themarketbrothers

Dare to short AAPL?

2012-02-09T10:39:00.001-06:00

These days, you’d be crazy to even think about shorting AAPL, right? They just had killer earnings and are on track to earn $40+/share in 2012, giving them a nice, comfortable valuation. However, the charts point to the notion that a long-term top is right around the corner.

First, on the monthly chart above, note that AAPL appears ripe to complete a 5-wave rally that started in 1998! I would expect a multi-year correction to ensue soon based on this chart alone.

On the weekly chart, you can see that Wave-V from the first chart has subdivided nicely into 5-waves as well. Even on this shorter timeframe, the wave pattern indicates that upside is limited.

The daily chart shows a typical parabolic blow off to finish Wave-V. Importantly, recent price action is confirming that a top is very near:

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

This weekly candle is on track for being the largest weekly gain in dollar terms, ever. Furthermore, we’ve seen 5 straight days of gains, with today’s price action including a large gap up followed by a large rally. This is typical blow off action, and it implies that the market is becoming too one-sided to sustain further long-term price rises. Look for a multi-month or multi-year correction to start soon.

USD/CHF Long-term Update

2011-07-13T11:09:00.001-05:00

I’ve been quite wrong about the USD/CHF. From my initial entry, I’m down about 1200 pips.

However, if you think the USD/CHF will continue dropping forever, think again. On a very long-term time frame, it is approaching very strong support.

On the 20y monthly chart above, notice that from 2004 through 2010, USD/CHF consolidated in a picture perfect triangle. Each subwave was in a 3-wave structure, and price held within accurately defined trendlines.

Since 2010, we’ve seen the characteristic “thrust” out of the triangle to the downside. A typical target is normally the 100% extension of the height of the triangle, which is around .8000. Also interesting is that the 50% extension of the previous down wave from 2000-2004 is right @ .8200 or so. Because triangles are precede the final move in a trend, I believe we’ll see a basing pattern and subsequent reversal in the coming months. Price should stay above .79-.80 for this thesis to pan out.

NEP could be a BUY

2011-06-06T19:05:00.001-05:00

1.5 years ago, almost to the day, I projected that NEP was nearly at a peak, and would suffer poor returns for the following 2-3 years. Unbeknownst to all the investors, there were several negative developments that arose from NEP, including accounting problems which led to a trading freeze and near delistment from the AMEX. As I anticipated from the charts, volume, and sentiment, price has since performed extremely poorly, averaging returns of –60% annually. All things come to an end, however, and NEP seems to have weathered the storm. It appears attractively priced, and I’m buying around $3. Here’s why:

NEP had $75m in cash as of 3/31/11, and currently has a market cap of $105m. If the auditors are not lying, then this is a pretty good valuation at which to buy NEP.
The accounting issues that plagued NEP are out of the way.
The lawsuits which sprung out of the trading halt and claimed that NEP breached its fiduciary duty to its stockholders have been dropped.
Volume is mostly down-trending as price declines (see chart below), indicating a decreasing level of interest in the stock. This is preferable to seeing volume increase as the stock tumbles which indicates lack of confidence in the company.
There was a significant basher article by “Bigfish” research which cause the stock to drop significantly on volume of about 3m shares). Then, the next day, there was a massive short squeeze on 3m shares as well. This price action is simlar to what happened in Dec 2009, except opposite (see chart). Back then, price spiked up in the direction of the uptrend on 3m shares, reversed violently the next day on 3m shares, and then proceeded to retest and exceed the previous highs. Now we’re seeing the same pattern. Call me paranoid, but it seems like someone is playing those spikes, and it tells me that we’re near a turn.
Finally, from an Elliot-wave perspective, we had a complex 3-wave down trend (see chart). This tells me that we could see a basing pattern and a rise out of NEP.
I conclude that NEP’s return prospects going forward are now positive.

Volume divergence on SPY

2011-05-14T08:55:00.001-05:00

It’s been a while since the last bearish post on the stock market. Clearly it has been wrong to be bearish, and I’ve paid for it. The market marches steadily higher, but it is currently displaying some signs of internal weakness that tell me it may initiate a choppy, medium-term downtrend soon.

First notice in the chart above that the market has carved out a nice 3-wave rally since the March 2009 low. Each subwave (A and C) has formed in 5-waves. Wave-5 of Wave-C appears to be some sort of ending diagonal. What is more interesting, however, is that on-balance volume has been trending lower even as price rallies, which indicates that this market is living on borrowed time. Look out below!

Email to NEP management

2011-04-14T09:35:00.001-05:00

I've written an email to NEP in the hope that management address the two valid points in Bigfish's reports when they come out with a more detailed statement in a few days.

To whom in may concern,

I have been a China Northeast Petroleum shareholder for 3.5years now and am very happy to see how the company has grown. The report by Bigfish yesterday was clearly an attempt to profit from the fact that many other Chinese companies have lied to investors. I argued against many of Bigfish's arguments here: http://themarketbrothers.blogspot.com/2011/04/is-bigfish-right-or-wrong-about-nep-is.html

Still, Bigfish did bring up a couple good points about errors in some of your SEC filings, including the recent 10-K report. I do hope that you will explain these discrepancies so that investors can feel more confident.

1. If you add up the quarterly drilling depth performed by Tiancheng, the total comes to about 306,000 meters, but in the 10-K you list the total depth drilled as 374,000 meters.

2. As Bigfish pointed out, the amended Q3 2009 report shows what I believe to be an incorrect combined revenue number when including Tiancheng in your operations on page 18. You seem to have corrected the revenue amount on your 2009 10-k. Still, it would be nice to have an explanation as to why the error was not caught by you or your auditor.

Thanks for your time and I look forward to hearing about the new acquisition when it goes through.

Aurelien Windenberger

BigFish disappoints with 2nd post, NEP should be fine

2011-04-14T08:43:00.003-05:00

Yesterday a new blogger named Bigfish came out with a very negative report on NEP, which I responded to here. Later he said he was going to come out with something this morning which was even worse, and so he has...or at least tried really hard to. Unfortunately for him, his argument today was much weaker then the one yesterday, and is much easier to counter. At least yesterday he pointed out a couple obvious and specific errors in some of NEP's filings. I pointed out that neither error is in the company's favor.

In any case, yesterday he argued that the drilling business must be a fraud because NEP paid too little for such a successful business. I agreed that the price did seem quite good, but also pointed out that NEP added additional value by buying the company (namely the ability to sign more drilling contracts with PetroChina), allowing it to increase its revenues and profit margin.

So today, Bigfish comes out and argues that NEP is a fraud because they are going to pay TOO MUCH for the rights to explore and produce on the Durimu oilfield over the next 24 years. I guess Bigfish is like Goldilocks and needs every deal to be "just right."

Bigfish does do a good job showing how many companies are going to be between NEP and the original owner, but I don't understand why this is terribly unusual. Yahoo user stinky6987 explained it well in reply on this post:

Not much here, but buying a company (Shengyaun) that owns the right to drill an oilfield doesn't sound the least bit suspicious to me. Also, while the report asserts that Shengyaun didn't pay for the right to drill and is turning around and selling that right to NEP, there are many reasonable explanations for this, none of which involve fraud:

(1) Exploratory drilling is inherently hit-or-miss, once Shengyaun hit oil with their exploratory wells, the value of their contract with Jiangyuan went way up.

(2) As the price of oil goes up, the value of Shengyaun's contract with Jiangyuan also goes up.

(3) "State-owned" Jiangyuan didn't get a good price when making the agreement with Shengyaun.

(4) The people in charge of "state-owned" Jiangyuan wanted to steal money from the government, so they gave a no-bid contract to Shengyaun and took bribes or have an ownership interest in Shengyaun (note this does not affect the actual value of the contract to NEP).

All four of these are great reasons why NEP would pay the $43mil. I can think of a couple more as well:

5. Bigfish didn't show any proof that the previous owner didn't pay anything for the rights. Its possible they didn't, but not guaranteed.

6. Obviously business in China is done somewhat differently then here in the US (although I'm sure not that differently), so I wouldn't be at all surprised if at least part of the $43mil is a bribe to certain people somewhere along the supply chain. Bigfish makes a good point asking why NEP didn't try to get the rights directly from the state owner enterprise. Obviously that would have been better, but perhaps there wasn't any way to do so. The oilfields are located in a different state then NEP, so perhaps only companies from that state were allowed to receive the rights directly from the government. I unfortunately have no idea if my postulations are true or not, but this seems just as plausible as Bigfish's arguments.

The bottom line for NEP stockholders is that this $43mil acquisition would tremendously increase the potential production capacity of NEP, and as such represents an excellent long term direction for the company. The biggest concern in my mind, and one that I can't believe BigFish didn't mention, is that there is the possibility that the field isn't actually close to as productive as NEP tells us it should be. This is a risk that investors take when putting money with any oil company.

Also note that most of the transaction is being done in stock ($10.6mil in cash, the rest in stock when it was trading around $5). Personally, I think this is a good sign because it indicates that the previous owner believes in the strong potential of the field and wants a share of the profits.

