More Distribution taking Place in the Dow 30

It looks like the big money has been unloading shares throughout this rally, and I think the market may be gearing up to make new lows. I last posted about the Dow here.

On the chart above, notice that over the past month, there have been 6 distribution days in this weak rally. William O'Neil explains that this sort of behavior normally precedes a market decline, as it indicates that institutional investors (who create volume) are selling. I think it's important to note that this distribution has occured in a fairly small price range, as this shows that these sellers have been capping the bulls strength. The last time I noticed this sort of distribution was at the beginning of the May-->July downtrend.

Also, notice the head and shoulders topping pattern. I would consider shorting on a daily close below the neckline on higher volume, with a stop above the recent high.


Trade # 17: GBP/USD Long (Update)

I last posted about this trade here. I am changing my entry order to 1.8350 with a stop @ 1.8250. My target is 1.8750.

In the last post, I mentioned that a new low was possible (which we got). The descent has been steady, tripping stops each time traders think a low has been set. Therefore, I will trade a breakout of the descending trendline vs. trying to pick a low. I have lowered my entry order to above Wave-iv of the ending diagonal.

The above chart shows the COT data for the US Dollar index. Notice that commercial traders are holding a net short position equal to the one they held in November 2005 (when the USD topped). This is in the midst of many people calling a new bull market for the dollar. I think this is bearish for the dollar, and supports going long GBP/USD.


Looks like CNEH could test $3.00

I last posted about CNEH here. I was expecting price to rally strongly after earnings were released, but the opposite happened. I mentioned that if price broke through the major support in the $3.50-70 zone, I would consider selling out because a major fundamental change must have happened to allow that sort of price action. The earnings report was strong, but due to a change in the pricing of oil, CNEH earned 1m less revenue than expected (this will be made up in Q3, but the market didn't like it). However, CNEH still has a TTM EPS of $.56 and they are revving up their drilling program according to schedule, so future earnings should still be growing at a 100%+ rate. Reassessing the stock, I feel that a decline to the $3.00 level would be reasonable, if not expected, so I am holding my position.

Notice on the daily chart above that CNEH's price action confirmed a double-three complex correction. Instead of bottoming at $4.03 after completing three waves down, CNEH made new lows after the earnings report. Thus, Wave-A is the first "three-wave" pattern. Now Wave-C would be the second "three-waves" in the double-three. A drop below $3.30 would be necessary to complete Wave-C.

I am guessing that $3.00 will hold as there is plenty of support in this zone:

  • $3.15: 61.8% retracement of $1.61-->$5.68
  • $3.07: Wave-C = Wave-A, a common relationship for corrective waves
  • $3.00: descending channel support for next 1-2 days
  • $2.93: 50% retracement of $.17-->$5.68

At $3.00, CNEH's P/E would be 5.36. Seems awfully cheap for a stock still growing at 100%+!

Wave-A took 16 days to unfold. Wave-C has taken 12 so far. Therefore, I would expect CNEH to drop for another few days before bottoming.


Trade # 17: GBP/USD Long

I am going long GBP/USD @ 1.8415 with a stop at 1.8308. My limit will be 1.8750. I am risking more pips than normal in this trade, so I will try to trail my stop to around 80 pips risk as soon as price has confirmed a breakout above 1.8400.

You can see above on the 4h chart that not much has changed in the larger picture except that the ending diagonal extended. It looks like it may be exhausted here, but nevertheless, another low would not surprise me. My strategy on this trade is to buy a breakout above the upper trendline, as well as the Wave-iv high. My stop is below a nice congestion region, and my limit is near the top of Wave4 top (as diagonal triangles normally retrace the entire previous wave).

Trade # 16: GBP/USD Long (Update)

I last posted about this trade here. I was stopped out for -80 pips. I tried to call a bottom, got burned, and paid for it. However, I still think the EUR and GBP could stage a strong rally.


Trade # 16: GBP/USD Long

I am going long GBP/USD @ 1.8340 with a stop @ 1.8260. My target is around 1.8800 or higher.

As you can see above, there is a nice 5-wave decline on the 8hr chart. Wave-v is forming as an ending diagonal, and MACD/RSI divergence is apparent.

The 1hr chart highlights the ending diagonal more clearly. The decline has been choppy and overlapping, with divergences forming against each succesive low. I am taking a long trade with a stop below the 5th leg of the diagonal. Hopefully this level holds.


Trade # 15: EUR/USD Long (Update)

I last posted about this trade here. I closed out the position for +58 pips after the pair broke through the supporting trendline. It now seems pretty hard to argue that a bull-trend is starting, so I am taking the profit while it exists. If the pair makes a marginal new low and then sharply reverses, I will wait for a 5-wave rally before going long again. I am afraid to go short at this point based on the risk/reward ratio.

