BWEN Breaks Out!

BWEN (Broadwind, Inc), has been in the process of forming a multi-month base, and recently broke out to the upside on good volume. This is looking like a strong stock!

On the fundamentals side, Congress recently renewed the ARRA 30% cash grant for renewable energy projects for one more year, so that should provide good support for wind turbine manufacturers like BWEN.


On the Razor’s Edge

As you may know, I’ve been bearish precious metals for some time. Recently, I shorted silver as it spiked to $29/oz, and took a quick profit. I mentioned that silver could make further new highs, but any additional upside was to be shorted. I maintain that stance, and believe that metals are hanging on the edge.


First take a look at the Gold chart above. For the past 2 years, gold has been a perfect, no-lose investment, capping a 10-year streak of straight gains. However, if you look carefully at the wave structure, it’s apparent that the uptrend is nearly complete, and signs of exhaustion are showing. Gold is still making new highs, but recently it has been carving out an Ending Diagonal, which will reverse violently. I expect one more test to 1430-1445 before a trend change.


Another factor that makes me believe metals will soon drop substantially is the fact that silver recently consolidated in a triangle (see chart above), and has now broken out to the upside. Triangles often precede the final thrust in an uptrend before the trend reverses (you can see many examples of this phenomenon that I have highlighted on this blog). Furthermore, volume has been down-trending as silver makes new highs, and MACD divergence is ominous. If silver reaches $31.66, I will be buying a Put for a sharp decline.

If you believe that metals are a one-way train because they are  “real money”, and because the Fed is printing trillions of dollars, consider this: money is backed by debt, so the money supply can only multiply and expand if people borrow the money that the fed is supplying to the system. Out of the three major sources of borrowing (government, consumers, businesses), two are slowing down, or will be forced to slow down in the near future. No new debt = slow money supply growth = slow inflation. Food for thought.


BIDU Cracks

This fall, I’ve been monitoring BIDU as it entered a parabolic thrust. Since my last post, it has not made much additional upside progress; rather, it has formed a very nice distribution base. This week, it finally succumbed to the overhead pressure, and looks to be in great shape to continue holding as a medium-term short trade.


Notice that for the first time in the entire 2-year uptrend, the stock never made a lower high and lower low. The fact that this has happened this week indicates that the stock is now technically in a downtrend. Also, note that it broke back into a rising channel. I see support @ $95 as it tests the lower part of the channel. I’d like to see it consolidate at this level for a few weeks, and then break down in the next portion of it’s decline.


SPX Update

SPX may be near completing a 2-year uptrend. I remain bearish, especially as the market nears the 1250-1300 zone.


Notice in the daily chart above that the market made a strong 5-wave move from Oct 2007 to Mar 2009. Following this, we’ve seen an equally impressive 21-month rally that has taken SPX from 666 to 1245, an 86% rally. However, this rally appears to have subdivided into zig-zag 5-3-5 formation, and it is nearing strong trendline resistance.

Note that Wave-C is relatively muted compared to Wave-A. This makes sense to me given the fact that the looming trendlines are providing good selling pressure. Also, given the strength of Wave-A, one would expect Wave-C to be slightly more modest.


The daily chart above shows Wave-C of the rally from the Mar 2009 low. Notice that it unfolded in in a clear 5-wave pattern. Each corrective wave lasted about 3-4 weeks, similar to the corrective waves in Wave-A. The fifth wave coupled with MACD divergence tells me that the market is about to turn over.

I have been proven wrong so many times over the past 21 months. At this point, I see no reason for the market to form a major top near this level, but on the other hand, this kind of sentiment seems prevalent right now. The top occurs when no one is expecting it as a possibility.


Out of Nov SLV puts, still bearish

As you know, I went short SLV via some Nov puts yesterday. This proved to be very timely, as silver did collapse from being up 4-5% to being down 3-4%! I took a very nice profit this morning, since I don’t want to risk SLV forming a base up here, leaving my Nov puts high and dry. However, longer term, SLV could be near a top.


