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.

Volume divergence on SPY

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!

Silver Breaks Down

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.

BWEN Breaks Out!

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

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

Out of Nov SLV puts, still bearish

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

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

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

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!

IWM Leading Diagonal

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

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

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

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

Gold shall tank soon.

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

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

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

Another leg down coming up?

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

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

Will Gold’s trap remain intact?

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

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

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.

This isn’t just “another 10% correction”

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!

NEP’s Volume: Something to Consider

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

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

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

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

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

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

Interesting formation on QQQQ

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!