Above you can see that at this point, it is hard to make the case for a new bullish trend, unless the EUR/USD makes a new low first. The clear 3-wave abc pattern is bearish, and price has broken the supporting trendline. Having said that, the market is very good at shaking people out of their positions, so this may have been a mistake. But still, the best strategy is to wait for a confirmed trend and trade a pullback, not try to call a bottom.


Trade # 15: EUR/USD Long (Update)

I last posted about this trade here. I am now moving my stop to breakeven, at 1.4670. I will continue to trail my stop if the trade progresses in my favor.

As you can see on the above 30m chart, EUR/USD has rallied in an impulsive fashion, hopefully indicating that a short-term bottom is in. It formed 5-waves for Wave1, and a choppy 3-waves for Wave-2. If a strong upwards correction is unfolding, the Wave2 low should hold, so I am raising my stop to just below there.


Trade # 15: EUR/USD Long (Update)

I last posted about this trade here. I was filled at 1.4670, and it looks like 1.4629 could be a short term low. I am moving my stop to 1.4625, right below this level. Therefore, my max risk is now 45 pips.

As you can see on the above 4h chart, it appears that Wave-V from 1.6037 is complete. Positive RSI and MACD divergence confirms this fact. Luckily, priced bounced off the long-term 38.2% fib (green horizontal line), as well as the long-term rising trendline (green sloped line), keeping my stop safe. At a minimum, I would expect price to test 1.4950 before dropping signifcantly: the 23.6% fibo, as well as the weekly R1 and Monthly S2 pivots reside in this area, and should provide decent resistance. That being said, however, price could correct to the 50% fib around 1.5300. I will likely continue to trail my stop if the trade continues to go my way.


Out of C

I have closed out my long position on C. As I posted here, the market is looking toppy, and C failed to form an impulsive uptrend. You can see my last post on C here. I closed out around $18.40 on the break of the uptrend line.

The 1h chart above shows that the rally from $14 was a very sharp 3-wave rally (corrective), followed by a 5-wave downtrend to just under my $17.25 buy point. Price then corrected upwards in a choppy fashion, followed by a fast and sharp break of the uptrend line. I find it interesting that financials diverged with SPX and $INDU: both indicies made a new uptrend high while financials failed to do so. Perhaps more declines are in store, so I'm sitting out for now, even though MACD divergence has been confirmed on the weekly chart.


The INDU bulls are weakening

The Dow Industrials appear ready to start another downtrend. The dead-cat rally from 10,827 has been very choppy and looks much to much like a correction rather than the start of a new bull market. I think we will see new trend lows in the coming weeks, and market breadth (ADV/DEC) supports this notion.

The $INDU daily chart above shows that after a strong decline on increasing volume (to form Wave-a of WaveC from the 10/07 top), price has corrected choppily upwards on decreasing volume. A very nice 3-wave pattern has emerged, but I would wait for a break of the rising trendline on heavy volume before aggressively shorting.

The 1h chart above shows that Wave-c in this small uptrend appears to have formed as an ending diagonal. This very bearish pattern will result in accelerated selling once the lower trendline is broken. Notice that the last leg of the diagonal briefly broke the upper trendline, but the bulls were not able to maintain that breakout. This is typical of ending diagonals.

Finally, this is the chart of the 5- and 10-day moving average of the NYSE ADV/DEC indicator. Notice that fewer stocks participated in second leg of the rally as opposed to the first leg. This is similar to the pattern exhibited in May as the market was topping. The rally could extend and break these divergences, but that is why I am waiting for a trendline break on the Dow before going short.

Trade # 15: EUR/USD Long

Wow what a selloff for the EUR/USD. At the point of greatest downside momentum, the EUR/USD was down 500 pips in 24 hours!

I am looking to buy the pair in anticipation of an upward correction (or the start of a new uptrend). My plan is to buy @ 1.4670 with a stop @ 1.4585. I will trail my stop if the trades goes my way.

The EUR/USD decline sure looks like it could be the start of a new downtrend, but that also may be why it is just part of a Wave4 irregular flat correction. I would be surprised that a downtrend would be announced this obviously to everyone. However, even if it is the start of a downleg for the Euro, I will try to play the bounce. If I am successful, I can trail my stop and earn a profit regardless of the larger trend. Strong support lies at the trendline, and the 38.2% fibo of the rally from 1.2483-->1.6037.

The 4hr chart above lays out the wave count from 1.6037. It looks like Wave-V extended significantly, but I think one more decline is in the cards (to complete 5-waves on all levels) before a decent rally starts. This would form MACD divergence, a very bullish sign.

I am choosing 1.4670 as a target level because of the following support levels:

  • 1.4694: 2.618 * Wave-I thru Wave-III
  • 1.4690: Weekly M1 pivot point
  • 1.4675: 78.6% fibo of 1.4310-->1.6018
  • 1.4667: 38.2% fibo of 1.2483-->1.6018 (Wave3 on daily chart)
  • 1.4630: Current level for the rising trendline on daily chart
  • 1.4593: Monthly S3 pivot point
  • ======================
  • 1.4658: average

My stop is just below the S3 pivot point.