Notice on the daily chart above that SLV had a MASSIVE reversal bar on record volume (by far)! However, given how obvious this reversal is, it may have one more rally to go (see wave count). This would once again squeeze the early bears, and reset bullish sentiment.

If we did get one more high, I would short it again. And even now I remain bearish silver medium-term. But because I had short term Nov puts, I decided to take my nice profits. I am still short via less-leveraged instruments.


Today is the day to short SLV

I’ve been waiting and watching for SLV’s typical blowoff move unfold. Today I took a short bet with it, buying Nov 27 Puts. This is obviously a short term play, but when parabolas reverse, the counter-move is usually very fast.


During a climax top, a stock leader that has risen for many months will suddenly take off and run up much faster than it has in any week since the start of its original move. On a weekly chart, the spread from the absolute low to the absolute high of the week in almost all examples will be wider than any price spread in any week so far.

- William O’Neil in The Successful Investor, pg. 80

Notice in the SLV weekly chart above that after rally for months on end, SLV has now blasted higher in a parabolic fashion. It is making it’s fastest gains of the entire move in the past two weeks.


On the daily chart, notice a few interesting features. First, about 5 days ago, SLV gapped way up and then rallied hard for three days. Then today, it gapped up once again. In O’neil’s book, chart after chart from the Nasdaq bubble shows this exact pattern, which indicates extreme bullishness that should reverse very soon.


BIDU Blow-off Continues

I prematurely posted about BIDU going parabolic a month ago. The rally continues, but keeping an eye on the bigger picture makes me think that the rally will soon run out of steam.


The monthly chart above shows how extreme the rally has been. Notice that after 17-18 months of strong rallying, BIDU has now blasted off in a classic blow-off formation.


The more interesting phenomenon appears on the daily chart. Notice that BIDU has recently consolidated in a triangle formation, and triangles often precede the final move in a trend. Furthermore, there is MACD divergence forming. So I believe that when this up move finishes, BIDU will begin a multi-month downtrend.

First USD/CHF reversal confirmation

A few weeks ago, I switched from long EUR/CHF to long USD/CHF. I still like this position, and today, the first sign of a trend reversal came out.


Notice on the daily chart above that USD/CHF has now clearly had the biggest rally of the entire downtrend. Coupled with clear MACD divergence, I think this indicates that the character of the downtrend has changed, and a new uptrend is potentially forming.


Trading in EUR/CHF for USD/CHF

Today we arrived at two conclusions: 1) EUR/USD looks bearish. 2) we still like EUR/CHF bullish as discussed a few weeks ago. Thus, we wanted to trade both currency pairs. Of course, we quickly realized that EUR/USD short and EUR/CHF long is the same as trading USD/CHF long. So we did some analysis, and we’re now quite confident in trading USD/CHF long. We’ve switched our EUR/CHF long position to USD/CHF long position.


The chart above (EUR/CHF daily chart) identifies why we were happy to switch out of EUR/CHF long. Notice that the pair bounced of 1.28 as expected, with nice MACD divergence. However, it is testing strong resistance, and just broke an ascending trendline, so it may be under pressure for some time.


The next chart (above) shows why we think EUR/USD is bearish. According to the Elliot wave count, the declines from 1.60 have been impulsive (5-waves) and the rallies have been corrective (in three waves). Currently, it looks like EUR/USD is completing a 3-wave rally to correct the drop from 1.50 to 1.18.

Thus, since we generally like EUR/CHF long, and EUR/USD short, we want to go USD/CHF long:


The 15-yr monthly chart for USD/CHF (above) looks rather bullish. First, notice that a 5-wave decline is nearly complete, which indicates a strong counter-trend rally ahead (multi-year). Second, you can see that price is holding at a very strong, long-term trendline (we believe this line will hold, so if price closes below this line on two monthly candles, we will exit the position). Third, Wave-3 ended with a parabolic move. Then, the currency pair went on to retest the parabolic low twice, but so far has not broken it substantially. We think this is quite bullish. Fourth, notice the MACD divergence that could be potentially forming.


