DJI, Dow Jones

January 25, 2012 Hamilton

The Dow Jones is the most watched index, it is also the most manipulated. It is now threatening to make a new high as it is only a hundred points away from the may highs of last year. Much of this thanks to the Fed. that announced an additional year to late 2014 of these very low rates and expressed a more open mindset towards other stimulative measures to help growth. The Dow is now close to its all time high of 14000+ in late 2007. No other index has accomplished this miracle. Is the Fed targeting the stock market and creating the next bubble? It is hard to judge what all this means, but it is certainly good to remember that the Dow, now more than a hundred years old, contains only one single stock General Electric from the early days and that one is trading at 1/3 of its high.

EXC, Exelon Corp.

January 25, 2012 Hamilton

EW provides you with a green, red or amber light. They do not occur in the same proportions. Most often the light is amber meaning that there is no clear-cut predictive value flowing from the EW analysis. That is not a problem since you simple move on to a stock that does present a clear picture, but that approach does not work if someone asks you about a specific stock! That is the case with EXC, this is a utility, mostly electric but also in the gas distribution business. It operates in the Mid-West (HQ in Chicago) and is the largest operator of nuclear power stations. So right of the bat, utility=good and nuclear=bad, the yin and yang of investing. So going straight to the charts this is what we have;

The charts are the same stock over the same time period. The one on the left is arithmetic and the one on the right logarithmic. Arithmetic charts have a tendency to exaggerate the rise of a stock as it follows a parabolic line. The log chart, despite being less commonly used, actually gives a much better proportionate presentation of what is going on. With only the chart on the left, the prediction that this stock may drop to $20 seems preposterous. On the right chart it actually seems to fit nicely. Now the short-term chart;

This looks a bit like MSFT, Microsoft. My best guess at this point is that we are in a triangle wave B, the A was the big drop from $90 to $34. The B will rotate a little longer around $41 and then wave C will drop to $20 (or lower). One could buy the stock here waiting for the e wave to form. You could get lucky and the stock just keeps going, negating the bearish outlook. The only certain thing is that a stop loss should be used at $38.

By the way, regression to the mean alone would bring this stock close o the $20 level.

CL, Colgate and Joe Granville’s OBV

January 25, 2012January 25, 2012 Hamilton

Joe Granville is rated the number 1 “technical” analyst in the US. He had his 15 minutes of fame back in the early eighties when he correctly predicted the 50% or so drop in the stock market, before it actually happened which is not always the case with analysts. His views should not be dismissed lightly, as he has been around a long time and is the inventor, if that is the word, of OBV, On Balance Volume. It is the main concept on which his predictions rest. Simple put OBC is the running total of the volume on up or down days. If the volume of trading is low but the price up the OBV rises, if the volume is high and the price is lower, the OBV drops , by more etc. etc. Underlying this is the concept that volume precedes price, which means that the price cannot go up without the volume rising (even allowing for very long periods that the link does not work directly).

His prediction now is that last Friday’s high is THE high for the moment and that the DOW will go down by about 1000 points every quarter, back to the March 2009 lows. Lets look at this concept using Colgate–Palmolive , a stock we expect will go down big time on the basis of EW analysis;

As you can read in previous blogs, the EW count here is that of a large 5th wave contracting diagonal that has been operational since 2005 and takes up most of this chart. The initial target is just under $45. As you can see the OBV was rising up to the time of the top of wave 3 in the diagonal, after that it drops again like a stone. All of this of course supports our view, at the very least for Colgate.

HXD, Hor. Betapro TSX Bear 2X

January 25, 2012January 25, 2012 Hamilton

Should the market go down, as we certainly expect that it will , perhaps even by a lot more than most people can imagine, owning some of the HXD might just be the best remedy. Unlike commodity based ETF’s (like HNU for Natural Gas) that are usually in contango (near contract cheaper than later contracts), this one does not suffer from the inevitable loss on roll-over as it is calculated on the index itself. The 2X leverage should be a bonus provided you deal with it properly; you want $100 “protection” you buy $50.

During the counter-trend B-wave rally in which the stock market lost about 50%, this HXD went from roughly $40 to $8, losing about 80%. $8 seems to be the the extreme for both the HXD and it’s mirror ETF, the HXU, see below. Looking at the short-term chart it appears that we have had a first wave up from $8 to $12(about 50%), coinciding perfectly with the autumn drop last year of about 25%. This thing tracks reasonable well and it is less sensitive to the downside than the upside (this is a simple mathematical outcome). The next big move should be wave 3 up , as the market goes down, also in a 3d wave.

The HXU is the inverse of the HXD. It therefore gives you a good example of what happens when markets go down, by looking at what happened when they went up. Very roughly speaking the index went up 80% from the March 2009 lows to the April 2011 highs. The HXU went from $8 to $25 or 200+%. This is exactly what should happen to the HXD when this market goes down. In terms of defensive strategies this beats cash any time as it does have a return!, but obviously it is predicated on the outlook being correct, or at least not incorrect.

There are many other ETF’s that are equally effective. The HSD does the exact same thing using the S&P 500 instead of the TSX60. No foreign exchange is involved as it is priced in Can $$. There are too many to list. Below are charts for the HSD and HSU;

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