In EW terms the B-wave is normally the mid-wave in an A-B-C, correction, (by definition 3-waves). They tend to have an inordinate amount of symmetry and seem to ignore all fundamental information being almost oblivious to the rest of the world. There are 2 basic problems with the B-wave. First of all what may be 3 waves now can always develop further into 5 –waves and thereby stops being a B-wave. Next they can, and often do, rise above the origin of the preceding A wave which, intuitively, seems to make no sense. Yet it happens like clockwork and sometimes with a margin of about 30%. Despite this , it still is a B-wave. Here are 4 examples (there are literally dozens of them right now).
and AGU.
Typically the B-wave will retrace 50% to 62% in most cases, sometimes more and , if it gets that far, it frequently double tops, as in SNC above. The symmetry is nearly always present for reasons I do not understand, markets just love symmetry. In most cases that means that waves c and a in the B wave are equal (as vectors). This is pretty much the case with all four examples. In some cases the symmetry goes further and all 3 sub-divisions in the B-wave are vector equal, as, again, is the case with SNC. Anytime you observe this symmetry it pays to be very careful as once the B wave is complete, it is right back down often to below the starting point. If by some oddity the top should occur at a rather precise Fibonacci number (61.8) as for instance with the Canadian dollar in Oct. of 2001 or 2002 and now with SNC, I would get out altogether.
AGU, CRB, RDS.A, SNC
We have not commented much on POT, other than to say that it is a rather high Beta-stock and very sensitive to China’s wellbeing. However, we did recommend selling AGU at about $72, after which it dropped to about $52. After that both stocks went off the radar screen and now that 3/4 of a year has gone by we have this bid for POT; so, if you happen to own it the question now is how high can it go? By the way AGU has not yet returned to the $72 price level! Here is the POT chart. (looks a lot like MFC !)
It is worth remembering that this stock was at $246 in 2008 and then dropped to $61, or about 74%. The subsequent rebound, after a swift move up, has been anemic for the last year and a half and it took the 40 billion offer to get prices to $152 or $22 above the bid. So,using EW what is a logical value? $154 is a 50% and $175 a 62% retracement, chances are the stock will trade within that range, probable at the lower end where C=A. A 4th and 5th wave are still needed to complete the pattern (the gap having occurred in the 3d wave of C.
Theoretically, using a discount rate of 0% and assuming that Malthus was right after all, albeit off by a mere 210 years and invoking the famous ceteris paribus by assuming the mathematical impossibility that China will continue to grow at 10% forever, the stock is worth an infinite amount, which is what the market seems to be banking on. The rumor is that another suitor is lurking in the bush even though it is not readily apparent who that might be as there are few companies that have the clout to take so much hay on their fork (China itself , maybe??). Buy on rumor and sell on fact, at $160 +
AGU, POT
Just a quick update on Agrium. The stock reported much better earnings than they “guided” a few months ago and in the euphoria of the moment the stock is up nicely. Here is the chart;
Up a few dollars so far on the day. Here is the rub; the reported earnings of 53 cents a share was down from 79 cents last year but that was an unusual year. Conveniently losses due to hedges on natural gas would have reduced the above profit by 17 cents a share. By the same logic the stock-based compensation also reduced earnings by 17 cents a share. Both of this miraculously are considered one time items – go figure are not hedges part of your operations and compensation? –this is like the consumer price index without food and energy! Anyway you treat these items as operational you have an income for the quarter of 53 – 17 – 17 = 19 cents for the quarter or 24% of last years. This time they guided more positively, maybe that accounts for the temporary rise in the stock.
AGU
AGU and also POT and MOS with it have continued to drop and at least as far as Agrium is concerned the outlook does not look good. The stock dropped below the $61 level and this is a sure fire indication that the a-b-c perfectly symmetrical correction is over. The overlap with previous high points argues that the stock will go further down, most likely to new lows. See previous comments.
Mosaic has already overlapped and was not able to retrace to the 50%+ level at all and therefore looks even more fragile. Potash (not shown) is somewhere in between but also a sell.
AGU, MOS, POT
Agrium has, like Potash and Mosaic, performed outrageously well the last 5 years or so only to go into a very steep dive last year. At this point we do not know if the $115 high 0r the $30 low represents the “true” value if there is such a thing. What we do know is that a hell of a lot of Chinese people were fed more than 5 years ago and are fed today, so I am agnostic about the China factor. Also we know that the stock has rebound to the 50% level, the lower end of the normal range of 50 to 62%. What is also fairly clear at this moment is that the rebound was a very symmetric A-B-C, which though it may yet change, is a dead give away to step aside. A trade below $61 would initially confirm this outlook but rather than using a stop=loss I would simple sell allthree.
AGU
When AGU was around $50 I suggested that it would probable trade lower even if it could still get to $55. That opinion still stands.
So far the move from the low looks very corrective. I suspect that we are in a c wave of some sort that will not exceed $55.
AGU
Fertilizer stocks have an enormous effect on the imagination of the minds of analysts. There is no limit how high they cannot go and the logic is simple; you know that China and India are working themselves up the food chain and , given the numbers, there will soon be a shortage. Malthus had figured this out about 200 years ago even though he came to a different conclusion. In the mean time we have had the bird droppings shortage on the islands off Chili to contend with and other precursors to this imminent shortage. Problem is the chart is not cooperating.
The low, at about $30 was made some time ago and since then we have seen the stock work it’s way back up to where it is now. It could easily go a little higher, like $55 before it comes to a halt, but IMO it is time soon to get out as the stock needs another leg down to complete the pattern. this is true also for POT and MOS. The risk/reward is no longer there,
AGU
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