Hamilton's E-Wave Analysis

CM Feb 2010

We have had our eye on Commerce bank before, usually in the context of a spread trade where you actually by the the one that breaths incompetence and sell short the star performer. The trade worked fabulously but required a certain degree of sophistication. Today the Commerce reported earnings and , of course they outperformed. What many analysts do not seem to know is that banks are not obliged to report like others under GAAP. They have their own rules under the Bank Act which, among other things, allows them , rather arbitrarily, to allocate loan losses over a 5 year period. That is known loan losses, not anticipated ones, which is why most of the loan loss allocation is little more than working the old fashioned cookie-jar. Well today’s euphoria was very much based on that , or perhaps people were simply happy that management did not again give away a few billion unnecessarily as in the case of Enron. Anyway here is the chart;

I am not sure how to count the retracement, probable an a-b- a-b-c, but that does not matter given the weight of the other evidence. As pointed out a long time ago, you do not want to own this if and when it gets closer to $78, which is roughly the standard  62% retracement. Already momentum as measured by RSI is failing. Same for MACD, not shown.  Remember also that 5-waves, which this one clearly has from the high of $105, NEVER stand alone. The potential for a severe down turn soon is therefore very real and should not be ignored.