Is Bigfish right or wrong about NEP. Is NEP really a fraud?

2011-04-13T11:07:00.009-05:00

This morning NEP dropped about 20% due to a newly posted questioning of a part of their operations by a new blog called Bigfish Research. (edit: This link won't work because the site has been suspended)

I read through their article and am now looking at all the 10-Ks myself to confirm or deny the accusations. While BigFish is correct on all his statistics, he paints the data in an extremely negative fashion to "prove" that NEP is a fraud and improve his short position. I have no problem with this as he is allowed to have his opinion and share it, however, I do think that investors should also have an opinion from someone who is long the stock.

All the information Bigfish put out in his blog is verified by what is in the specific reports he mentions he pulled it from. However, if you look at different filings, then the numbers are different. This presents a catch-22 for current and potential NEP investors.
On one hand, maybe the company isn't a fraud because the numbers make a bit more sense in other reports. On the other hand, why can't this company seem to be consistent across their filings. Is their accounting department really bad at making sure their statements match, or are they actually hiding something?

Analyzing Red Flag #1

If you look at the Q3 2009 amended report, the numbers that Bigfish talks about are true. For example, check out Page 18. You'll see that the company does in fact show that their combined revenues for the first nine months of 2009 would have been $76m, if Tiancheng was part of NEP the whole year. This is different then what was posted in the previous 10-Q for Q309.

However, if you look at the 2009 10-k, then the numbers match the initial numbers that NEP posted in the initial 10-Q after the acquisition.
Based on the information on page F-19, NEP would have had $79,362,000 revenues in 2009 if Tiancheng had been part of the company all year. NEP's production division made $51,081,000 in 2009, so Tiancheng had revenues of $28,281,000 for 2009. This means that their total revenues in the first 9 months was $14,704,000.

Note that in 2008 Tianchang's full year revenue was about $14.4mil, so before NEP acquired them they were growing at a reasonable pace, but not one that was extraordinary. The Q409 revenue figure of $13.6mil is certainly a massive jump, and I do agree with Bigfish that NEP very well may have asked Tiancheng to hold off booking revenues in Q3 so that they could be booked in Q4.

Analyzing Red Flag #2

NEP's business did not need to be SAVED. The oil production business profits were just fine, and Tiancheng was simply an additional bonus when it was announced. Its true that Tiangcheng was about half of NEPs business in 2010, but a big reason for that was due to the flooding in Jilin which drastically reduced NEP's oil output for a large part of the year.
Also, it makes sense to me that Tiancheng is able to generate more revenue being joined with NEP compared to operating alone. NEP already had contacts with PetroChina and thus were able to get drilling contracts that Tiancheng couldn't on their own. Tiancheng's margins also should be expected to improve with higher revenues due to economies of scale. Their margins would also go up once integrated with NEP because of cost savings for G&A.

Tiancheng's revenues have gone from $14.4mil in 2008, to $28.3mil in 2009, to $44.9mil in 2010. These are very impressive increases, but many companies have seen these growth rates when they were as small.

Analyzing Red Flag #3

I will agree with BigFish that it seems strange that they didn't mention Beijing Junlun Runzhong Technology Co. Ltd. (“JLRZ”) in the 2010 10-K. It seems like they should have drilled some wells for them, or at the very least, they should have let us know that drilling was delayed or completely canceled.

However, I don't see any issues with the rest of their operation. PetroChina is obviously a real company, and I don't see how they would let NEP pretend for 3+ years that they first sell petroleum to them, and now drill for them.

Also, I don't see why it's unusual that NEP didn't create a press release about the wells drilled for Daqing Shunwei. They drilled 54 for them all year, or about 14/Quarter. Its very plausible that Daqing signed a series of small 5 or 10 well contracts, which would not warrant a press release.

Analysing Red Flag #4

As for the total meters drilled figure listed multiple times in the 2010 10-K, I agree with Bigfish that there is something incorrect, because the company clearly only drilled 306k meters for clients during 2010, but for some reason lists 374k in multiple places in the 10-k. I can think of three explanations for this figure:

1. The company made a mistake in their calculations somehow and didn't catch it. Obviously this would be good and bad. (Bad because it should have been caught by the auditors).

2. The company included drilling done for themselves in the final figure. This seems unlikely because the company only drilled 6 wells for themselves in 2010.

3. The number could be fraudulent as Bigfish believes. The issue for me is that showing this higher number doesn't help NEP look better. Their revenue figures stay the same, so they list the avg revenue/meter as $120, when in reality it was about $147. This makes their operation look WORSE, not better!

Finally, I also noticed the higher revenue/meter drilled in Q4 compared to the rest of the year. Personally, I don't see why this is a red flag. Inflation in China during 2010 was high, and I would not be surprised if NEP was able to negotiate better terms for the wells it drills in Q4, vs the earlier deals they set up in early 2010.

Red Flag #5

This is probably BigFish's worst argument. When NEP bought Tiancheng, their Quarterly depreciation was about $375k. If we assume that they bought their rigs in a reasonably even manner since they started in Dec 2007, then we can assume that they had taken about $1.3mil in depreciation charges already when NEP bought them ($375k/Q x 7 Qs = $2.625m. Divide by 2 to account for gradual purchasing = $1.3mil)

Thus, their initial costs for the 7 rigs were about $13.5million. Lets assume the 4000m rig NEP purchased after the fact was a brand new rig and that the other rigs were purchased somewhat used. I will state that I have no idea how much more a 4000m rig costs then a 3000m or 2000m one, but I'm making guesses here which seem plausible:

3 2000m x $1.45m = $4.35m
3 3000m x $2.10m = $6.30m
1 4000m x $2.80m = $2.80m

Total cost is $13.45m.

These estimates seem completely plausible, at least to me. Of course we could also argue that the amounts are low, and perhaps we could get an opinion from someone which actually know the prices for these things, but to me I don't see how this is a Red Flag.

Red Flag #6

I have not done any additional research on drill rig capacity, but BigFish didn't give a great argument here. First off, we know that they drilled 306k meters, not 374k. So their production was only 1.8 times Eurasia's stated capacity, not 2.6.
The other point is that with 207 rigs, its very likely that Eurasia has many older rigs which are not as efficient as the NEP rigs, which are likely newer.
I don't have the time right now to look deeply into the issue, but BigFish should have used more datapoints.

Red Flag #7

BigFish's argument here is that 42% net margin is impossible. I would argue that it is not, especially when you consider that Tiancheng is doing this as part of a larger company. This means that this net margin doesn't include the additional overhead that they would need to pay if they were on their own.

Also, the oil and gas drilling industry has high gross margins. I took a look at RIG and its competitors and there they show that the average gross margin in the industry was 56%! Tiancheng's gross margin in 2010 was 61%. Thats only 10% better then the industry average.

Putting Everything Together

1. I will admit that the Tiancheng deal has been so good that it could be viewed as "too good to be true." No one can debate this and I wish that NEP would come out with a reasonable explanation for why the previous owner sold. I can think of a couple scenarios though. Perhaps the company was in a cash flow crunch, and the owner sold it because it was either lose it to bankruptcy, or collect $13mil for it.
Also, its clear that NEPs contacts have helped generate additional drilling contracts in 2010, so Tiancheng likely would not have done nearly as well alone.

2. I also agree that the numbers in the financials aren't adding up in all cases. The 374k meters drilled figure is clearly wrong and yet is posted multiple times in the 2010 10-k. Tianchengs 2009 revenues are also unclear because the amended 10-Q and the 2009 10-K have different numbers.
Personally, I believe that the reason for the discrepancy in both cases is user error, rather then fraud. Still, it is not a good sign that neither NEP's accounting departing or their auditors caught these differences in their reviews of the reports.

My personal opinion is that this is a great buying opportunity. Unfortunately I don't have extra cash to take advantage of it, but for me here are the possible outcomes:

1. The company is a fraud. Bagholders lose their full investment. Likelihood: 10-20%

2. The company is legit. In this case they will complete their purchase of the new oil field, and in 2-3 years will start producing large amounts of oil from it. From the $3 level the price of the stock could easily go to $30 in 5 years. Likelihood: 80-90%.

Personally I like those odds and feel that its worth speculating some money you can afford to lose on.

USD/CHF still bullish?

2011-03-08T10:31:00.001-06:00

In October, 2010, we went long USD/CHF. Today, it’s a couple hundred pips lower, but it hasn’t proven that it wants to go substantially lower. In fact, one interpretation of the price action indicates that it is ripe to rise much higher in the coming months!

In the chart above, first notice that price has been supported by a very strong 16-year trendline. Also notice that the sideways action since October, 2010 appears to be an ending diagonal in which each of the subwaves breaks down into 3-waves. There is MACD divergence, and today price broke back up into it’s previous range. if price can manage to stay above .92, We’ll be happy to continue holding this position long.

Natural Gas as a Substitute for Oil?

