NEP could be a BUY

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:

1. 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.
2. The accounting issues that plagued NEP are out of the way.
3. The lawsuits which sprung out of the trading halt and claimed that NEP breached its fiduciary duty to its stockholders have been dropped.
4. 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.
5. 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.
6. 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.
7. I conclude that NEP’s return prospects going forward are now positive.

Fool’s Gold?

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

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

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

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

Flat on EUR/USD

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

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

Another leg down coming up?

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

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

Is the EUR almost exhausted on the downside?

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

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

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

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

Taking another stab at the short side

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

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

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

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

Bloggers are very bullish once again

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.

Revisiting the Ultra-Bear Projections

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

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

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

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

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