We have two counts. In black a simple 5 wave sequence for wave 1. There are 1-2s and 4-5s in it but that is all At $56 the sequence would be complete. In red a first zig-zag A-B-C in which wave C is equal to A at $56. A rebound to perhaps as high as $74 would be next in both cases and then either wave 3 starts or a second zig-zag.
We have waited a long time for all this to develop and here we are, all that is left to do is buy at $56 plus a little.
So now that we have a prototype how does this fit with the Canadian Banks? First a bit more about B-waves. They can be regular, or irregular which simple means that they climb above the starting point of the A wave. Their are no hard and fast rules but I believe it is more or less accepted that irregular B-waves should not exceed the top of the A-wave by more than about 30 t0 35%. Here is an example, CWB, Canadian Western Bank, they pride themselves on financing anything that is yellow (think CAT) and belches diesel smoke;
You can clearly see the B-wave. This one just happens to be at the edge of the 30 to 35% or so limit, but in every other respect it is perfectly clear. Target $8 or lower. If that sounds ridiculous than keep in mind that it last traded there just 10 years ago.
An error crept into the chart, the 4th of previous degree line should be lower, at $6!
The next two big banks that have the clearest B-waves are CIBC, CM and BMO;
Commerce is of particular interest as it managed to double top, the last big bank to do so much to the surprise of many that work there and thought they would never see the day. In any event, nice B-waves and terrible targets. BNS and National Bank have B-waves that are borderline but still acceptable given the channels they are in;
Royal appears to follow the triangle scenario a little better and TD is unclear, perhaps because the Canada Trust part changed the company to such an extent that it simple cannot be looked at on a continues basis;
Royal sticks to it’s channel quite nicely. It would fit either of the two scenarios equally well, in fact it probably fallows the path of JP Morgan the best despite the fact that it has outperformed it by a long shot. TD must fall into the B-wave scenario given the otherwise not acceptable overlap. Putting it all together, including the insurance companies we have the XFN, the TSX capped financial ETF;
There can be no question that this is a B-wave, AND that it is complete. This chart has less time on it as the ETF did not exist prior to 2002. Fortunately, we can still see where the wave 4 of previous degree, that is on the way up, is. $11 and that is where we should go under EW rules and guidelines.
We have left out HCG, Home Capital Group. It is by far the best performer and fundamentally runs a sound business model. It does not fit easily in either scenario but with a little imagination we can make the triangle – distorted though it may seem to be – work quite well. The top is even perfectly above the apex! Here is that chart;
The conclusion must be that you do not want to be in the financials, period. By the way, this negative outlook is in no way predicated on what happens in Greece. If the timing seems to coincide it would be just another one of those fallacies, after this, therefore because of this.
We are going to use JPM as a proxy for the Canadian banks in the next blog. For those that do not care too much about EW niceties we suggest you skip this blog and just remember the conclusion, that is that JPM stock is going to go down to below $20.
In EW terms there are two competing scenarios. Without getting into too much detail they are a. The top was in in 2000 (remember Y2K and the tech crash?), since then we have done an A, a – triangle b – c for B and are now poised to go into C ; this is shown in blue. The alternative b. is that the 2000 top was just the top of wave 3 and that from there we did a (bigger) triangle for wave 4 and then wave 5. This is shown in red. It is possible that that 5th wave is not done yet, but looking at the triangle’s mouth, the apex, certain equalities and the main channel lines we would give that a very low probability.
Whether this is going to be a C wave (5-waves) or a zig-zag correction (three waves) does not matter with respect to the target which is below $20. JPM is not the biggest bank in the US – that is Wells Fargo, WFC- but this bank is most closely associated with the NY city banks and the hoopla surrounding the bail-out and the Fed.’s easing. As such it should serve well as a model for other banks, even Canadian banks. That is next.
Goldman Sachs, by the way, is squarely in the B-wave camp;
We did once suggest buying this stock (see previous blog, the stock split 1057 to 1000 since!). It almost doubled but we forgot about it. Here, once again, this stock looks like it may well be a buy at around $9.80 or so. By then it will have lost 86% of it’s peak value and have completed a double zig-zag correction. Use a stop about one dollar lower, just in case.