2011-02-26T15:40:00.001-06:00

I recently read an interesting post by Carl Futia which explained why he thought that Crude Oil would soon drop in price. Part of his thesis was based on the fact that Oil is a commodity, and thus has substitutes (namely, natural gas). This piqued my interest, because at first glance, I hadn’t made the connection that oil could be substituted for NG; after all, you can’t just pump up your car with NG!

After some research, however, I agree with Futia’s assertion that NG can substitute a significant portion of energy consumption, which will cause oil prices to drop, and natural gas prices to rise. To explain this dynamic, I’ll start by showing the extent to which NG can be substituted for oil. Then, I’ll show how a small change in supply/demand for a commodity can have a large effect on price. Finally, I’ll highlight whether the market would agree with my assessment.

Can Natural Gas be Substituted for Crude Oil?

This web site has a very effective graphical representation of energy consumption in the US (which I’ll use as a proxy for the OECD countries’ consumption pattern). From that chart, you’ll notice that Industrial uses of energy account for approximately 1/3 of total energy consumption (21.8 Q BTU out of 68.5 Q BTU). Furthermore, Industry sources its energy equally from petroleum (oil, 35.7%) and natural gas (34.8%). Because most industrial uses of energy require heat energy (whether it be for smelting or generating electricity), petroleum and natural gas can be interchanged effectively. This is in stark comparison to transportation, in which the prevalent internal combustion engine infrastructure disallows substitution of fuels.

Based on these numbers, there exists a significant potential to substitute NG for petroleum as an energy source. A back-of-the envelope calculation suggests that global petroleum demand could drop by 1m BBL/day if the percentage of petroleum used for industry dropped to 30%, and NG rose to 39%. The question, thus, is whether a 1m BBL/day drop is significant enough to affect prices.

How dramatically do oil prices react to changes in demand?

To answer this question, we can look at what happened in the last economic downturn. Due to the Great Recession, Global oil demand dropped from a peak of 86.2m bbl/day in 2007 to 84.4m bbl/day in 2009, and drop of 1.8m bbl/day. As we all know, during this time, oil prices dropped from a high of $147/bbl to $35/bbl. Clearly, a nominally small decline in demand can have a large effect on prices.

Since the potential exists for crude oil to be substituted by natural gas in a significant way, one must only look at price differential to see if Industrial users can benefit from switching. Currently, crude oil trades near its record highs, at $100/bbl, while natural gas is trading near 10-year lows of $4/1000-CF. These extremes in price should offer enough incentive to trigger substitution in a significant way.

What does the market think?

The two charts show the price history for the past three years for Crude Oil (top) and Natural Gas (bottom). The bottom pane on each chart highlights the Commitment of Traders data. Notice that commercial traders are holding their largest net-short position in crude and their largest net-long position in natural gas in the past three years. Crude producers are rapidly locking in high prices and natural gas users are locking in low prices. It appears that they also believe that natural gas will soon begin substituting crude oil for energy needs, which will push up prices.

We’ve seen that there is a significant potential for natural gas to substitute crude oil in industrial applications, which would reduce oil demand. We’ve also seen that relatively small change in demand can cause large price fluctuations, and we’ve seen that the current pricing for these commodities supports a trend of switching from crude oil to natural gas. Finally, market participants are revealing that they too agree with this thesis. Natural gas seems like an intelligent investment at this point.

AAPL’s Triangle

2011-02-10T18:59:00.001-06:00

AAPL just completed a very nice triangle formation. I think this indicates that AAPL is about to start an extended downtrend. The upside target is 360-361, and could drop to $300 or lower.

Notice in the chart above the clean triangle pattern that formed in the past few weeks. According to Robert Prechter’s Elliot Wave Theory:

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.

Check out the examples below to see how triangles led to nice reversals.

EUR/USD Before and After:

NEP Before and After:

I believe it is time to become cautious with AAPL.

Natural Gas (UNG) Update

2011-01-23T09:40:00.001-06:00

Last October, I went long UNG because of a completed Elliot Wave pattern. Since then, there has been a bit of upside progress, but I believe the market is setting up for a much bigger move to come soon.

Notice in the chart above that price did bottom out shortly after I suggested going long. However, the rally has been rather shallow. What strikes me as bullish is that there have been several sharp attempts to make new lows during the past few months, but each selloff was bought, which indicates a lack of overall supply (basing action).

We are currently at trendline resistance, but I believe that because the COT data shows commercial traders holding their largest long position in months, price will ultimately break higher. My target is $12 on UNG.

Out of SLV put

2011-01-14T11:00:00.001-06:00

I was short SLV via a Jan put, and today I closed it out for a profit. Because it’s expiring in 7 days, I didn’t want to hold and risk a rally in Silver prices. However, it was a hard decision because of the fact that gold just broke down from an ending diagonal, and when that happens, prices can drop very quickly. Either way, it was a nice trade!

Silver Breaks Down

2011-01-07T19:09:00.001-06:00

As I pointed out a week ago, metals were on the razor’s edge. I projected a target of $31.66 for silver, and we got within 1% of that target. I’m not sure what will unfold going forward, but I think the $31.28 top will be significant, and I would not be surprised to see silver hit $25-$27 soon.

Notice in this chart that, as expected, prices reversed fast after breaking out of the triangle. Also, price broke an uptrend line on high volume, so conditions for further decline remain ripe.

SPX 1290 is the level to watch

2011-01-05T18:54:00.001-06:00

If SPX does reverse soon, as I’m expecting, 1290 looks like a good level for the market to peak at.

Notice in the chart above that not only is 1290 the level where Wave-C = .5*Wave-A, it is also the exact level where Wave-v of Wave-C = Wave-i of Wave-C. These tight Fibonacci correlations lend support to the idea that the market will top out around 1290.

BWEN Breaks Out!

2010-12-30T09:36:00.001-06:00

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

2010-12-30T00:20:00.001-06:00

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

2010-12-16T23:15:00.001-06:00

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

2010-12-15T01:02:00.001-06:00

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

2010-11-10T09:19:00.001-06:00

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

2010-11-09T10:03:00.001-06:00

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

2010-10-26T15:08:00.002-05:00

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

2010-10-26T14:42:00.001-05:00

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

2010-10-12T12:13:00.001-05:00

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!

2010-10-04T11:59:00.001-05:00

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

2010-10-04T10:28:00.001-05:00

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!

2010-09-30T18:36:00.001-05:00

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

2010-09-27T11:38:00.001-05:00

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

2010-09-21T14:12:00.001-05:00

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

2010-09-21T13:40:00.001-05:00

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

Stopped out of my Gold short… will consider trying again soon

2010-09-14T09:44:00.001-05:00

Fool’s Gold?

2010-09-05T16:45:00.001-05:00

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

2010-08-26T14:49:00.001-05:00

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!

2010-08-25T18:34:00.001-05:00

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!

2010-07-27T12:10:00.001-05:00

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

2010-07-27T11:57:00.001-05:00

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.

2010-06-29T14:29:00.001-05:00

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?

2010-06-15T15:28:00.001-05:00

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?

2010-06-06T19:06:00.002-05:00

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?

2010-05-28T19:21:00.001-05:00

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

2010-05-25T21:27:00.001-05:00

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

2010-05-19T18:31:00.001-05:00

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

2010-05-17T09:38:00.002-05:00

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

2010-05-07T10:30:00.005-05:00

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

2010-05-06T11:24:00.001-05:00

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

2010-05-03T09:36:00.001-05:00

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?

2010-04-27T21:57:00.001-05:00

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?

2010-04-20T12:20:00.002-05:00

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

2010-04-15T10:28:00.001-05:00

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.

EUR/USD still looks bearish

2010-03-25T13:40:00.001-05:00

As you know, I’ve been bullish USD and bearish EUR/USD since about 1.48-1.50. So far, the EUR has had a very strong downtrend. I am guessing that this downtrend will meet some serious support in the 1.27 zone.

In the daily chart above, you can see that EUR/USD is carving out 5-waves to the downside. This indicates that the larger-scale trend is down, and we should stay below the 1.51 high set back in December, 2009. 1.27 shows a nice confluence of trendline and channel support, so I could see the market falling to that level before the market enters a protracted corrective uptrend.

Updated NEP Q4 and 2010 projection

2010-03-17T10:53:00.006-05:00

China Northeast Petroleum (NEP) announced their preliminary Q4 production and drilling results today. The results were slightly better then their projections back in November, which I have come to expect from the company as they do a great job of giving solid yet conservative projections. Below are the results for both divisions of the company:

Oil Production

Back in November I projected that the company would produce about 231,000 barrels based on how many new wells they were projecting to add. The company managed to add 5 more wells then expected and must have also completed them more quickly, because actual production was 236,774, about 2.5% higher then my projection. Oil prices during Q4 were also higher then NEP's estimate of $65 for their projections. If we use the average Cinta monthly price from to approximate the price NEP will receive, they should average about $70/barrel for Q4, which translates to revenues of about $16,575mil. Assuming approximately 30% profit margin, their operating profits from production should be about $5mil.

