RBA , Ritchie Brothers and Elliott Wave and the TSX

August 8, 2011 Hamilton

Ritchie Brothers, they trade on Toronto and are in the business of auctioneering earth-moving and farm equipment. They have a near perfect EW chart. At this point it is not relevant whether or not the “top” is the top, suffice it that it is a top of some degree. After the lows – almost down by 50% – the stock rebounds in 3 waves (which could still develop into a 5-wave wedge) making a slightly higher high. All of this is classic “expanded flat” behavior, a model of which is shown beside the chart. The entire structure is a 3-3-5 and (apart from the wedge possibility) we are now in the initial stages of wave c which should drop below the earlier low of $15. C waves, the one we are in now, are always 5-wave affaires.

Now that Larry Berman is spending time in giving EW 101 lessons on BNN, complete with statutes of Mr. Fibonacci from Pisa, I thought I would add a little bit as well . This does not apply so much to RBA (but it might) as it does to the markets in general. As stated C waves are always 5-waves but there is a little complication one should be aware of. Everyone can count to 5, most of us have 5 fingers on each hand which makes that task a little easier, but often waves extend. An example is shown where wave 3 of C extends. The midpoint of the wave is called the point of recognition, for the obvious reason that this is about where hope fades and fear starts seriously. So you count to 5 and you think you are done. (the S&P now at 1150 is down 61.8% and this could be a turning point, in Larry’s example). But guess what, you are not, you are only halfway; it quickly gets to be a little like the kids in the back of the car – are we there yet ? – 5 minutes after leaving home. Ten hours later you arrive at your destination, frustrated, demoralized and fatigued.

I use the TSX rather than the S&P simple because it expresses the situation a little better. In this case it is assumed that wave 3 of C extends , the most often occurring situation. For each 1-2 that you have at the top you should have a 4-5 at the bottom. Things can get worse if wave 3 of c extends AND wave 5 of 3 also extends, but I will skip that one. There are a lot of variations. We could, any moment now complete a wave 1 and get a 1000 or more rebound and only then continue the drop. It is impossible to know these things in advance, but even if the “how” part is not predictable, the “where” part is a little easier, and that is a lot lower.

EMA , Emera Inc (aerodynamics of investing)

August 8, 2011 Hamilton

Emera probable stands for something like Eastern Maritime Electric etc. , it owns Nova Scotia Power and has generating stations in St. Lucia and the Bahamas, among a lot of other things. As such it is an energy company but probable more weighted to the sales and distribution side than the extraction. It has also promoted green energy alternative. In short it occupies that sweet spot that, deservedly, attracts a lot of investors, especially momentum players. Here is the chart;

You can see that the stock deviates from its normal course around the time of the lows, late ‘08 and early ‘09, (a 4th wave!). It continues the flight at a much steeper attitude and doubles in a year and one half., and then it loses momentum and slows down to a stall speed. This is pretty clear from a one year chart;

The one on the left is EMA, for a year it does nothing ( actually a 4 of 5 and a, failed?,5 ). For comparison purposes there is a chart of Citigroup on the right ( 2002 through 2007); it was able to levitate for about 3 years going through similar motions. In the end it dives to $25 or 1/22th of its value (these prices are adjusted for subsequent splits!). I have no idea if EMA will follow that example, however it is fairly common for stocks to fall back into preceding triangles , in this case about $18/$19. For anyone who has flown an airplane, it is a simple fact of life that once the speed is reduced to below the stall speed the plane loses its lift and literally drops out of the sky suddenly and unexpectedly. In the process the plain starts to spiral. The ONLY antidote to recovery, rather counter-intuitively, is to steer into the spiral nose down. In other words you have to grab the bull by the horn, which is why the present problems in the US have little to do with S&P’s downgrade and a lot with the fact that there is no one in the cockpit, and no one can find the bull. Worse even, the co-pilot treasurer has the gall to muse out loud about leaving his job.

ASX S&P200, Australia

August 7, 2011 Hamilton

From Bloomberg, this is the ASX200, the main index down under. Notice that after the initial high (A) around October of 2009, it took another year and 3/4 to just marginally eek out a higher high, not even managing to take out the high in the intervening correction (b). This index went from loosing about 1/2, to regaining 1/2 and most recently again losing about 1/2 so far.

As Canadians we should be concerned with what happens down under. Even though we do not share the distinction of once having been a continental sized prison camp, we do share all the blessings that came from being members of the British Empire Club, English being ,perhaps the most important. Lately we are both “commodity” countries which has come in good stead when feeding the insatiable hunger of China. Geographically, Australia is closer the the earth’s booming center so one would expect their market to do better. It has not. The TSX, in relative terms, was a bit over 6000 at the peak! The Aussie $$ ,on the other hand , did;

Roughly the Aussie $ follows the same pattern as the stock market, except it does it with much more gusto, an excellent reason to get out of Aussie $$. And, for that matter, the C$;

The C$ fell in a clear 5-waves from the peak in Nov. of 2008 at about 0.91 0r, if you prefer 1.10 Clearly good times are good for the C4 and bad times are bad. The next move appears to be down, perhaps al the way to 1.30 or 0.77.

PS. Also from Bloomberg, Alan Greenspan said that Monday will probable be a down day as a result of the downgrade and all the turmoil. The Maestro is back in form.

MG, Magna International.

August 7, 2011 Hamilton

The chart at the top was from Jan 24, this year. The larger chart below that is the updated one as of last Friday’s close.

Magna’s probability of getting hammered were just excellent. Apart from the completion of a nice 5 wave up sequence over 30 or so years, the stock had shown near perfect EW patterns. Other “hints” were that the stock might double top, almost always a good time to stand aside, particularly if that is at a level that coincides with a Fibonacci value (61.65 compared to Fibo. 61.8). At the time the expectation was that F (Ford) would get creamed, from $19 to perhaps $7); when your clients have a tough time, you have a tough time. In the mean time the founder and major shareholder F.Stronach, who had lost a bundle horsing around with race-tracks, tries his hand at joining forces with a Russian oligarch, in a deal that seemed to , disproportionally , favor the oligarchs . Fortunately, that fell through after the differences became overwhelming. Then, as if to put the icing on the cake, with a little help of M. Harris , a former Ontario premier on the board , he decides to change the dual share structure and with it reduce his ownership (otherwise known as insider selling). The resulting payout totaling nearly a billion was the most egregious “bonus” ever received by management in Canadian corporate history. The premier , who had a reputation as a penny pincher was not pinched either, receiving director fees worth multiples of what he had earned in his entire political career. This will always be seen as some sort of high point in Canadian capitalism, fittingly coming from a company who’s main claim to fame was labor-arbitrage, that is fighting unions , a business model that has lost much of its edge in recent years!

Getting back to the chart, Friday’s low ($32.98) took the stock down roughly 50%(46.5% to be precise) from the highs. The optimists might be seduced by the fact that c=a at that point so there is a perfect a-b-c correction that may now stop at the 50% level, which also happens to be the level of 4 of previous degree (not shown). I very much doubt it. The proper EW target is below $15. If 50% is not convincing, another 50% may be.

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