Recently I was asked when you should use a semi-log scale chart or an arithmetic one. There is no simple answer but EW is very much about good looks, that is beauty is in the eye of the beholder. Here we have Cigna, a healthcare/ insurance company that we looked at many years ago. We identified, correctly, the correction in 2001/2 and called for the stock to rise substantially to $37 from $15. The $175 level was not on the radar.

Revisiting this stock today, it is hard to make sense of the meteoric rise over the past 6 years, about 30x. Is this Obama care? Low interest rates? Or just a fluke? This is when a semi-log scale is appropriate (on the right) as it compresses the chart and gives you a better sense of proportionality. All of a sudden we get a nice channel and a plausible wave count.  The stock clearly has peaked or is peaking.

The other side of the channel is at about $55, and the 4th wave of previous degree at $6 to $15 depending how you count. Either way this must be a sell.

July 12 we warned that this stock was ripe for a solid drop despite the reasonable P/E etc. The stock had been around $52 the day before. Here is what happened:

Barely a dollar higher and a week or so later the stock goes into a tailspin dropping from $53 to almost $41 or almost 23%, right into the first logical target in a nice 5-wave move. It has also retraced 62% or so in an a-b-c correction. The next dive should come soon and take the stock to about $30 (see previous blog).

I had some very prescient calls on Cigna back in Oct. 2003, but few followers (see also a previous blog). Anyway it raises one’s level of confidence but even then I keep an open mind for the most bullish possible outcome as shown in the above chart knowing full well that it is incorrect. For this I have used a semi-log scale chart as it tends to dampen the ups and downs and consequently makes the bullish situation more plausible. If we are making a 5th wave it follows that the lows of 2009 were wave 4. If this point is connected with the wave 2 low we get a line which drawn parallel over the tops defines the channel. As a rule stocks seldom move outside the channel, particularly not when it is semi-log.  This interpretation is wrong because this 5th wave is not subdividing in 5-waves. More over the preceding b-wave should have been a three wave a-b-c, instead it is (clearly) a 5 wave move. In any case, even if , for the sake of argument, we assume this is correct despite the evidence, the stock’s maximum high is at about $62. A more correct count is the following;

Using the proper count and an arithmetic scale that high is actually only at around $57, and a double-top occurs even earlier. The B-wave and not a 5th wave becomes pretty obvious. It should peak a few dollars higher than it is today but might already be done.

The stock is trading at a P/E of less than 10, so the bulls will argue that there is a lot of “room” left to the upside. Perhaps, but this is an insurance company and lately they have everything imaginable working against them. If there is anything amazing about this stock it is that it is up here again, for a third time.

By the way, just as with Electrolux, the stock does not agree very well with the buy-and-hold philosophy. Just taking into account the big moves over the past 10 years the stock has travelled about $170, some 333% higher than the stocks present value of $51, up about 10% over the same time.

On the 6th of Oct, 2003 we had a little round table do at the National Club where I presented a few choice picks, one of which was Cigna, recall that this is exactly at the same time that FFH is making a low of about $50

Note that the stock had completed a very nice 5-3-5 corrective A-B-C where the C was about vector equal to the A. Nearly always a buy, in this case with a minimum target of $37 (top of B). Needless to say , nobody bought it.

Which was a shame as the stock exceeded the target  by $20 or so. More importantly after the new highs the stock is once again slaughtered  which may be somewhat indicative of what one might expect from the insurance business at this time. Much of their earnings are derived from their investment returns, without which the premiums are insufficient to cover the risks.