Drilling Services

Tiancheng completed drilling contracts for 60 wells with total drilling depth of 99,161 meters (325,331 feet) in the fourth quarter of 2009. This is very impressive considering that before NEP acquired it, the company had only drilled 80 wells totaling about 106,000 meters during the first three quarters of the year! Assuming that their revenue per meter remained the same in the 4th Q, revenues will be about $13.75mil. Thus I expect profit for this division to range from $4.6mil to $5mil, depending on the profit margin.

Combined Q4 Results

Overall, the company should announce revenues between $30mil and $30.5mil for Q4. Before all the restatements that will happen, I would have projected net income to be somewhere from $9.5mil to $10mil, or about $.35-.36 EPS for the Q. These numbers are clearly better then the estimates I came up with in November. It's nice to see the company continuing to impress in their operations.
Restatements and Potential Dilution

Unfortunately, because of the restatements that NEP will have to do, it will be harder to compare results. Personally, I don't like the way that FASB requires companies to handle in the money warrants because it actually makes it much harder for potential investors to analyze past results. Hopefully the company will do a good job breaking out their operating earnings from the expenses they will be taking on the warrants. I wish I had an idea of how much it will be, but looking at the information given in the press release only made me realize that I have no idea how to figure out the potential impact. I do expect it to be quite large though because we saw the price of the stock almost double during Q4.

One thing that the restatements did cause me to do was to look back through NEP's previous quarterly reports to figure out exactly how many warrants and options are outstanding and at what prices. As of 12/31/09, NEP had 27,715,818 shares outstanding. We know that Lotusbox exercised another 867,438 warrants in January, which I've assumed is all the exercising that will occur in Q1. If I'm correct, then below are all the remaining options and warrants which have not been exercised.

Updated 2010 Revenue and Earnings Estimates

Based on their results and on oil prices so far this year, I have updated my 2010 estimates to reflect my current expectations. I've increased the number of wells I expect NEP to drill in 2010 from 65 to 70, as well as increased to average oil price from $65 to $70 (note that Q1 oil prices are already set at about $73/barrel).
Finally, I've assumed that Tiancheng will drill 100,000 meters each quarter and get paid about $138/meter.

If we throw a PE of 10 on NEPs non-diluted EPS, the price of the stock would be about $13.50. Throwing a PE of 12-15 on their fully diluted EPS would lead to a price of $14-17.50. I think that by the end of this year NEP will be trading above $15 unless we see a tremendous drop in oil prices again like what happened in the late 2008.

Please feel free to post any questions or comments

ABX Update

2010-03-04T21:29:00.001-06:00

Here’s a quick update regarding my ABX short trade. As long as prices stay below $42.64, I will remain short.

You can see on the chart above that price is back testing the supporting uptrend line. I believe the market will fail at this level, and then continue it’s sequence of lower highs and lower lows. However, my stop is right above the last major swing high, at $42.64.

Bloggers are very bullish once again

2010-03-02T15:16:00.001-06:00

Exhibit 1: http://tickersense.typepad.com/ticker_sense/2010/03/march-1st-blogger-sentiment-poll.html

Exhibit 2:

Carl Futia: bullish
White Magic: bullish
Kevin’s Market Blog: not updated, but posted that if stock trades above 50-day for several days, market should retest highs, I take this as bullish
Bespokeinvest: bullish, in regards to strong breadth argument
Slopeofhope: getting gloomy as a bear, turning bullish
Elliot Wave Lives On: starting to seriously consider the long-term bullish picture, after having expected a bear-market rally for 1 year
Gary’s Common Sense: bullish, expecting ‘third-leg’ of this bear-market rally
Evilspeculator: neutral/bearish
X-trends: bearish

Clearly, the bulls are pretty numerous, but we haven’t even made new highs yet.

Now, look at the chart above. I posted here that the market’s rhythm has changed, because it’s been 18 trading days with no new high (previously, the market always made new highs with 8-10 days of bottoming). Also, you can clearly see that volume has been much lower on the rally, compared to the previous sell-off. Even if we do make new highs, I’m shorting the whole way up. But I think the odds for a drop below 1040 are high.

Interesting fundamental perspective on Gold

2010-02-23T12:41:00.001-06:00

I found this very interesting article regarding gold and it’s fundamental driving forces. I agree with the points so much that I thought I’d repost it, as it essentially says a lot of what I believe about gold, written succinctly. This post was taken from Jake Honeycutt’s Kaching wall-posts page:

We seem to be in the midst of GOLD-MANIA! It's become the next real estate ... touted by everyone as a "can't lose" investment. Except, almost none of these same people make any appeals to its fundamentals and most seem to ignore the fact that it's been jumping upwards based on buying from three groups:

(1) Central banks
(2) Gold ETFs
(3) Goldbugs who believe hyperinflation is coming

Central banks have historically bought right before prices start to go down (which makes sense since they are the biggest buyers of gold and would force the prices to go upwards when they are buying).

Gold ETFs are buying like crazy only because more and more people are investing via them. But once momentum runs dry, there's going to be a big void in gold purchases.

The hyperinflationists have never had much of a coherent argument to begin with. A rise in sovereign debt does not mean a massive rise in money supply or inflation. In fact, the exact opposite has been true in Japan. I'm not saying that we won't eventually get high inflation here in the US; it's possible, but it's not going to be "hyperinflation" and the Federal Reserve will almost inevitably stomp it out once it starts.

More importantly, however, recent evidence suggests we are drifting back towards deflation and M2 money supply only increased 1.9% in 2009 --- hardly a sign of hyperinflation. If anything, it's terrifying b/c it might signal a return to deflation.

More evidence… this time it’s different

2010-02-22T16:43:00.001-06:00

I posted yesterday why I thought that the market’s recent drop isn’t just another normal correction. Here I’m presenting further evidence that we may see 1040 before seeing new highs.

The chart above highlights the number of days it took to make new trend highs after each substantial correction in the past year’s bull market. Notice that each new leg up took 8-10 days to reach new highs. Compare that to now: we’re on day 12 since the low at 1040, and not even close to new highs. Also, notice that on the daily chart (as opposed to the weekly chart I posted yesterday), it is also clear that volume expanded on the downturn, and is shrinking on the upturn.

These facts tell me that the rhythm of this bull market has changed, and that the bear may be making a real comeback shortly.

This isn’t just “another 10% correction”

2010-02-21T20:38:00.001-06:00

I’ve recently been seeing a prevalent view point about the market starting to sprout up, essentially that this past 9% correction is just like the June-July ‘09 correction, and that we should soon see new trend highs. I disagree with this view, and I’m betting that we’ll break 1040 soon.

Take a look at the /ES (S&P 500 e-mini futures) weekly chart above. Compare the volume on both corrections: the first correction had withering volume over 4 weeks, followed by equal or higher buying volume when the market blasted higher.

In the January ‘10 correction, we saw massively expanding volume on the downside, and withering volume on the upside progress. This tells me that the tide has shifted.

Even if we do make a new trend high, I will continue shorting into this strength based on the massive volume distribution we’ve seen. Good luck!

Why I’m Wary of the Gold Bull

2010-02-16T16:14:00.001-06:00

Gold bugs are still raging. Someone mentioned that because gold has formed such a massive base between $700-$1,000/oz, it can’t go back down. Take a look at the charts below:

The first chart above is the Dow from 1974. In 2000, it topped out and dropped, but then recovered, forming a very strong base out of which is subsequently broke to the upside. Well, now we know that this base did not prove to be much in terms of support.

Now look at Gold’s chart since 1997. I believe we are in a 5th since the ‘99 low. You can see that gold formed a similarly massive base and has just broken out. I could see one more new high, but I think this base could prove to be very weak, too.

Potential RUT Head and Shoulders

2010-02-08T21:12:00.001-06:00

Just to further entertain the ultra-bearish argument, I want to present this RUT chart that resembles a long-term pattern that I highlighted as possible on the Dow more than a year ago.

You can see that the 2007-2009 bear market brought the RUT all the way back to the 2002 lows, and the bounced to the downtrend line. The decline was in 5-waves, and the rally was a triple-three corrective advance. If we were to retest 350, and then break this level, the head-and-shoulders projection would imply a further 59% drop to the 137 level. I would project 225 as more reasonable.

However if we did get a drop to 350, I would imagine everyone would be pointing out this head-and-shoulders, so we may get a fake-break that then leads to the next decade of bull-market growth.

NEP’s Volume: Something to Consider

2010-01-29T18:19:00.001-06:00

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

2010-01-27T10:25:00.001-06:00

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!

2010-01-22T15:10:00.001-06:00

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

2010-01-20T10:27:00.001-06:00

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

2010-01-18T19:34:00.001-06:00

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

2010-01-06T16:49:00.001-06:00

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!

2010-01-06T15:15:00.001-06:00

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

2010-01-05T20:53:00.001-06:00

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

2010-01-05T01:59:00.003-06:00

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

2010-01-04T11:53:00.001-06:00

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?

NEP is one of the Biggest Bubbles, Ever!

