Last year the target for CM was slightly above where we are now, say around $78 or so. This is where a 5th wave diagonal started its trip down and that is a normal retracement level . Also it is in the 50 to 60% normal rebound level. We have done this so I would be a seller, especially since the much better run Royal has already almost retraced its entire drop.
The successful long CM short RY trades simple may not work anymore.
The Commerce Bank CIBC has a nice chart that provides a good insight into what may happen in the Canadian market. The drop from 105 to 35 would certainly qualify as a “bear market†by anyone’s standards, moreover it is pretty well what one would have initially expected given that the “box†of 50 to 62 % down has a lower boundary of about $40 (which under one count might actually be the “orthodox†low , as opposed to the actual low at about $35). It has a nice 5-wave down structure, no overlap and perhaps a 5th wave that is a wedge or diagonal clearly defining the imminent end to the move. Waves 5 and 3 are about the same size but 3 is definitely not the shortest!
There is one little problem, 5-waves never stand alone, meaning they either attach to an A-B- preceding it (not the case here , presumable , given the 40 or so dollar difference in the value of the preceding tops), or there is at least ANOTHER 5-wave move following, albeit after a reasonable intermission. The down-trend prevailed for about 17 months, very roughly, so a reasonable intermission could consume the better part of 6 to 10 months. Under one count 6 months have already gone by, under another only 2; either way another 3/6 months of corrective action is not an unreasonable expectation. All this suggests that we may be in a B wave of a larger corrective structure, the point to buy again is at about a 50% retracement or roughly $50 (even a new low at , or marginally beyond the old one is possible but in our present bullish environment not all that likely!The B-wave can develop as a triangle, usually for the simple purpose of consuming more time
As to how high the correction could ultimately go?; if the wedge is indeed a wedge $78 ( alternatively, if the wedge is smaller, $67) is your target; if the $40 is the orthodox low $40 + 61.8x (105-40)= $80 would be the upper boundary of the new “boxâ€. Wave 4 of previous degree, a common retracement level is also at $78. Time wise it could be done by Sept. give or take a month. Interestingly the Royal does NOT have this potential, its best level would be around $51/52 so this opens the opportunity to put on the long CM/short RY trade again, for a potential gain of about $15 or so, nothing to sneeze at.
Once all is said and done the end of the bear market would be when this B wave is complete and followed by a C to make the whole experience an A-B-C. Suppose, for the sake of argument, that wave C has the same percentage drop as wave A, that is about 62%, and also suppose we do go to the cluster at about $78 in B, than ultimately we would end at about $29. This compares to the low in ‘98 of $24 which low might be considered a 4th wave of previous degree in this larger context and a common retracement target. Notice that this outlook does not rhyme with the TSE overall, but the the banks as a group never did.
First recommended on April 14, sell 1.2 shares of RY @ $41 for a credit of $49.2 and buy CM at $51 for a debit of $51, all per share of course. Total outlay required $51000 for a 1000 share position. The short finances the long but margin is nevertheless required on both. Earlier I suggested that if this makes you nervous, to sell out the position at an about 2% gain. Today I would strongly recommend exiting the position as the CM is reaching its FIBO limit in the next few days. Right now you would lose 1200 x (44.60-41) or $4320 by buying back the RY short and gaining 1000x (61.20-51) or $10.200, for a net gain of $5880 from the sale of CM, equal to an absolute gain of 11.53% in less than a month,all this without exposure to the banks.
Just a few days ago a spread trade was recommended selling 1.2 x RY at about $41 and buying CM at $51. The trade is essentially self financing so it can be done in a margin account, one side offsetting the other. Today RY is a little above $41 and CM at $53 plus for a net gain of, again roughly $2 which equates to about 4%. It may get much better than this but for anyone a little nervous on a directionally neutral position take your profit tomorrow and run.
Here is March 12.
As stated then we did not know if we would get 5 or 3 waves up, therefore at $35-$36 it was time to get out (rather many sure deals than a few bad ones). Now we know, it is 5-waves up which means that after an intermission ( b or 2) we should get another 5-waves to complete the move. This is what it might look like.
As it did follow the 5-wave track rather precisely I would now expect a pull back of about 61% to about $33 once it has reached about $42 /$44 or so. This is micro-managing the stocks future and should be taken with a good doses of caution and lots of salt. Ultimately the stock could trade back up to $44/$48 which at the moment seems crazy but we should remember that most of the negative stuff applicable to the US does not apply here. This is an oligopolistic backwater where banks are far less entrepreneurial,we do not have liar loans, mortgages without recourse and or the same degree of securitization. What we do have is the license to gouge provided by our central bank’s interest rate policy. Most other banks do not look as positive, in fact NA looks more like a 3-wave correction. It might also be a good trade to buy, say the Bank of Commerce and sell the Royal. Below is 2 –year chart.
Sell 1.2 shares of RY @ $41 for each share of CM bought @ $51 and then wait.
Speaking of banks, BMO has about the best ratio between high and present price, Commerce is not far behind both at about 33/34% . RY is at 50% so on that metric less attractive if you assume all will some day again trade at the same price, which is true today with 3 of them at about $26. I think we are at a point where missing the boat is a greater risk than not getting on board. All of these have the potential to rise $20 or so in the next few months so a little nibling is probably a good idea. GE is also a bank!
This is an art not a science so there is an element of judgement which can only be partially eliminated by doing it often. As far as the TSE is concerned I will go with the triangle, typically you then hit a bottom right under he apex and 5 tends to equal 1 so roughly around 7000. The S&P works better without the triangle, just an a-b-c 4th wave, otherwise the conclusions stay about the same.
Looking again at the Canadian banks I have added Commerce to see how it compares to the Royal. The chart is , as usual, open to different interpretations but given a very clear triangle and a fairly clear 3d wave I assume that ether the bottom has been hit already (and we are in a b-wave) or we are one leg short and could still drop to say $38 (this can happen in either scenario). In any case we have done slightly more than 61.8% from the $105 high and given that the next major move is probable a (counter-trend???) rally of perhaps $15 plus the risk/reward equation supports the idea that around here to a few dollars lower might well be a good buy. Here are the charts.
Click to Enlarge
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