it is certainly good to remember that the Dow, now more than a hundred years old, contains only one single stock General Electric from the early days and that one is trading at 1/3 of its high.
DJI
EW provides you with a green, red or amber light. They do not occur in the same proportions. Most often the light is amber meaning that there is no clear-cut predictive value flowing from the EW analysis. That is not a problem since you simple move on to a stock that does present a clear picture, but that approach does not work if someone asks you about a specific stock! That is the case with EXC, this is a utility, mostly electric but also in the gas distribution business. It operates in the Mid-West (HQ in Chicago) and is the largest operator of nuclear power stations. So right of the bat, utility=good and nuclear=bad, the yin and yang of investing. So going straight to the charts this is what we have;
The charts are the same stock over the same time period. The one on the left is arithmetic and the one on the right logarithmic. Arithmetic charts have a tendency to exaggerate the rise of a stock as it follows a parabolic line. The log chart, despite being less commonly used, actually gives a much better proportionate presentation of what is going on. With only the chart on the left, the prediction that this stock may drop to $20 seems preposterous. On the right chart it actually seems to fit nicely. Now the short-term chart;
This looks a bit like MSFT, Microsoft. My best guess at this point is that we are in a triangle wave B, the A was the big drop from $90 to $34. The B will rotate a little longer around $41 and then wave C will drop to $20 (or lower). One could buy the stock here waiting for the e wave to form. You could get lucky and the stock just keeps going, negating the bearish outlook. The only certain thing is that a stop loss should be used at $38.
By the way, regression to the mean alone would bring this stock close o the $20 level.
EXC
Joe Granville is rated the number 1 “technical” analyst in the US. He had his 15 minutes of fame back in the early eighties when he correctly predicted the 50% or so drop in the stock market, before it actually happened which is not always the case with analysts. His views should not be dismissed lightly, as he has been around a long time and is the inventor, if that is the word, of OBV, On Balance Volume. It is the main concept on which his predictions rest. Simple put OBC is the running total of the volume on up or down days. If the volume of trading is low but the price up the OBV rises, if the volume is high and the price is lower, the OBV drops , by more etc. etc. Underlying this is the concept that volume precedes price, which means that the price cannot go up without the volume rising (even allowing for very long periods that the link does not work directly).
His prediction now is that last Friday’s high is THE high for the moment and that the DOW will go down by about 1000 points every quarter, back to the March 2009 lows. Lets look at this concept using Colgate–Palmolive , a stock we expect will go down big time on the basis of EW analysis;
As you can read in previous blogs, the EW count here is that of a large 5th wave contracting diagonal that has been operational since 2005 and takes up most of this chart. The initial target is just under $45. As you can see the OBV was rising up to the time of the top of wave 3 in the diagonal, after that it drops again like a stone. All of this of course supports our view, at the very least for Colgate.
CL OBV
Should the market go down, as we certainly expect that it will , perhaps even by a lot more than most people can imagine, owning some of the HXD might just be the best remedy. Unlike commodity based ETF’s (like HNU for Natural Gas) that are usually in contango (near contract cheaper than later contracts), this one does not suffer from the inevitable loss on roll-over as it is calculated on the index itself. The 2X leverage should be a bonus provided you deal with it properly; you want $100 “protection” you buy $50.
During the counter-trend B-wave rally in which the stock market lost about 50%, this HXD went from roughly $40 to $8, losing about 80%. $8 seems to be the the extreme for both the HXD and it’s mirror ETF, the HXU, see below. Looking at the short-term chart it appears that we have had a first wave up from $8 to $12(about 50%), coinciding perfectly with the autumn drop last year of about 25%. This thing tracks reasonable well and it is less sensitive to the downside than the upside (this is a simple mathematical outcome). The next big move should be wave 3 up , as the market goes down, also in a 3d wave.
The HXU is the inverse of the HXD. It therefore gives you a good example of what happens when markets go down, by looking at what happened when they went up. Very roughly speaking the index went up 80% from the March 2009 lows to the April 2011 highs. The HXU went from $8 to $25 or 200+%. This is exactly what should happen to the HXD when this market goes down. In terms of defensive strategies this beats cash any time as it does have a return!, but obviously it is predicated on the outlook being correct, or at least not incorrect.
There are many other ETF’s that are equally effective. The HSD does the exact same thing using the S&P 500 instead of the TSX60. No foreign exchange is involved as it is priced in Can $$. There are too many to list. Below are charts for the HSD and HSU;
HXD
We were lucky having gotten the $1900+ and the $1500 levels pretty well right on. In the mean time we have bounced back up roughly $160 up from the low. This is the point where the light is neither red or green. It is amber so it is best to step aside. The bulls will be salivating from the mouth for this clean and clear a-b-c correction, expecting a new high down the road. The bears will be doing the exact same thing as they see a clean and clear 1-2, 1-2. A series of 1-2’s is the start of a very bearish downturn, typically the 1-2’s are similar in shape and retrace roughly equal amounts, in this case about 60%+ each. There are other possibilities as well. The sidelines is the place to be.
GLD
We were in and out of this stock at precisely the right time, with a 3 to 4 dollar gain. From here we have absolutely no idea what will happen next so staying out is the way to go. At $25+ it is not a buy, at $ 10 or lower it might be, time will tell.
RIM
Here are the DAX and the TSX. Germany and Canada have vastly different economies but clearly the correlation is quite high. The DAX goes from a low of 1000 to a high 0f 8000, the TSX from just under 2000 to about 15000, proportionately the exact same amount. The Euro, Germany’s currency went from the 80-ties to 130-ties over roughly the same time period. The Can. dollar from 62 cents to 1 dollar; again both by about the same amount. Both indices regained a very large proportion (near 80%) of what was lost in the great recession. Both did so in fairly clear B-waves. Both abruptly dropped sharply during last years summer, stopping at about the “pause”level of the B-wave. 4-5 months have gone by in what is clearly a wave 2 counter-trend rally. The next move is down hard in wave 3. Be prepared!
In EW terms I would assume that the tops occurred at the actual high points, in 2007/8. The action from that point on is a large “flat” A-B-C. The “normal”target for any correction is the 4th wave of previous degree. Neither the DAX of the TSX have done that yet. They should. Those levels are roughly 2500 for the DAX and 6000 for the TSX. Similar levels can be arrived at if you like the Head & Shoulder approach.
This is a huge top. It is taking so long because every time the bears get the upper hand another trillion or so in stimulus is frown at the problem, either from the US, the ECB or China. Investors are so ingrained with this Pavlov philosophy of buying the dips, that they cannot imagine such an outcome. I am a member of an investment club consisting of about 25 reasonable smart people. My views, even when expressed delicately, are considered something akin to the mutterings of the village idiot. Only one other member believes the market might go down. There are no bears and that might just be the problem.
DAX TSX
Morgan has a clear chart, furthermore Royal’s is very similar so it could be that today, maybe tomorrow, this sector peaks. The move from the December lows has been surprisingly robust but now these stocks have done what they should.
JPM
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