July 12 I commented that this stock should not trade above $75, here is the chart (and the entire blog is available);
The $75 was where the upper trend line resided for the 5th wave up. It is also close for the trend-line of the whole thing. This is what happens when you get there;
In just a matter of days it loses $9. First stop is at $60.
On July the 16th it was our opinion that this stock would not exceed $55, it was only a few dollars away from that. So far it is down $14 from the high of $54+, or about 26%.
To some this might come as a surprise, it shouldn’t. This invariable happens when stocks that were previously shunned and then become darlings go meteoric. Even more so when the largest house in Canada puts it in the top-pick / focus-list category. This ensures that 1400 brokers and quite a number of funds and the even larger number of copy-cat funds are loaded up on the stuff. Nothing needs to go wrong with the stock but at some point the air-pocket will be hit. This one is going lower.
A few years ago Zimbabwe’s (Rhodesia) stock market was the best performer. Nothing else in that country was except perhaps inflation that had gone through the roof. This is almost counter-intuitive as one would think that allowing the currency to degrade (a by product of inflation), would lead to a bad stock market. Clearly this is not true and the simple reason is that stocks represent, in the main, real assets and these should appreciate relative to the currency .
If that is true for Zimbabwe, the reverse should apply to that bastion of financial probity, Switzerland. The above chart is that of the Zurich index, the SMI. That is the big picture. In more detail below with the currency;
Note that the SMI is now trading at roughly the same level that it was at, 3 months after hitting the lows in march (The AEX , MIB, and CAC40 are doing similar things but a little less pronounced). The correlation with the Swiss Franc is spotty at best. It would seem that within normal ranges, whatever that is, the correlation is positive but once things start to hit the shoulder of the road, that changes rapidly and it becomes negative. The Central bank today lowered its interest rates in a surprise move, citing the “massive” over valuation of the currency. The timing is actually not that surprising if you look at the top chart (see also an earlier blog). The channel that has held for the past 30+ years , except in 2009, was once again threatened. It may well bounce here but ultimately we should reach 3500 at the very least. America is exporting deflation, and the Swiss do not like it.
Once oil (West Texas) had peaked around $115 a barrel, the wedge shaped structure that had propelled it there almost promised that it would come back to, at least, $84. Moreover it should do it quite rapidly. It did to about $95 and then it started oscillating for more than a month roughly around the $100 level, a nice triangle for sure. What was not clear is whether it was a B or a 4th wave triangle. It’s size, relative to the preceding drop suggested a B-wave. As in an A-B-C drop the C is often equal to the A, that gave a target of $82 or so (see black annotations). Problem is, it never got there and instead only barely flirted with the $90 level. This fit a 5-wave count much better (light blue). It also called for a return to about the level of the apex. This invariable happens with 4th wave triangles but not necessarily with B-wave triangles. The formation once again of another, much smaller, triangle more or less confirmed what was going on. The end result is that the outlook for oil is now far more bearish than it was originally. 5-waves in any direction never stand alone. We should now get at least one more set down to about $78, more likely a more prolonged move with more than just one more leg. Time will tell.