In the last month we have shown quite a number of “wedges” as examples of warnings for a substantial correction. Today the lower boundary of many of these was broken! This does not mean that the wedge cannot regain its composure and continue albeit at a less sharp angle, but it does alert us that chances are things can get a lot worse in a hurry!
Month: April 2015
YUM! Brands
For a count see our previous blog of mid 2013. It was at $75 at the time and has not moved all that much since. Again we think it is peaking perhaps for no other reason than that we simple cannot fathom why a restaurant chain called “Yum” should trade at 38x earnings. We know that Americans spend more disposable income eating out than they do in the grocery stores but from $10 to $80 in 11 years??
More importantly we noticed that on this stock both the RSI and MACD, together or severally, are extremely efficient and accurate coincident indicators. Each and every time they alert you to a drop of about 10% and this time there is reason to believe that it may go quite a bit further.
This is option stuff. The stock should drop rapidly (say in 3 months) to the base of the last wedge, that is $66. A July 82.5 put is offered at $2.34. That option should be worth 4 to 6 times that at or before expiry. As always talk to your broker. The same June option is offered at $1.40. Normally I prefer slightly longer options but this is one of those cases where shorter might be better, but consult with your broker.
CVX, Chevron update
Last year August, see previous blogs, we noticed the absolute precise symmetry in this stock’s legs, presumably waves 3 and 5. A good time, almost always, to get out, and it was this time as well as the stock lost about $35 or 30% in a very short time. Given the stock’s rise in the previous years this is hardly a serious correction, certainly not one that reflects the 50 to 60 percent drop in oil itself. So, like with Royal Dutch which, by the way, is of equal cap. size without BG included, but earns a much higher dividend, it looks like the next move might be down again.
The short term chart has a count that could accommodate that, it is not the only one, and the very clear wedge that it now sports going right into the 200 day moving average adds weight to this view.
RDS.B , Royal Dutch
Again the then, Dec. 14,2014, and now charts;
It has been almost 5 months and this stock has not (yet?) reached its ideal target at around $59 or a little lower (Big charts does not always show the daily extremes!). So what is going on, if anything?
There are a number of possibilities. First this may not be a 5 wave sequence down. Instead it may be an A-B-C correction (or partial correction). The C appears to be taking the shape of a wedge. Approximately the same result can be obtained by assuming a series of 1-2’s of different degrees to be followed by two 4-5’s at the bottom. Note that the structures from Dec. to mid Feb, and the one from mid March to now, are identical which supports that idea.
If it indeed proves to be a wedge the rebound target is raised to $74, so if you own it as per the last blog there is no need to sell. However, if you do not own it yet, wait till it gets a little closer to $59 again and then buy it. It earns a dividend of about 5.8% per annum, regardless of whether you chose to receive it in Sterling or hard Dutch Euros. Amazingly that percentage is the same for either currency but the tax treatment may not be! If this works you would have a total return of about 20%+3%=23% in six months or less. Talk to your broker.
P.S. According to latest earnings report earnings are down by 56%!