Zooming in on the USD/CHF chart (3y weekly chart above), you can see that Wave-5 has formed inside a channel that very closely resembles an ending diagonal, which indicates strong reversal ahead.

While the technicals appear strong for USD/CHF long, the COT data also supports this notion:


First, notice that the 78-week index for Commercial traders of USD are nearing the 100 percentile mark, meaning commercial traders are becoming very net long.


Swiss franc commercial traders are very close to the 0 percentile mark, indicating that they are very, very net short.

Overall, it is a bit frightening to go long USD/CHF when it’s in such a clear downtrend. However, the technicals indicate that it is nearing support, and the COT data shows that we’re taking on the same position as the smart money commercial traders.

Our trade plan is to exit at a loss if USD/CHF closes below the monthly trendline described above for two monthly candles. Our initial upside target is 1.05, and then 1.15.


Can’t Help Myself!

UNG must be on investor’s most-hated list, because since the energy bubble peak in 2008, UNG has done nothing but drop. At some point, enough is enough, and I believe that point may be soon here. I’m going long here.

The daily UNG chart above shows a very clear 5-wave decline, with MACD divergence on the recent drop. Time to take a gamble.

Outta NEP

A few months ago, before NEP was halted, I went long based on trendline support. Today, I sold that long position for a small profit. I believe NEP could face continued headwinds for some time to come.


Check out the daily chart above: first, notice that NEP is running into the combination of three trendline resistance levels, around 6.60-7.00. Furthermore, I think it will take additional time to unwind the excesses that were generated in the parabolic run into Jan. 2010. NEP’s business is looking good, but supply and demand of shares always rules. I think enough people got shafted in the $8-12 zone that they will provide nice supply, holding the price lower.


Now that’s what I’m talking about!

I went long EUR/CHF near the end of August based on several factors that showed it was ready for a nice rally. Since then, market action has unfolded quite nicely, and I am happily sitting in my long position. My original exit conditions remain in play (2 monthly closes below 1.28.


You can see on the monthly chart above that EUR/CHF held at the strong support that I identified in the initial post. In fact, on a monthly basis, EUR/CHF essentially reversed August’s losses. This is a very bullish Piercing Line pattern, and it strengthens my confidence in being long. However, 1.36 should be major resistance, and I am awaiting price to break clearly above this level.


BIDU goes Parabolic

I think the stock market is topping out. Blogger sentiment is extremely bullish and stock market sentiment is relatively very bullish. In the midst of these sentiment extremes, BIDU is going parabolic. I think this stock is a good short bet, though it could have a bit more upward thrust before reversing.


You can see in the daily chart above that since consolidating after it’s split in May, 2010, BIDU has rallied in a parabolic trajectory. The fact that 5-waves can be traced out tells me that this rally is near an end. Furthermore, when sentiment is bullish and individual stocks are going parabolic, I believe it’s a safe bet to short.


Stock Market Near a Peak

Today I’m revisiting my thesis from a few months ago that the stock market is in a bearish formation. Though it has rallied quite strongly over the past month, I think this strength is nearly exhausted. This is confirmed by technicals as well as sentiment.


First, check out the SP500 E-mini chart above. I see a very clear 5-wave leading diagonal, followed by a very clear 3-wave upward correction. At a minimum, we need to see a drop below 1,000 to complete this pattern.


Meanwhile, sentiment is very bullish. I have seen many bloggers commenting about the Head and Shoulders formation above, but everyone keeps talking about them and nothing ever follows through. Also, bloggers are very bullish in general, and bullish sentiment is at multi-month highs!

Conditions look ripe for a decline!

Reshorted Gold via DZZ

Reshorted gold circa 1286 by purchasing DZZ. Mental stop @ 1291-92.


Fool’s Gold?

