Here we have JNJ again. Like Colgate Palmolive, MMM and a few others this is a “blue chip” that has weathered the recent financial storms quite well , so far. It is also priced to perfection and having gone up in a clean 5-wave pattern, from 0 to $75, it has nowhere to go but down. The text-book (literally) model of the 5 wave sequence ending in a “diagonal” (read, wedge) is shown beside the chart. The wedge is invariable retraced in full.  Furthermore, a retracement to the 4th wave of precious degree, is normal and has the highest probability, that point is at $35 At around $29 we reach a 61% retracement of the  30+ year bull market, again a very likely event. This stock is a sell.

This is not to say that the stock is not good, that is not the argument. Stock prices simple fluctuate well above and well below what they should be worth. Good stocks may simple be sold because that is where the most money is to be had when in need.

For the sake of completeness, I have added Colgate Palmolive below. Remember that this stock may still have to go up marginally to complete the pattern. In all other respects it is a carbon copy. So is MMM. The charts can be enlarged by clicking on them, then they can be moved around to make comparisons easier.

Update from May31, at which time we suggested the stock should drop. It has done so and has followed the suggested path quite accurately. It got a little lower than expected ($56 rather than $58 ) and it is now rebounding, perhaps to about $62. After that it should have quite a steep drop. Here is the chart;

Keep in mind that a 5-wave down never stands alone! so another 5-wave down should follow once the “intermission” is complete.

As far as the Blue-chip stocks is concerned, talk has it that these companies are now able to borrow at costs so low that it can become accretive to borrow for the purpose of buying back it’s own stock. The cost of the borrowing would easily be met by the dividends not paid on the stock cancelled. Theoretically this process could, in the extreme, continue to the point where just one single share is outstanding that would then be entitled to all earnings minus the costs of borrowing – ( which , by extension, is used to explain why the stock will never really drop much). This argument is somewhat flawed, as equity has always been very expensive because of the non-deductibility of dividends. Ergo the argument is neither new , nor does it give recognition to the different functions of equity and debt. Banks etc. are doing the exact opposite for very good reason.

This one has, as most every stock, has taken its time and a few extra dollars, but now it is clearly going into a downward direction. For a stock that is generally regarded as a “blue-chip” this may be a surprise to some but not if you consider that of the 18/30 original stocks in the DOW only one remains in the index, and it (GE) is trading at a fraction of where it peaked eight years ago.

Back in July I thought JNJ might have corrected enough and consequently I suggested buying some put options at the money with about 6 months to go. Clearly I was wrong as they expired recently valueless; I was 5 months too early and 4$ short, proving, once again, that timing is everything. The beauty with options is that you lose relatively little and can do it again which I warmly recommend. Should you own the stock sell it outright or put in a stop at about $60. (By the way , the chart for the last 2 years is similar to Goldman Sachs’.)

Here was the chart in July, 2090

Here is today’s.

and in more detail: