BP , again – where might it go?

July 16, 2010 Hamilton

Ultimately BP could go to the $60 level being the top in an A-B-C multiyear correction. We will see but if this does happen it will not be in the next few weeks or months. So what is the shorter term target? Too many things are going right at this time. Exxon takeover, Arab capital injection, blame spreading,and dozens of other considerations that mean very little. So why not depend on the chart? $47 is about 62% retracement of the C leg. It also corresponds with wave 4 of 3, a common event. An island of sorts has been left behind by the two gaps on the way down and up, I do not expect the stock to enter this area again, so a drop below $34 is now unlikely. So far the rise from the lows has occurred in a very narrow channel suggesting that it is one single wave! Corrections are invariable a-b-c structures, so if this was a correction which I very much doubt, the stock would first go down only to rise again later. If it is a new bull market, which I prefer to think it is, the first leg up should be 5 waves which probable means that we have one more to go which could easily add another $6/7 to get us to $47 in the first round. There the stock should be sold ( and perhaps bought back $10 lower).

MCD, the Golden Arches.

July 16, 2010July 16, 2010 Hamilton

Previously I thought this one would not go beyond $66, it did so I was wrong but fortunately without too much damage. Here is another try.

On the left is the long term chart and on the right the short term one. Looking at the big picture one cannot help but wonder why people try to invent dynamite or other elusive substances when pork + potato + heat = riches ; all this while fighting rampant obesity. The stock behaved very much like everything else from 2000 to 2003, losing give or take 80% of its value. From the $10 level in 2003 it quickly regains its composure and actually starts displaying some very idiosyncratic behavior, rising much further that the market in general. Perhaps this is the difference between a 5th and a B-wave. It becomes a 7 bagger in as many years! Granted one never knows for certain but this is quite a performance and suggests that sticking to the “buy low , sell high” adage points to a short SOMEWHERE around these levels.

Looking at the more detailed chart, it is pretty clear that there was a triangle or, at least, a consolidation period of slightly more than a year starting at the end of 2008. Various interpretations are possible (shown in purple and green) but the common theme is that this is a “thrust” or 5th (and last) wave up. Both the larger and smaller triangle measure about $20 ($45 to $65) and consequently could lead to a top at about $72.50 ($52.50 + $20). Judging from the two apexes, the peak should already have been reached , or , this should happen in the next few months. The (green) upper trend line suggests a top not much higher than $74 at best. I have some issues with the count, preferring the purple one, but both the RSI and MACD are NOT confirming the new highs, lending credence to the bearish outlook. Use options if a straight short is not practical.

Tim Hortens (THI) may or may not be a reasonable comparison. Note that it has not even managed to double top. See below;

SBUX, Starbucks, warmly recommended near its lows and sold much too early) is another warning sign. It has retraced 62% of the drop from $40 to $7 and that may very well be it. It makes you wonder if there was ever a recession if people continue to pay $4 for a cup of coffee. Here is that chart;

RIM/AAPL pairs trade.

July 15, 2010July 15, 2010 Hamilton

http://www.thestar.com/business/article/835823–olive-a-rim-rebirth-in-the-offing

I read the Toronto Star simple because it is the only paper delivered in the country. It can be quite good at times as in this morning’s article by David Olive in which he anticipates the rebirth of Rim and,at the same time, a backlash against Apple. The article can be found on the internet under the above address.

In a pairs trade you go long A and short B with an overall position that is “market neutral”. A typical application of this concept , that was popular a few years ago , was to buy corporate bonds and sell short government bonds as a hedge. Often you lost on both sides as spreads widened and govies gravitated to zero. Not what you want, clearly it is important that the two entities A and B have enough attributes in common to make them pairs without being identical as then it would, by definition, not work. I year or so ago I had a comparable trade long CM and short RY that worked quite well. Both are, of course banks, but CM is groping in the dark whereas RY is arrogantly focused and as a consequence CM was lagging behind.

RIM and AAPLE more or less fit the picture sufficiently well to give it a shot. RIM trades at a P/E of about 12 at a price of $56 and APPL at a P/E of 22 at a price of $253. For the sake of simplicity we will overlook the fact that one trades in C$ and the other in US$ (which could be remedied by using RIMM instead) To be market neutral you need to buy 4.5X as much RIM as you sell AAPL (253/56)- you buy 4.5 shares of RIM and sell 1 share of AAPL. Technically you have no money in the game as the sell pays for the purchase (this does not work in retail!). From this point on you do not care where the market goes but you do want the two to converge. Will they? Here are the charts once again (using RIMM).

Both charts have identical time frames and both are in US$. You can click on them to enlarge and you can move them around to get a better feel. From an EW point of view, AAPL looks like a completed 5 wave up move whereas with RIMM it is more ambiguous as the top in the chart may only be the 3d wave implying that new highs lie ahead. In any case it is clear that RIMM is at the bottom of its range and AAPL at the top (buy low , sell high ). To put it another way, AAPL has a much higher degree of freedom to move up. Also one could , of course argue that the stocks are not sufficiently comparable to be considered a pairs trade. No problem provided one agrees with both stories but just do not call it a pairs trade. See also my earlier comments on RIM and AAPL .

To Finnish this subject , one might want to look at Nokia NOK, not sufficiently comparable but possible a buy in it’s own right. The chart be low is log-scaled to emphasize the a-b-c correction that the stock has suffered over the last 10 or so years

XOM, Exxon

July 13, 2010July 13, 2010 Hamilton

It is interesting to see that Exxon is displaying some very predictive patterns. The thing between the blue lines is known as a “diagonal” in the EW parlance. In plain English it is a flag or pennant. In mathematical terms it is a nonlinear log-periodic expression of market sentiments, whatever , the point is that at the slightest perturbation this thing can turn on a dime. Perhaps the takeover of BP or simple a squirrel somewhere on this earth dropping an acorn will give the impetus . However, if not , use your stop.

Oil is from$30 to $70 and this stock is flirting with the lows in October of 09. A good stop would be at around $55 or so as one more , brief, down-leg is still possible. Do not close your eyes as serious damage is still possible but that is what it is all about. See RD, Royal Dutch below:

The first chart is from Jan this year, suggesting it was a sell, the second is todays chart which is pretty ambiguous but further upside is certainly very plausible.

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