2009-12-28T23:51:00.003-06:00

You can see my previous posts about NEP here. As you can see, I’ve been wrong about where NEP’s rally will stop. These have been short term calls, so I believe I will be vindicated in the longer-term price action. I am going to prove to you that NEP is the biggest bubble ever, and that after the kind of move that we've seen in the stock price over the past 3.5 years will likely be followed by some years of stagnation, regardless of where this current spike peaks. The question will be whether you can sell in time to lock in your profits.

Let’s begin by examining NEP’s price action for the past 3.5 years (see the chart below which shows NEP’s weekly price candles).

The first aspect to which I’d like to draw your attention is a revised wave count. After reconsidering my previous wave count analysis, I believe we’re actually in the final thrust of a 5-wave sequence that began in 2006. This makes more sense, because the triangle from which we just broke out is normally a terminal pattern, meaning any rally is often fully retraced.

The second aspect deals with NEP’s raw price performance. In mid-2006 (7/17/06), NEP bottomed at $.17. Today, NEP closed at $9.16: a 5,288% return in just under 3.5 years, or 210% annualized growth for 3.5 years straight. No big deal, right? Many great companies out there have seen these kind of returns in their early years, right? This kind of growth should be possible, shouldn’t it? Let’s look at some facts: here is a list of great companies followed by their best lifetime stock performance, as well as their best 3.5y performance:

Company	Max Lifetime Gain	Time Period (y)	Best Annualized Gain	Best 3.5y performance
Amazon (AMZN)	9,187%	12.5	43%	1,503%
Hovanian (HOV)	1,042%	13	18%	1,437%
Research in Motion (RIMM)	9,283%	9	63%	1,397%
Apple (AAPL)	7,273%	25	18%	1,254%
Wal-Mart (WMT)	122,940%	27	30%	1,011%
Microsoft (MSFT)	59,538%	14	59%	693%
Barrick Gold (ABX)	10,946%	23	23%	686%
Proctor & Gamble (PG)	10,460%	38	13%	205%

China Northeast (NEP)	532%*	6	28%	5,288%

*(Note: NEP’s lifetime gain is so low because the stock started trading at $1.50, significantly above it’s lowest price of $.17, 3.5 years ago)

To be fair, I looked to see if AMZN did have similar growth over a smaller period. In fact, in the first 2.5 years after going public, AMZN did appreciate by 5,423%! But there are two key differences between AMZN and NEP: 1) this performance occurred at the height of the tech bubble; 2) AMZN was introducing a revolutionary service that warranted being rewarded with faster stock appreciation, while NEP is a simply drilling oil (what’s the big deal?).

Thus my conclusion from this data is that NEP’s 3.5y price performance has been ABSOLUTELY EXCEPTIONAL AND ABNORMALLY HIGH, given the un-uniqueness or lack of novelty in the business that would normally spur bubble-like performance.

My next thought related to price performance is that perhaps since it was a penny stock, such a massive move is not out of the ordinary, as you’ll often find 1000%+ moves in pump/dump stocks. Here are a couple such bubble charts that came to mind immediately (JRJC and MXC):

Notice the typical reaction is long-term downtrend, and these stocks only rallied 1,000%-1,500%. Now let’s compare these charts to a non-log NEP chart, and tell me if you don’t see a similarity:

NEP has been profitable since 2006/07. How is it possible that the market has mispriced this company so severely? An Oil-drilling company especially? What is so amazingly unique about this company that the market misjudged its profit potential at the beginning? How could it have been discounted this low? How is it possible that NEP was so underpriced to begin with that early shareholders have enjoyed 210% return per year for 3.5 years???? Has the market really been so inefficient, or is there something else going on?

Therefore, if you’re a long-term investor, ask yourself if buying at this point, after such a massive run over a relatively short period of time, makes sense. Sure, with the momentum of this move, it could double again, but this wouldn’t really change things much in the longer-term picture. When a stock goes parabolic, it will often retrace to the beginning of the parabola before starting a new run up. This indicates a retrace to $4-5.

In conclusion, make your NEP decisions knowing that history does not reward these kind of rapid moves over the next couple years. Ask yourself where the market went wrong such that it allowed the company to be so undervalued to begin with. Or, on the other hand, maybe you are part of the most obvious 10-bagger in the world (everyone has been touting NEP for a long time, well done!!). One thing I’ve noticed is that the market never rewards the obvious point of view in the long run.

Everyone, please find flaws in my logic, I'm all ears. Thanks for reading! I am wishing everyone best of luck in being able to sell their stock at high prices and booking the 'profits' that everyone has been bragging about! GOOD LUCK!

P.S. You can tell me all about P/E, valuation, etc. but I believe raw price performance will be the final factor in determining supply/demand, as history has shown in many other cases!

Interesting formation on QQQQ

2009-12-23T14:02:00.002-06:00

I last wrote about the overall market here. As you can see, since then the market has not made very much overall progress. Today, I noticed an interesting pattern on the QQQQ ETF that tells me that this could be a terminal thrust in this rally.

Above is the weekly chart of QQQQ highlighting my Elliot Wave count. I believe that the rally we’ve seen in 2009 is actually a triple-zigzag, a corrective move. I’ve come to this conclusion because there are no clear 5-wave moves in this rally; rather what I see is a collection of 3-wave moves that overlap significantly. Also, notice that volume has been dropping, and MACD is nearly curling over. Finally, notice that price is back-testing the uptrend line that it broke back in October.

The short term picture tells me that we’re nearing the end of this holiday rally. Notice that QQQQ consolidated in a very clear triangle before breaking out this past week. As I’ve mentioned many times before, triangles are normally patterns that precede the terminal thrust. Often, price will go up an amount equal to the height of the triangle. This projects a high of 45.62, where we are right now. Be careful if you’re long and complacent.

Happy holidays!

There could be a strong correction in the dollar soon

2009-12-18T18:18:00.004-06:00

Though I am bullish longer-term on the dollar, as you can see here, I think we could actually see a strong drop in the near term.

Take a look at the Commitment of Traders for the dollar index above. Notice that commercial traders have rapidly grown a huge net short position as the dollar has rallied. If you look back to the previous time there was a similar net short position, there was a large 5-pt drop in a short period.

The Character of the Dollar's Rally is Different

2009-12-18T10:27:00.004-06:00

You can see here that I've been following the progression of the EUR/USD for some time. I have been bullish the dollar, and thus bearish EUR/USD, because I believe that the majority of investors believe the dollar is in for a crash. Anyway, the dollar rally appears to have legs, and I think at a minimum, we'll see the dollar index hit 82 before it would make new lows, it at all.

You can see on this chart (daily candles) that /DX has made the largest counter-trend rally of the entire downtrend. This tells me that the character of trading has changed in the dollar. I believe this new rally is actually the start of an uptrend. It seems that the market corroborates this point of view because you can see that volume has been markedly higher in this rally. Even if we see a downward correction at this point, I would expect the dollar to then make a new trend high. It'll be fun to see what happens!

NEP Technical Picture

2009-12-11T13:07:00.004-06:00

NEP just broke to new highs today. Everything about this looks great! We know the company is excellent, as you can see from my brother's posts (Is NEP Buying More Drilling Rigs, NEP 2010 Earnings Projections, NEP's Newest Addition--Tiancheng Drilling and Oil Services, and NEP Update after Q3 Results). However, in my experience when everything is perfect, and optimism abounds, it's time to take at least short term profits. I expect a drop to $5 from the $7.00-7.50 level.

On the daily chart above, you can see that we just broke out of a massive triangle consolidation. However, these types of thrusts are often quickly retraced, even if just part of a correction. I could see a retracement to the $5 range, which should correct most of Wave-(i) of Wave-iii.

On this chart, you can also see that the up move has been quite parabolic, and the breakout has come after the overall stock market has made a big up-move. Clearly NEP isn't playing a leadership role. If this stock was breaking out to NEW highs near the beginning of the rally, I would trust this price action more. However, when it's one of the last stocks, I think this stock is getting ready to wipe out all the optimism :).

Good luck!

Finally!

2009-12-07T02:39:00.003-06:00

EUR/USD just made a lower low after making a lower high. So far, the downtrend is confirmed. Let's see how long it lasts!

That should do it

2009-12-05T10:24:00.002-06:00

I don't think there is any question that the EUR/USD has broken its uptrend now. If it does reverse once again and head higher, I think I'll quit trading.

The EUR/USD just won't break it's uptrend

2009-12-01T18:15:00.003-06:00

You can my post here from last week indicating the EUR/USD uptrend was broken. However, we got a quick reversal that brought price back above the trendline. My bigger picture assessment remains the same, however. I think the EUR is completing a topping process.

You can see my wave count for the EUR/USD. It looks like Wave-IV is subdividing nicely, with Wave-v taking shape as an ending diagonal. I could see a rally to 1.52 to complete this pattern, then we should enjoy a sharp sell off, similar to what we had during Thanksgiving.

Is NEP already buying more drill rigs?

2009-11-28T19:26:00.003-06:00

In my previous post, my 2010 projection for NEP, I based my revenue projections for newly acquired Tiancheng Drilling on the assumption that the company was going to operate 7 rigs for the duration of 2010. In figured this made sense to be conservative even if NEP bought more rigs at some point during the year.