Oil, Nat Gas, and Metals may be near a bottom

I think the commodity sector may be near a short term bottomed, based on charts of several commodities. I last posted about oil here. Essentially, it looks like there could be a bit of a last bit of weakness followed by a decent rally in all the charts listed below.

Notice on the USO daily chart above that selling volume has been declining in this Wave-c from $119.17. It appears that the sell-off is losing momentum. Since price is nearing a long term support trendline, as well as a previous support/resistance level around $90, I would expect a decent bounce from there.

I'm showing the daily chart for UNG (natural gas) because it is bullish, and UNG is well correlated with USO. The incredible decline in natgas has formed in 5-waves, so an upward correction is imminent.

This is the 2h chart of UNG, and I am highlighting it because of the strong MACD divergence. Wave-v could be forming as an ending diagonal, so perhaps we may see one more low before the downtrend is exhausted.

The two charts above are GLD and SLV, respectively. Notice that both metals are holding in well defined channels. They are also nearing the Wave-C=Wave-A levels of roughly $80 for GLD and $14 for SLV. It will be interesting to see if they can bounce from here. Based on energy being bullish, I would bet on a rally in metals as well.


CNEH Update

I last posted about CNEH here. I was expecting a sharp Wave2 decline, but instead (perhaps for the better), the stock has experienced a shallow and choppy correction. I think CNEH is a very good buy in the $3.75-4.10 range, with a stop below $3.35. Once this correction ends, price could increase sharply as Wave3 commences. In Elliot Wave theory, Wave3 is the usually the strongest wave in the trend. My target for CNEH is above $7.50 over the next 6 months.

Here's a brief background of CNEH's fundamental strength. The company's business model is simple: it drills oil from a field with 25mil barrels of accessible reserves and sells it to PetroChina at the spot oil price for the 1st day of each month. It reinvests the cashflow from oil sales into drilling new wells to produce more oil. In Q208, CNEH had 192 wells that produced 135K barrels of oil. The company's plan is to build 650 wells in total. Before oil prices exploded, CNEH's balance sheet was weak, as its current ratio was poor. At the time, to help finance its liabilities and its well drilling plan, it negotiated a $15m loan with an investment fund. Now CNEH has a good amount of cash, and is executing its drilling plan easily. The financial upshot of all this is that in 8 days, CNEH's TTM EPS will be roughly $.56. By the end of 2008, CNEH should earn about $.90, and will be growing at 50%+.

CNEH's historical P/E ratio has ranged from as low as 6.5 to as high as 47. More recently, it has ranged between 9.5 and 20. When earnings are released, CNEH's lowest estimated share price would be 6.5 * $.56 = $3.64. At an average P/E of 10-12, CNEH should be trading at $5.60-$6.72, and $9.00-10.00 by year end. However, CNEH is applying to graduate from the OTCBB to the NASDAQ/AMEX. On such an exchange, it will be exposed to more investors, and will be valued more appropriately to its growth. A P/E of 15-20 would probably not be unreasonable for a company growing as rapidly as CNEH. Therefore based on fundamentals alone, buying around $4 or so would have a potential downside of $.40-.50, but a much greater potential upside.

The technical picture is also promising. According to Elliot wave theory, trending moves occur in 5-waves while countertrend reactions occur in 3-waves. This is what happened with CNEH, as there was a 5-wave rally from $1.61-->$5.68, and a 3-wave correction from $5.68-->$4.03 (see chart). Since Elliot waves are fractal, the rally from $1.61 to $5.68 is Wave1 in a larger uptrend and the decline to $4.03 (or lower) is Wave2. Volume has been drying up in this Wave2 correction, indicative of decelerating selling pressure. Once Wave2 finishes, Wave3 will start, and this is often the strongest wave in the trend (as mentioned above).

My stop is below $3.35 because there are several layers of support in the $3.50-$3.65 zone:

  • $3.64: P/E of 6.5 with $.56 ttm EPS

  • $3.62: 50% fibonacci retracement of the rally from $1.61-->$5.68

  • $3.50: long-term support/resistance line

  • $3.48: Wave-iv low

Thus, if price broke below all of this support, it would indicate that something has fundamentally changed with the company, and I would no longer want to hold its stock.

One last interesting point is that CNEH has likely fallen due to the intense selling pressure on energy stocks over the past few weeks. However, while big name energy companies like Chesapeake (CHK) or Cimarex (XEC) have fallen 35-40% on high volume, CNEH has fallen only 30% on decreasing volume. One would expect a micro-cap growth stock to respond more strongly to the intense weakness in the energy sector. However, it appears that its fundamental strength is supporting the share price, and bodes well for the future.