Hamilton’s E-Wave Analysis

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

Two weeks or so ago we did this for the DAX, and came up with the number 5100. It went through there once or twice by a hundred points or so and went above it by 500 points but as we speak that was a pretty accurate call. Doing the same for the TSE we would suggest 10700 as the number. We have no idea what the count is but there are 9 legs down from the second top. It looks a lot like the DOW or S&P during the tech crash, a cascading waterfall. See chart below;

10700 is pretty well the base of the B-wave on the way up (stylized). It is also the point where the 61.85 Fibonacci retracement of the rally from the lows occurs. The RSI is already non-conforming by moving up.  Add to this that the HXD just hit an upper trend-line;

As you know, this has been my “top pick” for some time now and certainly from the $8 level where it was the exact inverse of the HXU. You may want to step aside for a moment, then again maybe not, depends on how nimble you are. This one is up 56% from the lows and has proven to be a good trading instrument or hedge.

We are nowhere near the ultimate lows but we may just get a little pause for a month or two and this might be tradeable even if you run the risk of missing the boat.

HXD, TSX

Our favorite, first love if you wish, is of course the HXD. It is the inverse as well but leveraged two to one. We were pretty adamant that this was a screaming buy at around $8. (See previous blogs for the reasons). It is now up 42%. The count could be similar to the HIF but more importantly this thing has barely budged. There is no reason why this one could not go to $20 or higher in good time.

HXD

We have urged people to but this ETF as a hedge if they hold stock. But after the lows in early April (where the HXD was the precise inverse of the HXU) we were a little but more excited about this ETF, even calling it top-pick. From an EW point of view these wiggles are very difficult to discern and count. A wild guess would be a series of 1-2,1-2s . This one could go a long way considering that it was as high as $40+.

HXD

Everyone that owns stock should own some of this stuff. Since hitting lows of around $7.80 in March and April the HXD has gradually worked its way up, a break-out if you wish, to the present level of $9.36, up about 20% against a market that is down about 10% so it tracks as advertised by 2 to 1. This is a great hedge!

Why hedge? Why not just sell the existing position? The answer is that your broker truly knows what he is doing and therefore his picks will outperform the market, so you want to keep them while you want to reduce your exposure to the market overall. Tax and commission considerations may play a role as well.

HXD

This is our favorite instrument. $8 was always an interesting  point as that is where the inverse HXU traded at the lows in March of 2009, see below;

A difference of only $0.08, and it has now held for the better part of two  months. And the HXU did a fairly straightforward A-B-C, which, by definition , is a corrective move. I think the time has come (or passed already) to buy the HXD. even at today’s price of about $8.65 or so. The Fed etc.etc. can not continue this shell game. The simple reality is that the world has mis-allocated roughly 3 trillion dollars or more, perhaps a lot more. By kicking the can down the road time is won but the question remains – as always – who is going to pay, bondholders, equity holders or taxpayers. Inevitable there will be a very serious headwind when we find out.

HXD, HXU

Here is the TSX again, just as a reminder where we are in the big picture.

According to Bloomberg/Businessweek the S&P, based on one measure of volatility, hasn’t risen this much amid price swings this narrow since 1971. We had ourselves observed earlier that the TSX had never in it’s entire history, had an absolute move this size, and that was a hundred points ago.

This alone should be a warning that things may just be a little ahead of themselves. The Fed. has been behind much of this by way of QE2 and more importantly coercing the market .Their word has been gobbled up like gospel, but in the end they are powerless to change market forces. So, where are we now on the TSX? Here is the same chart of a few weeks ago updated to today. I am , of course, surprised that we got above the 12000 level, but now that we are here it is good to see where this might go. The purple circle in the above chart represents a “cluster” of different measurements that could ultimately determine where this is going, that is if the whole thing is not already turning today. The cluster consists of:

       1.The parallel trend-line through the top of wave 3, where we are now at about 14200.   

       2.The double-top on a monthly basis, about 14500.

       3. The all time high at around 15150.

       4. The point where c equals a in an a-b-c B-wave, about 15100.

       5. The point where S = R= Q (light blue) at around 15200

       6. The parallel trend-line through the top of wave 5, also at 15200

       7. The next higher point would be where waves 5 and B are vector equal at 16500 if straight up. More logical would be to have some time go by which would lower that point (move along the red circle). This is highly unlikely as the intersection of the red circle with either parallel trend-line is at least 2 years away! To make a long story short, this market realistically has 7% max. to the upside. Time to buy HXD.

Without all the clutter, here is the DOW as well.

Notice that of the , give or take, 70 years that is covered by this chart all of 1 1/2 were spent at levels higher than we are today.

HXD, TSX

You could do all your trading with just these two ETFs. The Horizons X(TSX) D for down or U for up. They are leveraged so one should not go overboard but otherwise they do most of what is needed. Here are the charts;

The HXU, the bull one on the left could have been bought for $8 at the lows in March, today it is at $24 and appears to have completed an A-B-C of sorts. The HXD, the bear version is on the left and seems to have completed an A-B-C as well, ending with a pretty nice wedge that seems to go on forever. Today it hit a low of $8.03 and even though one cannot be absolutely certain, it is clearly a buy at these levels and should trade towards the $20 level and perhaps a lot higher!

The wedge , in detail , is below. It is the 5th of the 5th which is the wedge so do not confuse the two charts.

HXD, HXU