EUR/USD still looks bearish

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

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

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

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

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

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”

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

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

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

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

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

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

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

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

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

USD could be coiling for another large rally

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

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

Another Example of the Power of Ending Diagonals!

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

Gold Stocks Update

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

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

Revisiting the Ultra-Bear Projections

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

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

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

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

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