Bitcoin 5-waves up

 I finally bought some Bitcoin as part of an overall diversification strategy. I've been hesitant to buy for years because it feels like a bubble, given there's no physical value or income stream, unlike any other investment out there. However, its correlation to overall financial liquidity, it seems wise to have a small portion as a hedge. 

Nonetheless, I decided to assess the Elliot Wave count since 2011 when Bitcoin first started trading. It has followed a picture perfect 5-wave rally, with each wave subdividing nicely into 5-waves. While this is a bullish configuration in the long-term picture (on the scale of decades), a 5-wave rally is followed by a multi year correction period, which can often dip as low as the prior wave-4 low. 

So even if the momentum of the election rally takes us to $100k or higher, it wouldn't surprise me to see a dip back to $15k over the coming years. Either way, it won't really affect my portfolio in a significant way.

Laggards getting active means divergence

Following up on my last post, here is a bit more evidence that indicates a weakening market.

The image below shows three charts:

1. Top frame: /ES (SPX futures contract). Note that there are 7 distribution days in the past trading month (higher volume down days).
2. The green-line chart is a custom index made up of 50 stocks in the 90th percentile for relative strength.
3. The red-line chart is the opposite of the green line in that it's 50 stocks in the 10th percentile for relative strength. 

Notice how the red line is trending up whereas the green line is trending down. Laggards often get active and rally as the overall market reaches an exhaustion point. 

SPY Bearish Options Play

I entered a bearish vertical option spread today (it's a DEC 2016 211/203 SPY put spread). I'm betting that the SPY will close below 203 by 12/16/2016. If it does, I gain a max profit of $630/contract with a risk of $170/contract, for a risk:reward ratio of 3.7.

So what makes me think this is likely? Let's start with the big picture.

The chart above shows the 10 year monthly chart for SPY. Note that the Elliot Wave pattern indicates that a 5th wave could be close to complete. MACD divergence is clear, and the biggest volume months in the past year or so have been down-volume. All these signs tell me that the market is reaching exhaustion point.

From another perspective we can see that Dow Jones Industrials have been out-performing Dow Jones Transports. The two indices haven't confirmed each other and this is a bearish sign according to Dow Theory.

Finally, zooming in to the SPY daily chart, you can see that price is tracing out a pretty clear ending diagonal pattern. I love this pattern because it usually resolves in sharp counter-trend moves that often retrace the entire height of the diagonal. A one or two month move down to 1800 would not be out of the question, hence my reasoning for buying a bearish Dec, 2016 SPY put spread.

I plan to hold until expiration but I would sell early if we got a drop to 1800 at any point before then.

Trimming back Gold long

A year ago I posted that gold was looking bullish. Since then price has rallied about 25-30%. I'm cutting back a large portion of my position because I think the market could see a pullback soon.

On the weekly chart above, note how price exploded higher after breaking out of the ending diagonal pattern. This is just the behavior I was looking for. However, price is reaching $1400 which is the top of the ending diagonal and I would expect there to be some significant resistance here.

The more concerning problem is that commercial traders clearly think that gold prices are reaching overbought levels and they're hedging themselves more than at any point in the past 16 years. 

However, I don't think the bull market is over. I think we'll see a lull or correction for some time as commercial traders unwind their hedges. Then, once COT levels are more normalized, we could see higher prices.

Exited USD/CAD

This is a late follow-up post to my previous trade entry. I exited USD/CAD around 1.3140 for 600 pips profit. I noticed price action stalling right below 1.32 and exited slightly earlier than expected. While the past two days of price action indicate that it could continue higher from here, I am happy to close my trade for a good profit and move on.

Notice how we got a strong blast off after breaking out of the ending diagonal -- one of my favorite patterns.

Trying USD/CAD long once again

I was stopped out of my last attempt at going long USD/CAD. Price has dropped another 700 pips since then, reaching another level of support so I'm giving it another shot.

Entry: 1.2550
Target: 1.32
Stop loss: two daily closes below 1.2450

On the daily chart below, note that price is sitting on another confluence of good support. I'll exit on two daily closes below the lowest trendline.

Zooming in to the chart above, you can see a clear 5-wave decline. This indicates that the larger trend is down, and after a brief rally, there could be continuation to the downside. However, note that wave 5 is an ending diagonal. This tells me we'll see an explosive rally soon.

