NEP’s Volume: Something to Consider

You can see here that I was bearish on NEP’s price prospects while it experienced a massive parabola. We’ve now seen a 34% drop since the high. I am not sure exactly what will happen on the short term, but I wanted to share an observation that I take as bearish for the continued longer-term prospects for this stock’s price.

Above you can see NEP’s monthly chart. There are two striking features. First, notice that December’s volume was about 27m shares, approximately equal to the company’s entire outstanding stock. Based on the massive breakout, one might argue that because November closed above $5, institutions bought this stock in quantity (the ENTIRE company) which was responsible for the huge rally. So, following this logic, it would be bullish since large players are accumulating this stock.

Well, one month later the picture has flipped 180° in my opinion. January’s volume came in higher than December’s, and the month closed at a lower price than it did in December! What this tells me is that someone (or group) successfully executed a manipulation of this stock to unload a massive position above $5. The up move attracted enough retail/public buyers that the shares could be distributed well above the breakout point at a nice profit.

However, we have not yet seen many high-volume down days. I believe these are yet to come, and may be accompanied with more Form 4 filings. In fact, according the Reminiscences of a Stock Operator, a book which many NEP supporters have fondly quoted, “stocks are manipulated to the highest point possible and then sold to the public on the way down.” (pg. 246). I think this is because the hype created by the run-up creates solid demand to absorb large amounts of shares on the way down, as the dip-buying public steps up to the plate.

If this analysis is correct, it would imply that my thesis for poor returns over the next couple years is supported, because if a large portion of the stock is distributed among many smaller investors, an aggressive up-move will be harder to accomplish.

The Dec-31 institutional holdings report will shed more light on this hypothesis, but in the meantime, I’m curious to hear what others think! Good luck!

USD could be coiling for another large rally

After beginning a nice rally, and subsequently correcting that initial move, the USD has put in a higher low and appears ready to break out to new trend highs, hopefully confirming an uptrend. I think the odds that this move will be sustained are higher than even.

The reason I am still bullish is that the USD has held up very nicely and has formed a cup-and-handle pattern (see above USD/CHF chart). If price breaks above the top of the handle, it should sustain a nice continued rally, as opposed to reversing and continuing the long-term downtrend.

Another Example of the Power of Ending Diagonals!

On January 6, 2010, I commented that I thought that the VIX was due for a massive spike, based on the ending diagonal pattern that I saw. Well, here another example giving credence to the power of the ending diagonal!

Gold Stocks Update

This is an update to my previous bearish analysis of Gold and Gold Stocks (ABX) from November, 2009. Many gold stocks broke through uptrends today (subject to closing prices), so conditions are looking good for further downside.

This is an updated ABX chart. Notice that price has broken through a multi-month ascending wedge today. I wouldn’t consider a downtrend fully under way until prices break below $34.50. My plan now would be to move my stop to $48, and if prices break below $34.50, move my stop to $43.

Revisiting the Ultra-Bear Projections

It has been some time since I’ve posted some bearish charts. Obviously, I have been wrong the whole way up (as have many others), but now I’ve started to notice a doll-drum atmosphere amongst financial bloggers that I have participated in. I’m feeling that it doesn’t even matter any more, whatever I post will be wrong.

However, having reviewed some long-term charts, I just want to reiterate my bearish prognosis for the SPX.

The chart above is the Quarterly SPX charts since 1930. The wave count I posted above is generally accepted as the long-term Elliot Wave count. In 1994, I can imagine that the Elliot Wave buffs were projecting a top around the 450-500 level based on price reaching the upper end of the channel. This level was ‘supposed’ to be major resistance, but the market just barreled right through it, and that trendline became a new level of support.

15 years later, the market convincingly breaks back below that level of support (as you can see in 2002). My guess is that if the market resumes its downtrend, it will not find major support until the 450-500 level. In my experience, when a level that was supposed to be major resistance breaks, that level then becomes major support, as all the sellers in that region provide demand when price finally retests that point.

I think this downtrend will commence soon, as price is back-testing the uptrend line, and the market environment has become very complacent. Good luck to everyone!