I've been looking through the 10-Q again as I work on my long term projections and I noticed that on Sept 30th 2009 the company showed prepaid expenses for:
Deposits paid for puchase of drilling equipment $3,363,753

I can't think of any scenario other then Tiancheng had already contracted to purchase more drill rigs. I have no idea how much one of these would cost, but based on the $12mil in fixed assets they gained buying Tiancheng, I'm guessing a Rig costs anywhere from $1.5-2mil. In this case its possible that NEP is buying 2 or 3 more rigs, assuming a 33-50% prepayment.

Any thoughts or further information on this?

Parabola's reverse hard

2009-11-27T12:25:00.002-06:00

Check out the chart below and see if you can figure out what it is:

Can't guess? It's a flipped chart of gold. Notice the clear parabolic action in the past few months. Today we got a panic $60 selloff in gold (rally in this chart). Either we get one more panic buying spree in gold to complete the parabola, or start a sharp downtrend. Regardless of the short term action, I think gold's days are numbered. I think we may be witnessing an irregular ABC flat correction, where Wave-B goes higher than the previous peak. In this case, we will see an extremely sharp counter-move which should break below the Wave-A low. I could see a drop to 600 in gold. This would be excellent to destroy the bullish sentiment that has developed on metals.

Another reason why I'm bearish on gold is that many of the mining stocks are looking ultra-bearish. Take a look at ABX above. Even in the midst of nearly-1200 gold, ABX couldn't make a new high. Furthermore, it has carved out an extremely bearish ending-diagonal pattern. This foreshadows a drop to at least $25, but I would not be surprised to see a drop to $15.

Not Looking pretty

2009-11-27T00:05:00.002-06:00

Hang Seng is also looking very, very weak. Good luck out there for longs!

Notice it formed a very clear ending diagonal. This puppy looks ready to crash to at least 19,500, if not start a new leg to retest the lows.

Let's not forget

2009-11-25T10:06:00.003-06:00

Let's not forget where we stand in the bigger picture. 10520 in the Dow is a very important resistance, and at the very least, I expect a few weeks downside from here.

The 3-day chart above shows that price is retesting a long-term downtrend line on $DJI. Also, Wave-C = Wave-A at 10,520, so the entire correction may be nearing an end. People seem to assume now that the market won't drop, and that the dollar will continue dropping. Good conditions for a contra-move.

NEP 2010 Earnings Projection

2009-11-23T09:00:00.009-06:00

Introduction

Even though we haven't finished 2009, China NorthEast Petroleum (NEP) has given us a solid, yet conservative guidance for Q4, so I am looking forward to 2010 with my projections in this post. I've come up with four scenarios to present, based on what oil prices might do next year. My nature is to be conservative when I create forward looking projections, so just know that when looking at the numbers.

In order to make the projections I've split NEP into their two operating segments, Drilling and Oil Production. We don't have much more information on the Drilling segment then what I presented in my last post on NEP, so I will be basing my estimates mainly on info from the press releases and the 10-Q.
As for the Oil Production numbers, I have been keeping a detailed spreadsheet of NEP's past financial results, as well as projections based on those past results, for two years now. At this point I feel that I have a very good handle on what levels of expenses to expect based on oil production and oil price levels. In my projections I won't be showing all the details, just the projections for producing wells, average oil price, revenues, and net income. But know that these numbers come from my more detailed spreadsheet.

Lets quickly look at the major factors to consider when projecting revenues and expenses. This only applies to the oil production as for Tianchiang I've simply assumed they will drill 220 wells, receive about $185k per well, and have a 30% profit margin.

Revenues
Obviously the main consideration is the average oil price. My brother (see his last post here) and I believe that the US Dollar will strengthen in the coming months, and I also expect the US to relapse into a 2nd recession next year, so I'm not one of those people expecting oil over $100 again next year. The other factor is the level of production. I've assumed increasing production as the year progresses based on NEP's stated plan to add another 60-70 wells.

Expenses
Cost of Sales:
Production Costs: NEP incurs about $5/barrel
Depreciation: This numbers ran between $9.50 and $10 per barrel in 2009.
Government Oil Surcharge: China charges a tax on on oil revenues when oil is higher then $40/barrel. This tax starts at 20% and increases to 40% on the price over $60. See NEP's explanation on page 29 of their 10-Q
General and Admin:
NEP has low G&A costs. Typically they have about $1mil in general operating costs, and then another $750-1000k interest and amortization expenses on the loan they received in 2008.
Taxes:
NEP's tax rate this year has been about 32%.

Scenarios:
Now that we've gone over my assumptions, here are the four scenarios:

1. Oil stays in a tight band all year between $60-70, averaging $65 each quarter (extremely unlikely but a nice base scenario). In this case NEP would have about $1.21 EPS in 2010.

2. Oil moves down in the first half of the year and then back up, but finishes next year lower then it is today. This is my favorite conservative projection. In this case NEP would have about $1.07 EPS in 2010.

3. The world enters another serious recession and deflation hits. Oil drops from current levels to about $35/barrel in the 2nd half of the year. I really doubt this would happen, but wanted to put it in to show that NEP will still earn about $.60 EPS even in this "shit hits the fan" scenario.

4. Continued inflationary pressures and a greater concern by the market that peak oil has arrived pushes prices up throughout the year to end 2010 at about $100/barrel. This would be ideal for us and NEP would have about $1.45 EPS in 2010 if this happened.

2010 NEP price expectations

Having been invested in this great company for two years now, I have come to realize that the stock will never move like you would expect it to. Still, 2010 seems primed to become the company's best year yet, and thus I do expect the stock to have a nice run-up in the next 12 months. Assuming that NEPs meets their projections of $.80/share in 2009, today we have a stock with a TTM PE of 6.5 ($5.20/$.80), that will likely earn between $1.05 and $1.10 next year even if oil drops 15% from today's prices, and will earn $.60 even if oil tanks back down to early 2009 levels.
I find it hard to believe that we will still sport a PE under 10 in a year (although its not impossible), so I think that we should see this stock hit $10 by next fall. that's a 100% gain from today's levels. If more institutions find the stock and it gets on a roll, it would not be out of the question to see a PE of 15-20 on it, which would move the stock to $15-20. This is what all of us owners are dreaming about, but I'm certainly not expecting this yet.
Of course, caution is also warranted because if oil prices move down to the $35-40 range again, I'm sure we could see this move under $3.50 again, and possibly down to $2.50. Just know that at that level you'll be picking shares up for 4x their worst earnings potential.

The bottom line is that this a very well managed company that isn't taking crazy risks in order to increase their stock price. Management is clearly thinking long term and I believe that that in 10-15 years any stockholders that have held the stock the entire time will be very happy, but I will go more into that in my next post.

EUR/USD breaking down

2009-11-22T17:19:00.003-06:00

As I mentioned in this post, I thought that the EUR/USD would continue to weaken because of the divergence that it was showing against the US Dollar index. We've had choppy downward action, and I think we're getting ready to start the fast phase of the decline. Watch 1.46 as a downside pivot.

You can see in the daily chart above that EUR/USD finally closed convincingly below the uptrend line that has been supporting price action since March. Unless we get another quick spike back above the trendline, I think we'll be in for continued weakness. Keep an eye out on this.

NEP's newest addition, Tiancheng Drilling and Oil Services

2009-11-19T22:43:00.005-06:00

On October 1st, China Northest Petroleum (NEP), announced that they acquired another company, Tiancheng Drilling Engineering Co. Ltd. As NEP put it in their press release, the "Acquisition Expands Company's Vertical Integration Within China's Oil E&P Industry." At the time I was interested to see the purchase, but also curious as to what the net financial effect would be, so I decided to wait until the Q3 10-Q before coming to a conclusion.

In the initial press release we received some nuggets of info on the new company and what it might add to NEP's overall revenues and earnings. Some highlights are listed below:

-NEP paid $13mil in cash for the entire company
-Seven rigs in operation.
-320 employees
-Capacity to drill 220 wells annually
-One of three PetroChina- licensed private drilling operators
-NEP has not utilized Tiancheng for drilling services in the past.
-2008 revenue of approximately $14.7 million, net profit of $5.2 million
-cash flow positive from operations.

For me the two key points from this release were the $5.2mil profit and the fact that they were also cash flow positive from operations. $5.2mil is extremely good considering it only cost $13mil to buy the whole company, so I wondered if perhaps 2009 was not being so kind to Tiancheng and thus I couldn't wait for the 10-Q to come out.
On Monday we were finally able to see Tiancheng's results during the first nine months of the year, and NEP also provided us with some addition pieces of information about their acquisition throughout the 10-Q. I've copied some from pages 28-29 below:

"Tiancheng enters into drilling contracts with PetroChina and other private oil companies to provide oilfield drilling services, and generates revenue based on the depth of each well drilled for clients. Clients will typically pay 30% of the total projected drilling costs as a down payment to start the drilling process, and pay the remaining balance within 12 months according to the specific contract term.