USD/CAD long - Wave 5

USD/CAD has dropped to my target zone of 1.3250 so I'm going long. My ultimate target is 1.44 or higher. I will exit if I see two daily candles that close below 1.3190.

On the weekly chart below, you'll notice a clear Elliot wave count. I believe we are nearly complete with a long-term Wave 4. Note that the market has punished bulls after the massive parabolic spike. However, we are now in the eighth consecutive week of declines. This persistent decline has only occurred twice in the past 20 years: 1996 and 2007. In each of those cases, the market declined for 9 straight weeks, then initiated a sustained rally. Also of interest is that 1.3250 marks a roughly 11% decline from the top at 1.4680. The wave 2 correction back 2012 was also ~11%.

On the daily chart, notice that price dropped from 1.4680 nearly non-stop, but it did carve out a triangle in the middle. Triangles often precede the final thrust before price reverses and continues the main trend (up). You can see a confluence of trendlines that are acting as support. If price closes below these for two days in a row, I will exit my trade at a loss.

Our first tiny house investment!

Tiny houses are all the rage these days. In February, I completed my first one and am listing it on Airbnb. Check it out below!

https://www.airbnb.com/rooms/2237551

If anyone wants to stay, the first few guests are free!

USD/CAD Short Update

This is an update to my original post about shorting USD/CAD from January.

As you can see in the chart below, price stayed withing it's long-term channel lines, completing the 5th wave rally. I was a few days early, but ultimately, price has dropped down to nearly 1.3500, providing a profit of 700+ pips!

If price reaches 1.3250, I will look to go long in preparation for a 5th wave targeting 1.50!

USD/CAD Short – 700 pips profit potential

I'm going short USD/CAD around 1.4060-1.4250. Will exit on 2 daily closes above 4250. Target is 1.3500.

On the monthly chart above, note the confluence of several trend lines. Also note the Elliot Wave count which is pretty clearly indicating a completion of a 5-wave cycle within the larger wave 3.

On the daily chart, you can see that price is hitting the confluence of two different-degree channel trendlines. Also, you can see the fractal breakdown of wave-v from the Monthly chart.

If price manages to close above 1.4250 2-3 times (i.e. daily closes above the channel trendlines), I will exit. There could be a strong intraday rally above this level as price overthrows the channel in a final burst, but it should quickly reverse and close within the bounds of the lines. The target is demarked in red, around 1.3500.

The case for a gold rally

Gold is looking bullish.

The chart above is 10yr chart with monthly candles. Note that price is sitting on strong support – an ascending trendline and a previous high. Also notice that volume has tapered off substantially in the past 1-2 years, a good sign indicating that selling pressure is waning.

The next chart, a 5yr weekly chart, shows that gold is completing wave-5 of an ending diagonal. Historically, these patterns are terminal and are followed by an explosive move in the opposite direction. Wave-3 of the ending diagonal should never be the shortest wave; thus Wave-5 should go no further than 1050, or else the pattern is invalid.

  Finally, note that commercial traders are more net-long now than at any point in the past 10 years!

Combining all the evidence above with the bullish seasonality factor of August, I feel comfortable buying gold at these levels with a stop below 1050.

CANSLIM Stock: WAB – Westinghouse Airbrake Technologies

This is another CANSLIM stock that I’ve been monitoring since Dec, 2014. It just broke out of a “double-bottom” pattern, so I’ve gone long.

I’ve included the CANSLIM criteria below. Note that this stock meets the criteria on almost all counts.

Criteria	Target	Actual
YoY Net Income Growth Rate	20%	22%
YoY Sales Growth Rate	25%	26%
EPS Growing past 3 years?	Yes	Yes
EPS Estimate Higher than last year?	Yes	Yes
3yr EPS Growth Rate	25%	33%
Return on Equity (5-year average)	17%	19%
Within 10% of High	Yes	Yes
New Product, Management, etc?	Yes	Several acquisitions (Aug/Sept), and again in Feb, 2015
12-month relative strength percentile	80%	61%

Let’s take a look at the chart, which shows a breakout of a decent double-bottom.

Note that price broke above point “b” on Friday, accompanied by high volume (80% higher than average). This indicates informed demand.

Strategy: Long @ $89.71 (just above point “b”) with a target of 20-25% gain (~$108). Stop loss is at –8% loss, or $82.60.