Once again, I’m talking about Gold. A few months ago, I was expecting a sharp drop, which did occur. However, the subsequent bounce has been stronger than I expected. I still believe that gold will weaken soon, and if it does make a marginal new high, it won’t be sustained very long.


In the first chart above, the 3y weekly chart, notice that gold broke a multi-year supporting trendline, and is not in the process of retesting this trendline from below. Second, notice the MACD divergence that has not yet fully resolved. Third, notice that in every other major rally prior to latest one, volume expanded heavily on the upswings. This time, volume is absolutely meager, which indicates that buyers are not nearly as confident as they were in the previous rallies.


Next, take a look at the COT data for Gold. The chart above shows gold’s price in the upper panel, and the 78-week COT commercial trader’s index in the lower panel. When the blue line is at 0, commercial traders are more short than they have been in the past 78 weeks, and vice versa for when the line is near 100. With the recent rally, commercial traders have taken the opportunity to drastically increase their short positions, which is a bearish sign.

Finally, I want to comment on sentiment. Seasonally speaking, August and September are quite bullish for gold. However, because this tendency has been so apparent in the past couple years, there is now a general consensus that gold will continue to rally in the coming weeks and months. Combining this bullish sentiment with the bearish factors mentioned above tells me that the probability of a drop is higher than the probability of a rally, and I am positioning myself accordingly. Good luck!


Flat on EUR/USD

I am currently out of the EUR/USD and plan to avoid trading it for a for weeks/months. I am not sure what it will do going forward, but my bias is slightly bullish. If EUR/USD does happen to rally to 1.35-1.40, I will at that point look to re-initiate a short position.


You can see in the chart above that the EUR/USD did respect the trendline resistance I wrote about at the end of July. However, the selloff was very sharp, and a little too “obvious” in my opinion; i.e. anyone observing would now assume that the downtrend is back in full force. I think it will take some more time to neutralize the bearish EUR sentiment, so it would not surprise me to see a rally to 1.35-1.40. Either way, I have no risk on EUR/USD at the moment, so I don’t whatever happens.


EUR/CHF might be ready to enjoy a rally!

EUR/CHF has been down 12 out of the past 14 months. This is understandable, given the debt problems in Europe, but at some point the decline is over-extended. I think this time is nearing, and I am willing to make a long bet on EUR/CHF. As long as EUR/CHF doesn’t have two monthly closes below 1.28, I’ll stick to my guns.


Take a look at the 20y weekly EUR/CHF chart above. First, notice that price is holding at a very long-term support trendline. While price bounced off this level last month, I think it will take more than just one month to resolve the demand that this trendline should create. Also, notice that RSI is beginning to form divergence with price, so as long as 1.28 holds on a monthly closing basis, this RSI divergence should support prices into the future.


Now take a look at the 5y daily chart. First, I find it interesting that from the Oct 2008 low, price consolidated in a triangle formation. As I’ve posted about many times before, triangles often form before the final move in a trend, and once that move completes, the trend reverses. Second, notice that the decline out of the triangle has been parabolic, in a clear waterfall selloff. Once these patterns terminate, they often mark the end of the move for an extended period as the excesses of the move resolve. Finally, notice that the Oct 07—>Oct 08 move is about the same size as the Jun 09—>Aug 10 move.

These indicators tell me that 1.28 should prove to be strong support, and I expect to see a rally soon commence, with a target of 1.45.


EUR/USD, stop making me look good!

About 6 weeks ago, I pointed out that the EUR/USD looked prime for a sharp counter-trend rally. We have indeed seen a nearly 1200 pip rally! So far it seems like the market is trying as hard as it can to follow my projections, but of course that will end at some point. Either way, now that we’re at resistance, it wouldn’t surprise me to see the EUR/USD drop, and possibly continue the long-term downtrend.


IWM Leading Diagonal

Back in May, I mentioned that the stock market finally ended its uptrend. I am still bearish the stock market, and my hypothesis is that it will not make a new trend high before making a new trend low. Currently, I really like the bearish pattern on IWM.