In the first nine months of 2009, Tiancheng has completed contracts to drill 80 shallow wells, which include 74 wells for state-owned PetroChina Jilin Branch and six wells for non-state-owned Daqing Shunwei Energy Development Co. Ltd. The total drilling depth accomplished this year is 105,896 meters (~347,428 feet), with the revenue of $14,700,455 and net income of $4,820,661 or $0.22 in fully-diluted, pro forma EPS for nine months ended September 30, 2009. Tiancheng currently has existing contracts to drill 86 additional wells, and more contracts are under negotiation to increase the utilization of rigs and continue to grow sales revenue"

Page 8 also shows the combined 3-month and 9-month results of the two companies. Below are three tables showing revenues and net income for NEP and Tiancheng as separate entities, and then results of the combined company if the transaction had occurred at the beginning of 2009.

A couple things also popped out at me looking at the numbers:
1. through the first 9 months Tiancheng completed 80 wells, generating $14.7mil in revenues, or about $185k per well.
2. NEP expects to generate about $13mil in Q4, which would mean completing 70 wells if the average revenue per well stayed the same.

It will be interesting to find out how almost as many wells will be done in the 4th Q as during the rest of the year. I assume that they are fully booked at the moment and that earlier some of their rigs were not being fully used, or perhaps some of the rigs were only purchased mid-year. Another possibility is the fact that drilling can be difficult during the rainy season.

What is clear to me is that this was a phenomenal purchase by NEP's management. Not only does this diversify the company's source of revenues, the purchase also increases the top line of the combined company by about 50% and the bottom line by 65% for 2009 (using Q4 est provided)!! NEP now has another steady source of cashflows that will allow it to continue its expansion program even if oil prices fall into the $40s again.

PS: Watch for my 2010 pr0jections post coming in the next couple days.

NEP update after 3Q results

2009-11-18T01:15:00.004-06:00

China Northeast Petroleum (NEP) announced their 3rd Q earnings this morning, along with 4th quarter and full year guidance. As usual, the company set another quarterly production record and had solid positive earnings.
In this post we will examine the company's performance over the last few years. I am also working on a 2nd post which will present my projections for the company in 2010 and future years.

I have had a substantial (for me anyways) position in this stock for two years now and what has been very interesting for me to see is that so far the performance of the actual company has far outperformed the stock performance. That is pretty impressive considering that the value of my position has doubled.

Historical Performance

The table and chart below show actual results for NEP's last 15 Qs, as well as projected data for the 4th Q09 based on estimates provided by the company in their recent earnings release. It is important to note that the estimates for Q4 DO NOT include projected revenues ($13mil) and net income (est about $4.6mil) of NEP's newest acquisition, Tiancheng, an oil drilling and services business. I have expressly left this new source of revenue and income out of the Q4 Est in order to show only the oil production results. The new company will be an important source of new revenues which I will discuss in the 2nd post.

Q4 estimates assume $65/barrel average oil prices based on the Mean of Platts Singapore index during the months of Sept, Oct, and Nov (this is because NEP is paid the previous month's price for oil delivered each month). This index requires a paid subscription, but thanks to Nawar on the Yahoo MBs, we can use the average price of Cinta crude on the Indonesian Crude Price index as an appr0ximation (recently Cinta has been about $1/barrel higher then the MOPS price received by NEP as per their recent 10-Q).

The company has clearly done an excellent job exponentially increasing both revenues and net income over the past four years. This growth has come mainly due to a 12-fold increase in production, with some help from higher oil prices. During the middle of 2008 the company was clearly helped by record oil prices, but it also proved that it could earn a reasonable profit even with oil averaging $40 as it did in Q1 2009. As can be seen by the chart below (courtesy of Stockcharts.com), investors were worried that the company would have serious issues making a profit on $40 oil, driving the price of the stock down to $1.25/share in March 2009. An $.11 EPS for Q1 2009 was enough to show investors that their fears were unfounded, and subsequently the stock price moved from $1.25 to over $5 in the next three months.

Today the stock trades at $5.16, with TTM earnings of $.78/share, meaning that the company trades at a trailing PE of about 6.6. Not a bad deal for a company whose revenues and earnings are both at least 12 times higher then they were 3 years ago.

In the next couple days I plan to post my projections for 2010 earnings, as well as look at what we could expect this company to look like in 5-10 years.

If anyone has any questions they would like answered in the next post or comments, feel free to leave them.

PS: Thus far, I have not fulfilled my part of the plan my brother and I had when we started themarketbrothers blog. Going forward I am planning to continue making contributions. You'll notice quickly that my posts will tend to be more fundamentally oriented, while my brother prefers technical analysis.

US Dollar Index Divergence with EUR/USD

2009-11-16T23:57:00.003-06:00

A week ago, I noted that /DX had made a lower low while many of the major currencies in the basket which comprise the USD index did not make similar higher highs. Today, the divergence continues, and until it is canceled, it looks like /DX could have a serious rally in store.

The above 1h charts are /DX on the left, and EUR/USD on the right. Notice again that EUR/USD has yet to breach the previous high, whereas /DX has clearly breached it twice now. This is bearish divergence for the EUR/USD, and looks bullish for /DX, as long as EUR/USD does not rally to new highs.

MON Update

2009-11-10T15:46:00.002-06:00

Just an update on Monsanto (MON). After breaking through a bearish channel, MON has retested this breakdown zone on a short-covering rally inspired by a reaffirmed guidance from management. This is a picture perfect opportunity to add to shorts. If price closes above the trendline for 2-3 days, then it's time to consider covering. Thus the exit strategy on the downside could be to cover if price breaks above 78.71 and closes above the trendline.

WTF???

2009-11-09T12:10:00.003-06:00

/DX made a new low today. Only 1 other major USD pair has made a similar move (GBP/USD). The other major pairs, especially the heavily weighted EUR/USD, have not reflected this new low in /DX. I don't know what to make of this, but it seems that there are some short term manipulations in play, because it is not possible for USD to be at a new low when 5/6 other currencies don't reflect this. This could imply that /DX is washing out the bulls before a strong blast-off.

The top-left chart is /DX. Notice it made a new low. Clockwise from /DX, you can see EUR/USD, GBP/USD, USD/CAD, USD/CHF, and NZD/USD. Was GBP/USD's breakout really strong enough to bring the whole /DX index to a new low? Seems doubtful to me.

Edit: USD/JPY and USD/MXN (two other relatively import trade partners used to calculate /DX) are also both high off their lows.

Monsanto update

2009-10-30T08:56:00.003-05:00

I last posted about Monsanto here. I was calling for declines based on a severely underperforming stock price. Currently, it looks like things are unfolding according to plan. If we rally to $75 or so, I may add more to my short position.

You can see in the weekly chart above that MON has broken it's bear flag pattern to the downside, and looks like it will easily close the week below. I would like to see a rally to $75, a retest of the breakout line, to add more shorts.

Distribution keeps on coming...

2009-10-21T15:04:00.004-05:00

...the smart money unloading on the dumb money. We now have 7 distribution days in the past month, and MACD divergence. Watch out below!

(you can see the distribution days and MACD div on the SPY daily chart above)

Furthermore, we're getting major divergence on the 5- and 10-dma Advance/Decline issues. Much fewer stocks participated in this last rally from the October lows. We're heading down :).

"Could Apple's Run be Over?" -- Revisited

2009-10-20T11:27:00.005-05:00

Back in Spring '08, when AAPL was making it's 2nd major test of $200, I projected that it was possibly at the end of its bull-market. We're now back at $200 and AAPL has just reported it's best earnings ever. Once again, however, I am pessimistic on AAPL's future. I believe we are within $10-20 of it's high price for the next couple years.

Above is AAPL's weekly chart. From an Elliot Wave perspective, notice that it is nearly finished with a 5-wave rally since its resurgence when Steve Jobs retook the helm as CEO in the late 1990's. Notice that throughout the bull run, up through the end of Wave3, there had been increasing volume (even at higher share prices). However, on this 5th wave advance from $85, volume has been shrinking. In Elliot Wave Principle, Robert Prechter explains, "...look for lesser volume as a rule in a fifth wave as opposed to the third." This is exactly what is happening now, not a very bullish sign going forward. My downside target range is from $50-80.

So, if we are in the fifth wave of AAPL's advance, how close is it to being finished? The wave count is a little bit unclear, but there are 5-waves up, so it could be nearly complete. It would be funny if the earnings pop left an island top in place, but I'm open to the possibility that we head a bit higher and form a topping pattern before reversal.

On a different note, I did see some bearish option activity today as well. My Jan '11 40 put on AAPL actually increased in value today, in the face of a 5% spike up. Clearly someone is willing to bid up the OTM, long-dated options on this strength.

Anyway, time will tell what happens, but I'd say risk/reward ratio is tipping in favor of selling at this point.

