Month: September 2011

RY, DB and GS

Hamilton

These three financial institutions do not have that much in common but they tend to go in the same direction much of the time;

RY sept 2011

The Royal is down roughly 25% and,if the count is correct, not yet at an initial low. As indicated in a previous blog $43 is about the mean level over the past ten or so years (see previous blog), and it seems to want to go there. The DB and GS are following similar counts;

DB sept 2011 gs sept 2011

There are a number of variations and with the RY and DB it is not entirely clear when the down-trend actually started but what they do have in common is that none of them are complete!

MIB Milan, DAX and EWG

Hamilton

mib sept 15 2011

History has a tendency to repeat itself. Years ago Mr. Leeson managed to single-handedly (not quite), bankrupt his employer Barrons, perhaps the most venerable institution in the UK. Then we had a 7 bln. loss at a French bank and now 2 bln. at UBS. Having myself been in charge of  dealing operations at two separate US banks in Canada, I cannot for the life of me understand how these guys can get away with it except is there is gross neglect on the part of these guys’ employer.

When treasury secretary Rubin decided to use the treasury’s funds to bail out Mexico, it was properly viewed as an unlawful use of his powers. Recently the constitutional court in Karlsruhe deemed the actions of  the German government to shore up the ECB’s bail-out fund as  perfectly legal despite the fact that one does not need to be a legal scholar to know that without any doubt at all it is presently unconstitutional.

So things do repeat or at least rhyme and looking at the exchange in Milan, Italy we are now back at the lows of March 2009. The preferred count would be the standard A-B-C rally that failed to make a new high (an alternative would be a triangle). Here the drop from the Feb. highs seems to be incomplete, needing at least one (if not more) 4 and 5 legs to make it the 5 wave sequence that it should become. This may well become an example for others to follow.

Mr. Geithner who three years ago impressed nobody by his boyish display of inexperience is know back on his white horse galloping to the rescue of Europe’s economy. Just to prove that history does repeat they are again looking primarily at the liquidity problem, not the solvability. All this heart-warming stuff may give that pause that we need. Below is the EWG, another proxy for the DAX. I bring this up constantly and repeatedly as I do not think anyone is actually paying attention.

ewg sept 15 2011 ewg sept 15 2011 l

The EWG is sitting right at the level of the B-leg of the rally (the DAX was a little lower). There is no way that the 5 wave large C down is complete. I would not suggest that the German index needs to follow Milan down the 71% it already has lost (it comes from 45000), but I would nevertheless expect the direction to be the same. As can be seen on the larger scale chart the EWG comes from about 37 and should it get to 8 (where wave 4 of previous degree resides, a very normal event ), the EWG could conceivable go down 78%. That, by the way, would erase all gains over the previous ten years, which , relatively speaking, is not all that dramatic. Athens is, of course ahead of everyone and may actually soon become a buy, if for no other reason than that there is so little room to the downside.

athens sept 2011

BP, British Petroleum update.

Hamilton

The verdict is now out, they were mostly to blame but the other parties were not completely innocent either. Despite all the ups and down this stock has adhered remarkably to EW principals and Fibo ratio’s. Back in Jan 6 it was recommended to sell the stock at $47.50 (see the old blog) The stock did go higher as on Jan 18th it almost reached $49 (a $1.50 difference) and then it starts to implode. Here are the two charts, then and now;

BP jan 2011 bp sept 15 2011

Again it reaches 61.8%, this time to the downside and stops dead at that point. A $7 (to $42) rebound is quite likely here but the pattern does not appear to be complete so one needs to take care when playing this!

SI, Siemens (as proxy for DAX).

Hamilton

Si2011

This was our prognosis back in March of this year. Siemens then traded at around $120 fractionally below the high. Then it was suggested that this stock would probable be an excellent proxy for what the DAX might do, after all it is a very prominent company within the German economy. So far this is what has happened;

si sept 13 2011

$81/$82 was suggested as a first stopping level, for the simple reason the that equates with the level of the B-wave, or pause in the rally from the lows of 2008. Notice, by the way , that the entire and larger B-wave is near perfect, with both legs almost vector equal, the second leg just slightly exceeding the ideal level of $142.

From a wave count perspective it is highly unlikely that the initial move down is complete. This is shown below in more detail;

si sept 13 2011 d

At this point it is not entirely clear if wave 3 (in light blue) is complete or not. We did get to a low of $86.32 (and even lower intra-day outside US hours, so it is plausible. In any event at least a 4 and 5 is required to complete this first wave. The DAX,  of course, already has gone beyond this $81 equivalent level and has declined  more than the 61.8%  of the entire rally, at least on an intraday basis (roughly 5120).

Wave 4 and 5 in the above chart have been drawn on the assumption that the entire drop since $145 in May or June is just wave 1 down! It is however entirely possible that we get an extension and that wave 5 takes us down so far that all of this will prove to be the entire C wave. Waves 1 and 3 have taken the stock from $145 to $85 or about $60. If wave 5, as is so often the case, ends up being equal to 1 and 3 combined and further supposing wave 5 would start around $100 then that would take the stock close to the ideal target of $30. The $10 difference could be accommodated if wave 4 becomes a triangle rather than an irregular flat as shown. The DAX would no doubt follow down approximately the same path. That this is not too far-fetched possibility is pretty evident if one considers that wave A in 2008 took the stock down $120 (from $160 to $40) in 10 months. A similar feat (see the parallelogram) now would take the stock to $145-$120= $25 around Jan. / Febr. of 2012 . If wave 4 starts in a week or so and lasts a little over a month we could be in Nov. by the time wave 5 starts. If 5 then lasts about the same time as wave 3 (2 1/2 months so far) the timing would be dead on! The whole episode would look like this!

si sept 13 2011 l2

Should the slight throw-over of $4 or so in April be repeated on the downside, the stock would trade precisely at $25. A quick look at GE tells us that this is entirely possible.

ge june 2010

The moral of all this is that one should avoid the temptation of buying the “dips” because the market is so cheap. If things go as fast as the above scenario suggests you will not have a chance to get out before the bottom arrives and by then you will be a lot poorer. Once I was asked testily by a former “colleague” of mine what this has to do with Canada and the TSE. The answer then and now is that what the DAX does, the TSE does as correlations approach 1 in a bear market.