Month: June 2011

WTIC, West Texas and HOD

Hamilton

wtic may31 2011

3 months ago (and before that) we warned that oil was going to take a beating. The chart above was unequivocal in its meaning – a very nice a-triangle b –c  in progress. Here are today’s charts.

wtic june 25 2011 HOD

On the left is WTIC (continues futures contract for West Texas) and on the right I have added HOD (Horizons Betapro Oil Down 2x, the U is for Up). Being a bear ETF it should essentially resemble the other chart except that it should show twice the magnitude and be inverted.

WTIC targets, give or take, $85 which is where C=A, a normal and frequent occurrence. From about $115 to $85, if and when it gets there would be just shy of 30%. HOD, coming from $5 should therefore increase to about 1.6X 5=$8, where C is also equal to A. Paradoxically, should oil NOT drop that far, the situation could actually be much more bearish longer term. Also if these targets are met, it does not necessarily mean the end of the decline. A much more complex correction may be in the making.

Today’s drop is, prima facie, the result of the IEA (International Energy Agency ? )announcing a 60 mln. barrel injection into the system. Why now remains a little bit of a mystery considering the relative glut of the stuff. The US will contribute 40%, or so, to this endeavor by pumping the stuff out of it’s Strategic Reserves , another blatant example of a, probable illegal , use of assets in an attempt to distort market forces. Apparently this has been arranged for some time, no doubt with a little prodding from the Fed, always a champion of free markets unless inconvenient. Convoluted theories are already being presented to put a bullish spin on the situation.

MCD, McDonald

Hamilton

MCD june 2011

Back in February it looked like this one had peaked. It simple continued its rise and added , perhaps , another 2 to 3 dollars. The problem may come from viewing wave 4 as a triangle (there is a flash-crash entry on the chart that may not be real). If you shift wave 4 to the left, you need one more leg to complete wave 5 and that may well be what we have been getting. A drop to at least $50 is in the cards.

I listened to an analyst today who strongly believes this is the stock of the future. It derives only a small portion of its income from the US, most from Europe, and barely anything from China, but that is coming. As a very good reason to buy ,he mentioned that the company had measured a reduction in the time it takes to serve a hamburger from one year to the next. 6 seconds and that this represented 6x 1million on the bottom line. Being able to measure is not the same as being in control. Time will tell.

IFF, International Flavors and Fragrances.

Hamilton

This is a 5bln cap. company that is, as the name suggests, involved in specialty chemicals. It earns a dividend income of about 1.8% and presently trades at a p/e of 18. Here is the chart;

IFF

Everything about this chart points to a large “flat”, that is an A-B-C where the legs are about the same, here successively bigger, without the stock making any headway.  The typical subdivisions are a-b-c,a-b-c,1-2-3-4-5. We just started 1 of the C wave. This scenario would ultimately result in a loss of about 60%.

There is an outside, very improbable, bullish alternative (in red) that views the recently completed up-leg as wave 5. Even in that bullish interpretation a loss of 40% is still a logical outcome. Both can be avoided by selling now.

ELD, Eldorado, Gold etc.etc.

Hamilton

ELD june 2011

This stock has risen from a few cents to $21, precisely over the same time as gold had (or is having) its renaissance. In and of itself , this qualifies as a “bubble” of sorts. If so it is good to remember that all bubbles , without exception , were eventually reduced to their origins or below that!. This stock has already lost about 1/2 of its last leg up. Any time now it could have a very nice bounce but that would probable only be part of a much more complex correction.

  I have an open mind, I think , with respect to the count, and realize that there are other possible counts. But the one thing that stands out in this chart is the very, very clear expanding triangle. These occur only in 4th (and B- ) wave positions, the question is 4 of 3 or 4 of the entire move up. As there is another , smaller contracting triangle right above it, I assume that the bigger of the two is of a higher degree and therefore is wave 4 of the entire move. This does make wave 5 much larger than normal, but where it comes to commodities it is quite normal for the 5th and not the 3d wave to be the extended one. All of this ultimately points to a stock that should trade down to $3 at least.

Further supporting  at least the direction, is that this is a low cost producer. Paradoxically, and this is counter-intuitive, the lower the cost the closer the correlation to the “stuff” itself. This makes sense if you consider that marginal miners benefit disproportionately from a rise in the price of gold. For some reason this did not apply to ELD, see next;

eld gld

Until just recently, ELD outperformed gold (using GLD as a proxy) rising more than 400% against gold at 240%, a very large outperformance that has all but been erased over the past few months. But even now it is over-valued compared to the big boys;

GLD ABX

I have used ABX , which so far has underperformed by about 200%. I could have used Goldcorp or Kinross and the result would have been a little better and a lot worse respectively. Most of these too are low cost producers. Should Eldorado one day join this group its stock price would drop to $3 (where it would also underperform GLD by 200%). A bubble is invariable caused by a concentration of investment capital and this stock is aided in that sense by it’s very popularity with at least 20 analysts (????) following the stock.

Why gold stocks underperform the stuff by so much remains a bit of a mystery. Perhaps it is that you can now take “pure” positions in ETFs that were, until recently, not possible. This is cheaper and does away with the idiosyncratic attributes of individual stocks (think BRX).