Year: 2009

CBS May 10, exit option!

Hamilton

CBS May 10 2

Here is CBS, first discussed on Feb. 22 for the purchase of a call option. Here is the text then. It was written  where the two red arrows are in the chart.

Cbs May 10

If you had bought the June $5 option and held it to this point, it is now time to sell. RSI, MACD, 200-day MA, and the wave count all suggest that this is it for the time being. With less than a month to go to expiry the option should be worth about $3 .40 bid, $3.70 ask, for a gain of more than 8X.  The $7.50 strike , June is $1.05 / $1.15. If an earlier expiration date was chosen, with a $5 strike  there would have been a smaller gain. Lets just call it 30%.

MGM May 10 , hope springs eternal, forget the fundamentals!

Hamilton

MGM is a very good example of why you should ignore fundamentals most of the time (by the way EW does that , all the time). We looked at the stock on Feb.6, when it was about $5, wondering where it might go and never looked at it again. This is gambling after all. Well from a high of about $103 it hit a low of $1.81 in March (like everything else), clearly a real bear market. In the meantime capacity in Las Vegas is going to increase by 16.000 rooms or about 12% (mostly Citi Centre, a joint venture between MGM and Dubai World – wondering how your petro-dollars are recycled?). The house take is down by 17%, the number of visitors has fallen about 9% and the average room rate fell by 32% The only shining light here is that gambling is not entirely discretionary, for a good number of participants it is an obsession if not an outright addiction and consequently demand is inelastic relative to income. If you have doubts about this go visit Casino Rama and observe for your self the sad circumstances of the clientele. Sodom and Gomorrah certainly come to mind.  Here is the big picture.

MGM May 10

This could be a full cycle (5-waves from the lows) so it is conceivable that it would go bankrupt some day (there are 31mln shares sold short) but that is still a little down the road , if it happens. The lesson here is that you should completely ignore all fundamental evidence and almost as a matter of principal , like a Pavlov dog if you wish, always buy a stock below , say $3. Here is the detail.

MGM May 10 2

Not quite as good as C , F , CBS, MAL and no doubt many others but there is strong support for this “hold your nose and buy” approach. It worked for Bre-X , NT, Asea Brown Boveri, Ahold. This is the hope factor at work, just do not stick around too long. GM is a definite maybe, maybe not!

Ford, May 9 and pattern recognition.

Hamilton

Lets have another look at Ford, just to make sure we got it right. Here is BigChart for the last few years.

Ford May 9

This particular pattern is a “diagonal”in EW terminology; in plain English it is an expanding wedge. It occurs always in a 5th wave position (or C in a correction). What it tells you is that things have gone too far and too fast and hence one should expect a violent (relatively speaking) reversal, invariable back to where the pattern started or further. All legs within the pattern must be 3’s (sometimes hard to tell as there are irregular corrections which make things look as if they are 5’s) Below is the “model”once again.

diagonal015

Notice that all the waves are pretty well identical except for wave 4 which is irregular in Ford’s case and not in the model. Otherwise everything is as it should be. This would allow a rise to about $7 before a serious pull-back should occur, but that is fiddling in the margin. Keep your eye firmly on $9.60+ as a minimum.

One other thing that supports Ford this time is the “guideline of alternation”, it is not a must but more often than not things reverse themselves the second time around. During the 1930 Ford lost money and GM and Chrysler did not. Ford dropped from #1 to #3 , GM and Chrysler went to #1 and #2 positions respectively. Ford was pedantic and clung to outdated ways of doing business, a description that now better fits GM. By the way, from 1929 to 1932 vehicle production in North America dropped from 5.4 mln. to 1.4 mln., down by about 75% This time around the numbers are 16 mln. to 10 mln. give or take, which is slightly more than 30%. So Ford may not be a hold forever, on the other hand, it could go to about $15 just to retrace the entire 5th wave down, also very common.

RIM May 8

Hamilton

We had a good run with RIM and then decided to leave it alone, something I warmly recommend, from time to time, particularly with high beta stocks like RIM. You do not have to play, or play all the time.                                                                                                             Long term RIM has potential since , under one count, it still needs a fifth wave to complete a multi-year ascend. Here is the picture.

RIM May 8

Under this count all of the action from’03 to ‘08 was wave 3 (notice that it stayed above wave 1). Ergo it is possible that we still need a fifth to say $160 to finish the whole cycle. This is at least plausible as RIM was a late comer to the tech party anyway. Now in more detail;

RIM May 8 2

The red depicts the BAD scenario, the green the GOOD scenario. When will we know? One thing would be if we closed the second gap and reattached the island to the mainland, BAD. Alternatively we could close the first gap , GOOD. Keeping an eye on it, but must confess this is a stock I do not understand all too well. The problem in a nutshell is that we have 2 lows, making it unclear if the move down was an a-b-c or a 5-wave structure, time will tell. Fundamentally I can easily envisage either outcome, particularly once you start throwing money at sport clubs.