Let’s review the Elliot waves. From the 2007 high, there was a fairly clear 5-wave decline into the March 2009 low. This was followed by a fairly clear 7-wave rally (abc-x-abc) into the April 2010 high, which is corrective. I first mentioned this count near the April high.

When I counted 7-waves up for the corrective rally from the March 2009 lows, I expected to see an impulsive selloff to confirm that the long-term downtrend would resume. I believe we have seen this, as the first leg down since April 2010 was a leading diagonal with 5 overlapping waves. You can see that the leading diagonal was halted at a long-term support line, and since then we’ve had a 3-wave rally. Also, notice that volume has been substantially above average on the declines, and below average on the rallies. This looks like distribution to me.

Thus, at the point, I would expect the market to turn over soon and start heading down. The next decline should be a brutal 3rd wave.


Gold shall tank soon.

I last discussed Gold a month ago, and thought that if price broke above $1,250, I’d be wrong about Gold reversing. However, gold has tried to break above $1,250 several times now, and failed. I think the next big surprise in gold will be to the downside.


Notice Gold’s daily chart above. First, there is a 5-wave progression from the 1040 low set on Feb 5, 2010. 5-waves are usually followed by reversal. Second, Wave-V from 1040 looks to be forming as an ending diagonal, which as you know, reverses strongly. Third, notice the MACD divergence with price. And forth, notice the declining volume as gold is “breaking out” to new highs with bullish sentiment. Volume should be increasing sharply if this breakout were real.

I think all these factors should lead to a sharp decline in the price of gold in the near future.


Another leg down coming up?

Last Wednesday, bloggers and readers were going nuts as the market was dropping sharply. Crash call after crash call was being published, and it seemed impossible for the market today rally. Of course that was the bottom, and here we are, 70 points higher! I am noticing a bearish pattern that I’d like to share. I consider it valid as long as SPX stays below 1120.


Notice that the drop from 1216 can be counted in a series of first and second waves. Wave1 ended with the ‘flash-crash’, Wave2 was the sharp reactionary rally. Wave-i of Wave3 retested 1040, and now Wave-ii of Wave3 appears to be unfolding as a flat (3-3-5). Notice that volume has been trending higher with the declines, and lower with the rallies. This tells me that we’re still prone to selling off. Today’s breakout above 1105 probably convinced a lot of bears to capitulate, as is apparent from today’s price action. We’ll see what happens!


Will the EUR/USD Collapse?

I had been shorting EUR/USD from 1.51, and closed out the trade when the EUR hit 1.2700. However, I acknowledged in that post that there was the potential for more downside. We did in fact continue selling off hard, to below 1.20! Commensurate with this selloff has been the creation of a massive bear herd—now it’s obvious that the euro WILL collapse! I think the EUR/USD will bottom soon and test 1.3250.


Take a look at the chart above. From an Elliot Wave standpoint, we are nearing the end of an extended decline. Wave-V from 1.52 is nearly complete, and was approximately as long as the distance from the beginning of Wave-I to the end of Wave-III; this is a common occurrence when Wave-V extends. Wave-iv of Wave-V formed as a triangle, and triangles often indicate a move is nearly exhausted. If we do bottom, a rally to 1.2750 followed by a rally to 1.3250 seems reasonable.


The chart above shows the USD Index. I show this chart simply to highlight the triangle that USD broke out of. This sort of thrust is usually terminal.

The next few weeks should be very interesting!


Will Gold’s trap remain intact?

Gold is up from since I mentioned that it looked bearish after the false breakout. However, the gold market still looks bearish, as long as it continues to stay below $1200.


You’ll see on the GLD daily chart above that 120 (~$1200/oz) is a critical resistance. If there was a true bull trap last week, gold needs to stay below that level to prevent all those traders from breaking even. I think this might happen because volume shrunk during the rally this week. Nevertheless, I will exit my gold short if the highs from last week are broken.