Comparing 2009/10 NEP to 2007 NEP

NEP: Aug ‘07 to Sep ‘07

NEP:Dec ‘09 to Jan ‘10

Look at the two charts above comparing NEP’s current parabolic run to it’s previous parabolic run from Aug to Sep, 2007. Notice the similar progression of sharp rallies, followed by short correction. If my read is correct, and this similar “climax pattern” takes place, we should print the ultimate top in a few days. This supports my theory that NEP’s move will top out in the next few days.

Get Ready for a Volatility Spike!

I think the Volatility index (VIX) is about to see a major rally. Notice in the daily chart below that price is carving out an ending diagonal pattern, and as you know, once price breaks out of these patterns, the upside is usually vicious!

NEP should top within the next couple DAYS

Reviewing NEP’s chart today, I remembered a very important chart principle regarding triangles. NEP just broke out of a triangle, and I believe this thrust will be terminal and should end within the next 1-5 days.

Here are the relevant principles regarding triangle formations from Elliot Wave Theory by Robert Prechter:

A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse…

On the basis of our experience with triangles…we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market.

(note: bold emphasis added)

Now let’s look at NEP’s chart to see where we stand. The first chart was taken from a post written several days ago and shows that NEP definitely did break out of a triangle formation. And as you can see from the labeling, this is likely a 4th wave triangle. Thus odds suggest that this recent rally is terminal in nature.

The second chart below shows the detail of the triangle and subsequent breakout. I have highlighted the apex of the boundary lines of the triangle, and you can see that this point in time will be reached within a few days. As the quote mentions, the market will often reverse at this point in time.

Therefore, given the excessive bullish sentiment currently surrounding this stock, the parabolic nature of the rally, and the Elliot Wave principles, I am inclined to believe that the stock will begin a reversal within the next few days. Good luck to all!

NEP is still undervalued

The title above may come as a surprise considering that this blog's last couple posts have been decidedly negative towards the prospect of further price appreciation from NEP. But its simply explained by the fact that my brother and I have a difference of opinions on NEPs future returns.

My brother is technically right when he says that "long-term (1-3years) share-price prospects for NEP are substantially lower at this price", but NEP will still have excellent returns going forward, especially on a longer term horizon (5-10 yrs). Will it return 5288% in the next 3.5yrs? NO. So in that sense my brother is right. Still, I think that it will still return at least 25%+ per year over the next few years.

My brother is a chartist and based on the chart I too agree that this move from $5 to $10 has happened very quickly and at some point I think we will see a substantial correction. But this correction might not happen until the shares reach $11, 12, or even $15. I did finally take some profits because NEP had become 75% of my portfolio, but I still hold most of my shares and plan to for a long time if the underlying business continues to improve like it has over the last several years.

I took a quick look at NEPs historical earnings on Morningstar. Their combined profit from 2004-2006 was about $.03/share, or 1 cent per year. This year we expect earnings to be $.73, and for them to jump to $1.20+ next year. So I would argue based on this that the price of the stock still has catching up to do, since its "only" up 5288%, while earnings are up 7200%.

I've spent some time the last several days creating a detailed long term valuation model for NEP. It's close to being finished, but I'm trying to figure out how to post the data succinctly in an easy to follow way. However I will post a couple main points now:

- Based on what I believe was a conservative scenario which assumed no further leases are signed and only slow growth in the drilling segment, NEP has a Present Value of $13/share if you apply a discount rate of 15%. This means that an investor wanting to receive a 15% annual return on his investment from now until 2022 would be will to pay $13/share assuming that NEP issued their free cash flows back to him each year.

- I will post details later this week, but its important to realize that this valuation assumes that management will fail to acquire more leases or other value-adding acquisitions. Management has proven to be quite good over the last few years, so I believe that there will be new acquisitions within the next year or so that will add more value.

- I assumed that oil prices would only increase by 7%/year over the next 13 yrs. I think they will in fact increase much more, which would also increase the PV.



The Bottom Line is that while I agree with my brother that the price of the stock is becoming extended on a technical basis and may retrace a portion of the incredible gains we have seen this last month, NEP is most certainly still UNDERVALUED. Thus if your horizon is longer then a few months, I feel confident that the stock is still a good purchase at $10/share. Just don't go all in.

You be the Judge

I stand by my previous hypothesis that the long-term (1-3years) share-price prospects for NEP are substantially lower at this price. Is this not a parabolic chart?