This three month old story keeps on tracking. Today we are dead smack on the trend-line of the triangle, perhaps completing wave e. e can continue to about $17.30 before the structure is negated. Soon we should know if this is a triangle, if it is a 4th wave or a B and where to buy. Interestingly GS has the very same pattern except that the lower trend-line is pretty well horizontal. See previous blogs.
For more than a month now, MS has followed our script quite nicely so here is another update most of which can be found in the previous eight blogs. First the “big” picture. The charts that are available to me are flawed in that when you look at things over a longer period of time the charts are based on daily or weekly values that often deviate substantially from reality. I will use MSN and Yahoo charts as follows;
Notice that in the MSN chart the high in 2001 is well in excess of $100, whereas in the Yahoo chart it is $90 at best. Similarly the lows shown in in the latter part of 2008 are about $15 on both charts. In reality the lows occurred at around $9.68 if I am not mistaken ( Mitsubishi bailed them out with $9 bln. at the time.) , so we have not broken that level since as the most recent low was $11,58. In any event it is rather obvious that we are dealing with a nine year time frame during which the stock dropped more than 90%. (Prior to 1986 the company was a partnership and consequently did not have stock.) We dropped below the fourth wave of previous degree (at about $20) and the whole structure appears to be rather symmetric. Therefore it is possible that the entire correction for this stock is over in which case the situation looks like this;
It is normal for first waves in new bull markets to retrace almost the entire first leg so this count is totally credible particularly since it is a standard 3-wave a-b-c, the hallmark of a correction. The only problem is that there seems to be a triangle forming over the past three months!!! Here it is once again;
So far at least it is clearly a triangle. These structures can only occur in waves 4 or B positions, both of which are bearish. The former immediately and the latter after a corrective c-leg up. For our big picture scenario to hold the stock may not drop below the old low (of 8?) So if it gets there, buy it around $10. Alternatively there is no triangle and it would probable be a buy already.
MS according to the charts could be forming a triangle. Here is an update;
We are following this with a little more interest than usual, having missed the opportunity to buy at $12. At the risk of boring the reader, I have done a little math just to test the validity of this being a triangle. Wave c relates to a by a factor of 0.652 and d to b by a factor of 0.748. Not ideal but close enough not to reject the notion of a triangle. Wave e now may not exceed c at $17.50, but also does not have to be contained by the triangle’s boundaries. The ideal level for e would be at $16.89. All this is mostly academic as you should not trade on it. But if it does all this, and it is a big if, then it will be a screaming buy at just under $10 where it would hit the upper channel line as support. $10 is also what was paid for Bear Sterns by JP Morgan. It is unthinkable that it would not pay that sum again for it’s own, far more distinguished, offspring now that it has been orphaned by it’s other parent, Glass-Steagall.
There are many other stocks that have a triangle forming, at least the possibility for one, Siemens (SI) and the TSX are possible examples;
Both are presently in their respective e-waves, and whether or not they are actually forming triangles is perhaps less important than the fact that they have been going sideways for 5 months. Consolidation patterns are invariable resolved in the same direction in which you entered them, in this case down.
Un till it stops working, we will keep monitoring this stock while it seems to be tracing out a triangle. This pattern, when it occurs in a sequence is always in the 4th wave position and , for that reason, announces as it were the end that is right around the corner. Typically after the triangle is complete the stock will move in a thrust a distance approximately equal to the size of the mouth of the triangle. After that, realizing that it has gone too far, it returns to the apex and , more often then not, to the highest point of the triangle. All of this with the reliability, almost, of the sun rising in the East.
So what can go wrong? First of all just because it looks like a triangle it may not become one. If you look at GS the pattern is very similar but should it move a little lower the triangle idea will be negated. Apart from that a whole slew of other patterns could be developing, both up and down. To avoid the uncertainty you simple do nothing un till the outcome is clear! The triangle might not be a wave 4 in a downward sequence as it could be a wave a in an upward correction (see the light blue annotations). Thrust are furthermore famous for their speed, as the name suggests, so we do not recommend going short the stock at all. What we do recommend is to wait for the triangle to complete itself and also for the thrust to travel the “normal” distance and then buy the stock. That is at about $7 if all these expectations are met. The reward is a 100% return in a very short period of time.
I understand that the stock is trading at 0.4 times book and that if it were to trade at a p/e equal to the industry’s it should be worth about 5x as much. Perhaps.