The stock market is now in a downtrend

Today was an important day in my opinion. We finally made a lower low and broke the 15 month uptrend.


You can see in the chart above that since March, 2009, SPX made a clear series of higher lows and higher highs, thus defining an uptrend. Then we had the crash on May 6th, which stopped just shy of the previous trend low on Feb 5th; uptrend still intact. After a rally which made a lower high, however, the market has now resumed selling off, breaking the series of higher lows.

One might compare this decline to that of August 2007, in which we had two sharp down-legs with extreme bearish sentiment. But notice that back then, the market stopped short of making a lower low, and the uptrend continued for another couple months.

Now that the downtrend has been confirmed, my strategy will be to short rallies against 1180.


Gold is looking ugly

Gold was all over the news last week as it was raging to new highs. I now think that it may be near the end of it’s uptrend, and I’m shorting KGC (Kinross Gold) as a proxy for gold, with an order to exit if GLD makes a new high.


My first chart shows yearly candles for gold. Notice that we’ve had 10 straight years of higher prices in gold. Gold is the “no-lose” investment today. Even if gold eventually does hit $2,000/oz as many people expect, I think we need an intermediate term correction that creates a down-year candle to shake some people out. Even the massive inflation in the 1970’s only lasted for 4 years. Furthermore, we are seeing the weakest inflation in 44 years, even with the trillions and trillions of dollars that governments are printing. This implies massive deflationary forces which could spell weakness for gold.


The next chart shows weekly bars for the past 11 years. From an Elliot Wave perspective, notice that 5-waves have completed. Often times, commodities will have a massive rush as the trend ends, but my thesis is that perhaps we will see an intermediate correction before we get this massive rush. A correction could take gold to the Wave-4 low of $700. There is clear RSI and MACD divergence, but these have yet to be confirmed.


The daily chart above shows a very interesting phenomenon that occurred last week as the media was excessively bullish on gold. Notice that price broke out above the previous high and stayed above there for several days, enough to convince people that it was a real breakout. Then today it gapped lower, trapping all the bulls badly. If this false breakout is significant, we should not see a new high, and thus I am placing my stop at that level.


One other interesting chart which shows the excessiveness of gold’s rally is the weekly candles of gold priced in euros. Notice the clear parabolic nature of that rally. Once again, no matter how badly the press portrays the situation, parabolas are unsustainable. Either gold will tank, or the euro will rally, or both.


Finally, take a look at the daily chart for KGC. Most gold stocks have slightly underperformed gold, but not nearly to the extent that KGC has. Its relative strength to GDX (a gold stocks index) has been weakening ever since gold bottomed in 2008. Since gold stocks tend to leverage moves in gold, I see KGC as a good stock to short; if gold drops, KGC should drop harder than most gold stocks, and if gold rallies, KGC may continue to underperform, thus lowering my risk.

It’ll be interesting to monitor what gold does in the near future. It’s obviously too early to call a long-term top in gold, but I’ll try to catch a rising knife at this point. If gold makes a new high, I’ll know that I’m wrong on the short-term.


Taking a Bet with NEP

Back in Jan, 2010, when NEP was rising exponentially, I made several posts clearly explaining that price would soon top, and that it would start a downtrend and poor returns going forward. I think NEP’s intrinsic value is between $9.70 and $13 (using 24% or 15% discount rate, respectively) so today I’m taking a risk and purchasing some shares into the recent downtrend, with a stop @ 4.77.


You can see on the 3y daily chart above that there is a very long-term trendline which has supported price action ever since it broke higher with the news that it was uplisted to AMEX. By going long here, I’m betting that the trend will continue, and that NEP’s management will get its s*hit together and correct the company’s financial statements! Regardless of what happens, though, if price breaks below the trendline and goes below 4.75, I’ll take a loss and stop myself out, as this would indicate a longer-term trend reversal.