CANSLIM Stock: HFF, Inc (HF)

I’ve known about the CANSLIM method for picking stocks since 2007/08. Back then, I used MSN Money’s stock screener to find suitable stocks, but that has since been discontinued. About a year ago, I created an Excel file that uses the RCH Stock Market Functions Excel add-in to pull data from public sources and calculate my own metrics to find stocks that meet the CANSLIM criteria.
I’m currently looking at HFF, Inc (HF) as it meets almost all of the CANSLIM criteria and is sporting a very nice cup & handle pattern.

CANSLIM Criteria	Target	Actual
YoY Net Income Growth Rate	20%	35%
YoY Sales Growth Rate	25%	26%
EPS Growing past 3 years?	Yes	Yes
EPS Estimate Higher than last year?	Yes	Yes
3yr EPS Growth Rate	25%	50%
Net Income Growth Rate (5-Year Average) OPTIONAL	25%	150%
Return on Equity (5-year average)	17%	30%
Within 10% of High	Yes	Yes
New Product, Management, etc?	Yes	Lots of closed deals in Dec, 2014
Insider Ownership	10%	13%
12-month relative strength percentile	80%	54%
6-month relative strength percentile	80%	34%
3-month relative strength percentile	80%	85%
Institutional Ownership	5%-35%	76%
Notes		Financial/property management

Chart

The Cup & Handle is well formed with declining volume in the handle.

My strategy is to buy at $37.25 if volume is 25-50% higher than average on the breakout day. My stop will be @ $34.64 (7%) and my limit is $44.70 unless the stock reaches that target within a couple of weeks, in which case I will hold longer.

Bitcoin fever entering final stage

In April, 2013 I successfully predicted a severe correction in Bitcoins based on bubble principles. 7 months later, Bitcoin is at all-time highs once again. According to Elliot Wave Principle, market movements following the overall trend of that market occur in 5 waves: 3 impulsive waves with the trend and 2 corrective waves against the trend. Once the 5-waves are complete, a prolonged corrective period occurs where prices reverse the overall trend.

Take a look at the charts below (note that each successive chart is a magnification of the previous chart, as identified by the red dashed box in each larger chart). The first chart below shows lifetime price action. Note that prices have clearly moved in 5-waves. Interestingly, each wave formed it’s own mini-bubble:

1. The first wave ended in June, 2011, at $30. It was parabolic in nature, and corrected all the way down to $2 by Dec, 2012.
2. The third wave ended in April, 2013 at 266. Once again, it was parabolic in nature, and suffered an extremely sharp 80% decline in a few days. Then, prices moved sideways for a few months to finish correcting the excess.
3. Finally, the 5th wave is following the typical parabolic pattern. Buyers who entered the market near the end of Wave3 (in the $50-200 range) are all making a huge profit (5-10x). However, since we are nearing the end of the cycle, an imminent, long-term correction is about to begin. This will be a painful downtrend characterized by daily decrease in prices, with the occasional brief rally.

The second chart below shows 6 months starting around the Wave 4 low from the chart above. Note that the wave principle is fractal in nature, and Wave 5 of the larger trend breaks down into 5 subwaves (i thru v).

Finally, looking at the 10-day chart starting around the Wave iv low from the chart above, we see 5-waves unfolding once again. Drilling down through each successive chart indicates that at each time frame, we are in the 5th wave of the rally.

From the purely technical perspective of Elliot Wave analysis, the charts are showing a marked exhaustion of the 5-wave trend. While there is potentially a bit more upside left, I would predict that the trend is weeks, if not days away from expiring.

One other interesting point is the “personality” of the 5th wave. Elliot Waves have distinct characteristics since they reflect the mentality of the herd. In wave 5, “…The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top.” (Hint, hint, family and friends finally “seeing the light”). Furthermore, “Volume is often lower in wave five than in wave three” as you can see from the first chart. Finally, “…At the end of a major bull market, bears may very well be ridiculed…” as evidenced by yours truly.

Bitcoins may be a very useful medium of exchange and they may prove to be successful long term. But in the medium term, a market will always work in the same way: It will never go up forever, and it will always make sure to minimize real gains for investors by natural price corrections. Therefore, if you’re holding on to a nice profit in Bitcoins, it may be a wise time to sell the majority. You will have a chance to buy back at much reduced prices in the coming months.