Month: January 2011

WTIC, West Texas Crude Oil

Hamilton

Once upon a time, about one hundred years ago, the sale of oil was subsidized in the US in order to stimulate demand. They could not give the stuff away. Not that long ago  (1998), it traded at around $10 or so which might actually have been cheaper, on an inflation adjusted basis, than it was at the end of the nineteenth century. Here is a chart.

wtic 2011 1

In 1998, the same year Ford reintroduced the V8 engine that had been mothballed for many years before that, oil hits a low after going up and down for many years in what some EW gurus believe was a 4th wave triangle. If so the rise from $10 to $147 in 2008 is probable a 5th wave with the , for commodities usual,  excessive blow-off. Then it comes back down to earth at a phenomenal pace in what must be the first leg of a correction (A), then comes the B wave. Here are charts with a little more detail;

wtic 2011 2  wtic 2011 3

On the left we have a picture similar to that of the NYSE ; again we have an expanding triangle or megaphone in the mid position with an A and C leg on either side. Symmetry is not perfect but close. The retracement has reached 50% which is good enough even if a little less robust than 62%. Both RSI and the MACD have rolled over a long time ago. But the dead give away is the wedge in the C position. This structure should be a 3-3-3-3-3 leg affair, it normally has overlap between 4 and 2 and it only exists in a 5th , or C position. Similar structures occurred recently in ABX and G. These things can be a little treacherous as any two 3ies is itself a 3 so one can be mistaken in believing the structure is complete when it is not. In this case the rise is so anemic that the risk that that entails is relatively minimal. A break of the lower trend-line at $86 would confirm the end of this structure and the beginning of the next leg down to, at least, $68.

    By the way, the point here is not if I myself believe this or not. I am simple applying EW. What would cause such a drop is anyone’s guess, perhaps someone will figure out how to burn water, or some mega field is found right on our doorstep. Maybe we will start burning thorium in our nuclear reactors or the Ford Volt really catches on. Or maybe the global economy will be sufficiently sluggish ; it does not take that much because no one can afford to hold back on production and this stuff is, after all, priced at the margin. One thing is certain, should this happen, and that is that one Canadian economist will be writing another book to explain why the World is not yet getting smaller.

NYSE (NYA), New York Stock Exchange

Hamilton

The NYSE is arguable the broadest of all the benchmarks for the US equity markets and consequently offers the best “picture” of what lies ahead. Here are the charts, long-term, mid-term and short-term.

nya 2011 2 nya 2011 3

The bigchart on the left covers a generation, about 40 years and I assume the low was in or around 1974. The next 34 years are the bull market primarily driven by the baby-boomers who are now about to retire (and presumable moving from an accumulation mode to a draw-down mode). Into the peak, in 2008, a five wave sequence can be discerned that looks pretty well straight vanilla EW. The drop from that peak erases about 60% in little more than a year what had taken 34 years to make. This is done , again ,  in a fairly straight-forward and easily recognizable five wave dive.

EW gives structure to what is pragmatically observed in real life, as such it is not a “theory” and it postulates nothing, all it does is observe what is. One of these observations is that 5-waves in one direction never stands alone, that is there is either an A-B preceding it, or a B-C following it. Here the latter clearly applies, which is why one would expect another dive despite  the fact that a drop of 60+% is more than sufficient for a bear market. Also it is intuitively highly unlikely that 34+ years would be corrected in a little over a year! So, we are looking for a B and C wave.

nya 2011 1

This brings us back to the B-wave, in this particular case one that follows the A – triangle B – C structure, albeit with an expanding triangle instead of the more common contracting variety, which does not make any difference. Note that so far the NYSE has retraced about 60% of its drop to where it is today. Furthermore the time spent in wave C is equal to the time spent in A (see blue t ) and C is roughly 60% of A in terms of amplitude, i.e. vertical distance travelled (see green arrows). The MACD is already turning over but the RSI is still going up. This could mean that we have, give or take, completed the B-wave.

The one and only thing that argues against this is the markets idiosyncratic propensity to do things in perfect harmony, that is symmetrically. Even though the time spent in waves c and A is equal that is not the case for the amplitude. To become “vector” equal this can go on for perhaps another 3 months or so and the index could climb to , give or take, 8600. This is a level where the upper trend-line of the expanding triangle intersects with the blue circle and A,B and C are vector equal..

As there are only another 600 points to the upside, maybe, and at least 4000+ to the downside , the risk reward suggests that it is time to pull the plug. In Germany business confidence has reached its highest level EVER  (go figure) ,so, from a contrarian point of view, maybe this NYSE will roll-over sooner rather than later.

PAA, Pan American Silver and the B-wave.

Hamilton

paa

Due to overlap the count in green is simple impossible ( waves 4 and 2 overlap quite a bit) unless an entirely new bull market started in ‘93. So our guess is that either the purple or the blue count is correct. It does not matter one iota which one is the correct one (purple, probable) as in either case , and for that matter all three cases , it is unreasonable to expect a 20 or 30 odd year bull market to be corrected in a single year. Accordingly one would suspect that the move from the low of ‘09 is a B-wave!

paa 2

Clearly the up move has three parts to it, a pretty steep first part A, followed by a year and some rotating around $25 or so B, and then another spurt up in C. In this case the consolidation in the middle takes the form of a triangle, an extremely common occurrence! Once the triangle is complete (when you break above the upper trend-lineit is quite a simple task to pinpoint rather precisely where and when this B wave should go. Using the symmetry draw in a stylized C wave and using a circle with a radius equal to the A leg you find the point where there is vector equality. If ,furthermore , the point is at an interesting level, like 50%, 62%, or double-top then chances are you are on the right track.

By the way, had you sold at the end of the A-leg in the belief that at about 50% that was the B-wave, you would not have lost a dime as the triangle would have alerted you to the error and have given you ample opportunity to reenter.

Suppose all of the above is incorrect and we are in a 5th wave ( the green count), again not much would be lost as the trend-line for that runs only $3 higher, after which you would still make the same dive down!

POT, and the B-wave.

Hamilton

Potash, and for that matter all the other fertilizer companies like MOS and AGU, all have B-waves, and in the case of Potash, an exceptionally clear one. Here is the chart once again.

POT b-wave

That this should be sold, at $160, was fairly clear some half year ago. The green “trapeze” ,if I remember my trigonometry, tells you precisely where the C wave travels the same (vertical) distance as the A wave. However C waves ALWAYS have to be 5-waves themselves which was not yet the case then. Furthermore a 50% or 61.8% had not been reached yet. So the better symmetry point was the next one (the stock was late but only a single dollar off the 61.8% target of $174 (the high was $173). Notice that the RSI and MACD turned a long time ago and the last few weeks the stock was propelled by upgrades, recommendations, Mosaids spin-off from Cargill and a whole slew of other noise.

By the way, if this is a B-wave, the stock will trade below $90 soon. Time will tell. A mistake that can easily be made, and I did on AGU, is that because the A wave within the B wave does not need to have 5 subdivisions as does the C wave, it is possible to be too early. The correction in Potash has already lasted 2 years so I do not think that applies now.