Why Sadar Biglari's proposed compensation package from BH is a fair deal for investors

After being invested in Steak and Shake (SNS) last year from $5.80 to $9, I've continued paying attention to them. Today the company has changed its name to Biglari Holdings (BH ) and trades at $320 (They reverse split 20-1, so its $16 when compared to my shares).

I noticed that their stock price has dropped from as high as $418 in early April, and wanted to see why. Apparently one big reason is because of the new proposed compensation package for the CEO, Sadar Biglari. Here is the gist of it:

1. Biglari is selling his other company, Biglari Capital, to BH for $1. Biglari Capital is the general partner of The Lion Fund, L.P., a Delaware limited partnership that operates as a private investment fund. The Lion Fund manages about $50mil, and Biglari Capital was paid 25% of any returns over a 5% annual hurdle with "high water mark" stipulations.

2. In return, Biglari would now be paid an incentive bonus based on the increase in Book Value of BH. Again there will be a 5% annual hurdle before any bonus is paid out, at which point his bonus would be 25% of the gain in excess of 5%. There is also a "high water mark," stipulation in place. Finally, Biglari would be required to use 30% of bonus money (at least 50% after taxes) to purchase BH shares within the next 120 days after issuance.

Thus far, investors have been screaming bloody murder on the message boards and even well respected (by me at the very least) NFI has sent a letter to BH against this package. However I feel that this package is quite fair and that investors will actually end up quite satisfied with their returns if Biglari makes a lot of bonus money. Let me go over my logic:

There are three main ways BH book value will go up:

1. Profits from Operations

2. Increase in the value of company investments

3. Purchase of other companies through issuance of stock

The first two ways are clearly beneficial for investors as in the long run the stock price will follow if the company's value increases in those ways. The third way is where investors could be hurt, because new stock being issued to purchase another company would potentially dilute current investors, yet possibly create a situation where Biglari could receive a bonus. However, I believe that Biglari will only use stock to purchase other companies when they represent a good long term value because he holds a lot of BH stock and the value of his shares would fall by more then his potential bonus.

Here's what BH's book value has been the last 5 years:

Now lets look at how investors might benefit long term vs how much Biglari will benefit. In the chart below I've assumed that Biglari delivers earnings of 10% of Book Value each year, giving him a bonus of 12.5% of the increase in Book Value.

As you can see, investors do quite well for themselves, pocketing 8.75% yearly gains, while Biglari receives a yearly bonus in the $3-4mil range. I feel like many CEOs at publicly traded companies make quite a bit more whether or not they deliver long term performance figures that would be as solid as these.

I think it is clear that Sadar's long term plan is to emulate Buffet and Berkshire Hathaway. He will take cash from Steak and Shake and other future acquisitions and plow it into investment opportunities which he feels will yield higher then 10% returns. I bet that in a few years the bulk of the yearly Book Value increase will be due to the increase in the value of investments owned by the company. At that point, one could consider BH to be a hedge fund, and Biglari's bonus to be his management fee. Personally, his fee structure is much more appealing that the typically 2%+20% of profits.

Disclosure: Don't own any BH at the moment, but seriously considering buying some right now.


Closed out EUR/USD Short Trade

If you look at my last post about EUR/USD, you can see that I favored the collapse scenario for the EURO. We certainly got a nice swoon! My target on this trade has been 1.27 for a while, and since we got that price today, I decided to take profits and sit out for at least a couple weeks. I believe we could see additional downside, but 2,300 pips in 6 months is fine for me.


On the daily chart above, notice that price easily pierced the weekly trendline dating back to 2002! I believe that the congestion around 1.35 was where all the buying pressure from that trendline was absorbed. Once the buying power was absorbed, there was nothing to hold up the EUR when it actually reached the line, and it was able to easily collapse (probably tricking many a retail trader who bought there for an ‘easy profit’).