Shorting EUR/USD between 1.50 and 1.60

2009-10-15T10:54:00.003-05:00

Dollar sentiment appears to be hittings rock bottom. Check out this link on Carl Futia's blog, as well as this post on G-Rahal's blog for good examples. In addition, the EUR/USD is nearing strong resistance. I think we should get a retest of 1.25, and ultimately, a drop to .9-1.0. Thus, I will be scaling in shorts between 1.49 and 1.60.

You can see here that there are three strong trendlines that have been breached to the downside. They should act as good resistance to further gains. However, if price closes above the lower trendline (where price currently stands) for two months, I will close out the trade.

This chart above shows the COT data for the EUR. Notice that commercial traders are at bearish extremes for the EUR. Not a good sign for strength in my opinion.

Similarly, Commercial traders are holding highly-long positions in the Dollar. The combination of short EUR and long USD makes a down-move in EUR/USD more probable.

Is Monsanto Losing It's Touch?

2009-10-13T01:12:00.002-05:00

I just noticed an article about Monsanto reporting about a potential Anti-trust investigation by the US Justice Dept (see this link). I then took a look at the chart, and saw an intriguing short opportunity. Perhaps Monsanto is nearing the beginning of the end of its food supply domination? I would short this around $76 with a stop above $87. Target? $20.

Notice that MON broke it's long-term uptrend, and has since been consolidating the losses. However, notice that after an initial rally to $95, it has been downtrending. This is in stark contrast to what the rest of the market has done:

You can see on the SPY weekly chart that after the first leg up, the market rested for a couple weeks. But then, unlike MON, SPY broke sharply higher. This underperformance by MON makes me more confident in shorting MON. It'll be interesting to see how this plays out.

Sentiment hitting bullish extremes = reversal imminent

2009-10-07T20:41:00.007-05:00

I think sentiment is reaching bullish extremes in the midst of strong distribution from the smart money. In addition, the market is blowing off in the midst of global good news, which leads me to believe that we'll reverse tomorrow or Friday to end the week much below SPX 1080, and likely not make a new closing high.

It's quite amazing actually: there's usually a mix of bullish and bearish bloggers, but at turning points it's really interesting to notice how everyone, even the previously bearish people, switch to attempt to trade "one more rally before the turn." Here's my analysis of the blogs I follow (see links on sidebar):

Carl Futia: normally bullish, currently looking for a rally to 1120

George Rahal: switched to bullish at the Friday low (nice!) but looking for new highs

Kevin's Market Blog: was cautious at end of Sept, but is now looking for retest of highs

Bespokeinvest: neutral

Slopeofhope: bearish, but only 10% short, waiting for that final pop to enter fully

Elliot Wave Lives On: had a mostly bearish wave count, but switched to more bullish wave count today

Gary's Common Sense: cautiously bullish

Evilspeculator: just capitulated his bearish position for that "one last rally"

X-trends: normally ultra bearish, but now open to possibility of a bull-orgy climax

To sum up: nearly everyone is on or has jumped on the "one last rally" boat. Take a look at this chart below that shows investor pain (from www.marketpsych.com):

We're not even at new highs but everyone is happy to enjoy the expected ride to above 1080, at which point they'll sell. I guess I'll be on the other boat and say that we're not going to new closing highs.

The second point is that this rally is terminating on good news. In fact, the rally from Friday's low has been ignited by Australia. On Monday, they raised rates, and today they reported job growth vs. job losses. Sounds bullish, right? Take a look at the AUD/USD chart below:

This 20-y chart looks bearish to me, as we're retesting the trendline that was broken to end the 8-year uptrend. This leads me to believe that we're witnessing the end of the rally coming on the good news. You can see the same thing on the long-term SPY chart below:

Again we're hearing all this great news about the global economy about how things are getting better. However, all I see is that we're retesting the bottom of a 20-year uptrend that was finally broken last year. Notice how volume increased on the decline and has decreased on the rally?

Finally, in the midst of the bullish sentiment and "strong recovery," we're seeing strong distribution by the strong hands. Check out the daily chart of SPY below:
We have 5 distribution days in the past month, indicative of strong selling by the market drivers (institutions). William O'Neil (founder of IBD) correlates this with a high possibility of a trend change. This indicator has worked very well in the past for me, probably 4 out of 5 times. In addition, we're retesting the underside of the uptrend that began in mid-July.

All-in-all, we're seeing excessive bullishness in the midst of distribution and good economic news. I will aggressively short any rally, and I do not expect the market to make it much higher from here.

It's official, distribution is here

2009-09-30T15:03:00.003-05:00

I'm glad that I'm back to a nearly fully-short position, because today marks the fifth day that we've seen heavy distribution in the past month. I'm looking for a sharp breakdown any day now, and I think those who are waiting for 1100+ will be left in the dust.

90% short, will add more on rallies through SPX 1130

2009-09-28T11:45:00.003-05:00

I think it would be too obvious if the mkt rallied at this point. The fact that I switched to bullish after a 60% rally tells me that I'm being the sucker. I don't want to be less than 90% short, and will add more if the market rallies higher.

Tricky market bottoming here

2009-09-24T09:58:00.002-05:00

I am net short as I've been for the entire rally. However, today, I closed out 25% of my position at SPX 1050, as I am not expecting a rally back to new highs above 1080 to finish out this rally.

Notice that there is strong trendline resistance at /ES 1130. I will reenter into my full position in the 1080-1130 range. Notice the MACD divergence is portending a strong decline coming up, so I'm just closing out part of my short position, instead of the whole thing.

I like this chart the best. Notice that we need one more up wave to finish wave-c. Wave-ii of Wave-c was a normal 3-wave zig-zag. Wave-iv of Wave-c looks like it's an irregular flat where both longs and shorts get whipsawed--first with the fed spike yesterday, and then with the plunge this morning. This is one of my favorite patterns; I haven't seen one formed like this in months, so I'm happy to make a bet on this one.

Good luck to all!

XLF nearing a top

2009-08-06T05:42:00.003-05:00

I think XLF should print a top in the $14-16 range and then start a downtrend back to the $10 range. I will start scaling in short positions in this zone.

Notice on this long-term chart that XLF is backtesting some strong trendlines. These should provide overhead resistance.

On the daily chart, it definately looks like XLF is carving out an ABC, especially considering that price busted above $13 without a pullback beforehand. Furthermore, price is going parabolic into WaveC which tells me that sentiment is becoming too bullish. We could see price rally into the $16 zone, but there should be a $3-6+ correction soon.

Shorting NZD/USD

2009-08-05T17:52:00.003-05:00

I think the US Dollar is nearing a bottom (as I posted here) as many people are bearish and few are bullish. I'm trading this speculation by shorting NZD/USD in the .67-.72 range with a target at .50 and below.

You can see in the 10-year chart above that there is good resistance in the .67 to .72 range. We've had a nice ABC-flat rally since prices tanked back in 2008, and based on the dollar, I think this currency could be ready start the next leg in its downtrend.

Taking a big risk

2009-07-31T13:48:00.002-05:00

I think the US Dollar index is about ready to start a strong uptrend. However, I would like to see a rally to 80 or higher in the next week to confirm this pattern.

Notice in the upper frame of the daily chart above that price is standing at an uptrend support line. Also, it appears that price action has traced out a flat ABC correction since the Dec. 2008 top (notice the clear 3-3-5 formation). It looks like Wave-v of Wave-c appears to be an ending diagonal, so today's drop in the USD should quickly reverse if my analysis is correct. Also, commercial traders are holding their largest long position in the past year.

All these bullish factors are mitigated by the fact that retail traders are super-long USDl. I need to see the reversal quickly, otherwise the bullish sentiment from retailers could cause it to drop quickly.

Climax Baby!!!!

2009-07-23T10:17:00.002-05:00

It appears that 980 in the SPX will prove to be the market's top (at least for the short term). I believe we're seeing a climax buying spree, and we should start to reverse by the end of today.

The market has rallied almost non-stop for 2-weeks. Then, over the past two days, it consolidated in a wave-4 triangle. Finally, today we got the typical terminal thrust. Check out those 3 wide-range hourly bars, looks like a climax to me. I think 980 should contain the upmove.

Long-term trendline analysis

2009-07-20T17:17:00.003-05:00

I've learned a lot from Atilla's xTrends blog, including trendline analysis. Here is my attempt at some longer-term analysis which further supports the notion that current market action is just a bear market rally.

As you can see from the above weekly SPX chart, there is a very long-term trendline which has been controlling price very effectively. Given that we're testing the underside of this line, risk-reward favors the bears.

The daily DJI chart above shows a decade-long channel that has been controlling price action. Once again, we broke through this channel and are now retesting the underside. We've only seen a muted reaction from restesting this trendline, thus far. I find it hard to believe that we break back into this channel on the first try.

Given how strong the market has been, however, it makes sense to consider a mildly bullish scenario that holds within the broader picture. In the COMPX chart above, there is the possibility that we could have an ending diagonal forming. This is in line with the charts above, because price would be hugging the trendline vs. breaking above. Also, it would set up the stage for a very sharp decline later on. Best of all, it would burn out the remaining bears in a slow upward grind, creating the sentiment extremes for a top.