Regardless, if the EUR/USD bounces from here, it appears that there could be one more wave down to follow. I would love to see price break through the 2008/09 lows before starting a sustained uptrend, just to create the bearish sentiment required for an uptrend.


Exited ABX short @ 42.65

As you know, I’ve been short ABX from around $47.20. I recently got stopped out of my short position since the Gold market has been exceptionally strong. I closed out the trade @ 42.65 for a small profit, according to my trade plan.


Is the EUR almost exhausted on the downside?

I have been short EUR/USD since about 1.50, and now that it has dropped nearly 2000 pips, I am cautiously considering my exit strategy. I see two possible scenarios, outlined in the following chart.


Scenario 1 is the ending diagonal scenario in green. This implies limited additional downside to the 1.30-1.31 zone over the next few weeks.

The second scenario, which I am currently favoring, is a break through the support trendline, continuing an extended 5th wave from 1.38. The reason I’m favoring this scenario is that retail traders have shifted to net long in hordes, after the EUR tanked due to the Greece downgrade. Sentiment is not overly bearish the EUR, nor bullish the USD, so I think it would be perfect to see price drop to slightly below 1.23 low set in 2008, before starting an extended upward correction to 1.3250 or so.

Either way, I have moved my protective stop to 1.3425. If Scenario 1 is in play, I am not missing too much downside with this stop. And if Scenario 2 unfolds, price should not rally above 1.3425.


NEP's earnings restatements - What do they mean?

If you are like me, then you've been trying to figure out why NEP has had so many issues with their accounting, and what those issues actually are. A couple weeks ago I got a good lesson about how and why companies have to take a loss based on the change in fair value of warrants. Today I read up on the other big write-down, which is related to the impairment of oil properties.

NEP had to take a $13.2mil impairment charge on their oil properties in Q4 of 2008, and another $13.8mil charge for Q1 of 2009. I did not understand what these were for, but after doing some reading up on the subject, I think I understand what happened.

In short, accounting rules require companies to make sure that the capitalized oil and gas properties as listed in their balance sheet are not higher then the current "SEC" value. This value is figured out by the company based on their current proved reserves, current oil price, and expected future production schedule. If the oil and gas assets are higher then their current "SEC" value, then the company must immediately write-down the difference and take it as an expense in the current quarter.

What this means is that if oil prices plunge, as they did in Q4 and Q1, then the "SEC" value of oil and gas properties will decline, and thus an impairment charge might be necessary. In NEP's case this resulted in a $27mil combined charge for the two quarters.
What is interesting about this charge is that the company cannot add back to the value of the properties later on if oil prices do go back up, which we know they did. Thus the company has charged off $27mil of its oil assets which would usually have been taken over a period of years as Depletion.

So what does this mean?
NEP's future stated income will be higher because there will be less future depletion expenses.
We also know the NEP's future stated income will be higher when the warrants are exercised.

When all is said and done, nothing has changed operations wise for NEP. They accounting department clearly needs some improvements, but I would argue that they actually hurt themselves more then anything because the company paid about $7mil more then it needed to in income taxes over the last couple years due to their understating non-cash expenses.


Taking another stab at the short side

I believe the market is near a short-term top (that could to be a longer-term top) based on highly bullish sentiment and exhaustive characteristics of this rally. I am looking to short the market buy purchasing TWM (Russell 2000 2x Inverse ETF) around $18.


First, check out the Put/call ratio chart above. Notice that the ratio has spike to extreme bullish readings. Options traders are highly bullish following the last few days of the market rallying.


Notice on the IWM chart above (5y weekly chart) that price is nearing a major resistance level. Also, notice that the rally is in 7 waves (ABC-X-ABC)--this is normally a corrective setup. IWM has rallied more than 100% in 13 months with only small corrections in between. The time is ripe for a major correction.


Finally, on the daily IWM chart above, notice that after a massive, relentless run, the market gapped higher and rallied hard. These kind of gaps can often indicate exhaustion when the happen after an extended run, and I believe now is the time to capitalize on this setup.