Nature's Law ?

Elliot Rules, guidelines and interpretation

Two of the motive waves in a 5 waves impulse tend toward equality in time and magnitude, also wave 3 is never the shortest. Let’s see how these guidelines conform to this count.

Wave 1 from 12,724.41 to 11,866.62, 857.79 Dow points, 6.74% drop in 9 trading days.
Wave 2 up to 11,896.44 hum?
Wave 3 from 11,896.44 to 10,719.94, 1,176.50 Dow points, 9.89%, in 5 trading days.

Wave 5 should be equal to wave 1 or a 0.618 relationship, resulting in 857 or 529 points.

Sub Waves (1) (2) (3) (4) (5)
(1) from 11,896.44 to 11,383.68, 512.76 points, 4.31%
(2) to 11,444.61 retraced 11.88%
(3) from 11,444,61 to 10,809.85, 634.76 points, 5.55%
(4) to 11,239.77, retraced 68% of (3)
(5) from 11,239.77 to 10,719.94, 519.83 points, 4.62%

Total sub wave move from 11,896.44 to 10,719.84 is 1,176.60 points or 9.89% from 0, the 0.618 golden division is at 6.11% or a level of 11,169.57, very near wave 4 (less than 1%).

So if this wave count is correct we are in wave 4, let’s see where it takes us, it can be a straight up line but most possibly wave 4 will be a triangle that always occurs in wave 4.
The 15.75% drop in the Dow in 14 days should warn us that the market will take some time to consolidate.

A five wave Elliot pattern?

In this Dow Jones Chart and the accompanying table, let’s see if an identifiable Elliot wave pattern emerges.

Most of the times third waves are the extended ones, in our case wave III advanced the most, going from 11,934.58 to 12,719.49 for an impressive 6.58% gain in 8 trading days.
As wave I resulted in a 2.46% gain, the relationship between III and I is 6.58/2.46 or 2.67 times, very near the 2.618 Fibonacci number.

When wave III is extended, waves I and V tend towards equality, wave I with its 2.46% gain and wave V with 2.74% are very near correspondence, with only an 11% variation.

The golden section (0.618 – 0.382) is present in Elliot patterns.
When wave III is extended a textbook golden section forms in wave IV both in percent and in time. Wave 5 went from 11,897.27 at the start of I to 12,724.41 in our proposed end of wave V, for a 6.95% total gain in this movement. Now, the 0.618 part of this movement is a 4.30% advance from 0, resulting in a reading of 12,408.85.

12,408.85 is almost exactly our 12,385.16 level for fourth wave, also the 0.618 part of the 25 trading days is 15 days, the amount of time from 0 to the top of wave III.

They say chartists are guilty of seeing formations and patterns anyway they look at a chart and this could be no exception to that, patterns are easily identifiable after they end, that’s what makes speculating in stocks a very difficult art.

The following weeks will shed light about our proposed model; in the meantime my advice is extreme care with your long positions.

Elliot .......Anyone?

Wave (A) went from 12810.54 to 11897.27 totaling 913.27 units down, wave (B) length as of Friday’s close is 685.5, resulting on a 75% retrace of wave (A). If this is really a zigzag correction (because of the 5-3 A-B), the end of wave (B) must be near.



Let’s review the zigzag rules and guidelines:
Wave (A) always subdivides into an impulse or leading diagonal. PASS
Wave (B) always subdivides into a zigzag, triangle or combination. PASS
If wave (B) if a zigzag it will retrace 50 to 79% of wave (A). PASS as of Friday 07/01.
In a zigzag the top of (B) is lower than the start of (A). PASS as of Friday 07/01

The breaking of the 2-4 uptrend line warns us of a change of pace, also the S&P bullish percentages are in bear mode.


Sentiment: The 5% - five day gain of the DOW looks like a bull trap. Start looking for shorts or at least be very careful in your long positions. Parabolic SAR of your holdings or momentum should give ample warning.

Three long Ideas for Next Week

Virgin Media (VMED)

On February 17 VMED posted its strongest ever full-year financial results, revenue growth across all areas were up 5.8% Y v Y, and up 6.6% on a quarterly basis. Neil Berkett, Chief Executive Officer of Virgin Media, said: “A strong financial performance combined with the launch of a number of market leading product developments ensured 2010 was a year of great achievement for Virgin Media. We have driven our consumer division to its highest ever rate of revenue growth, maintained robust cost control and delivered our best ever financial year. The significant strides forward in our Mobile and Business operations contributed to this substantial result.”

After the earnings announcement, VMED traded on what appears like an ascending triangle with a flat upper line around 28. For more than 2 months buyers could not make up their mind about the stock price going above 28, then on April 20 VMED reported solid financial results again. Quarterly total revenue of approximately $1,600 million was up 5.7% year over year, quarterly free cash flow was around $162.8 million, up 117.7% year over year, and net income from continuing operations was approximately $7.3 million or 2 cents per share compared with a net loss of $266.2 million or a loss of 82 cents per share in the prior-year quarter.


VMED broke above the flat line at 28 and closed Thursday at 29.76 for a 6.3% increase above resistance.

The stock looks overbought with a strong possibility of a pause or a return move back to the support line which should take place on light volume. The big picture for VMED shows the stock trading at a 3 year high with no foreseeable resistance.

Measuring techniques give us a target of 32, for an 8% profit, a move below 27 will be a signal of exiting the trade for a 9.27% loss.

Crosstex Energy LP (XTEX)

Crosstex operates as an independent midstream natural gas company. The midstream natural gas industry is the link between exploration and production of natural gas and the delivery of its components to end-use markets. In North America, the industry includes approximately 1.2 million miles of pipeline, 525 processing plants and other facilities.
The Company was formed in 1996 to provide gas gathering, processing, transmission, distribution, supply and marketing, as well as crude oil marketing.
Crosstex has 500+ employees, with headquarters in Dallas, Texas.
Crosstex offers two equity securities for investment. Crosstex Energy, L.P. (NASDAQ: XTEX) is a master limited partnership (MLP) that owns and operates the assets of the midstream energy business. The partnership's equity is traded in common units. Crosstex Energy, Inc. (NASDAQ: XTXI), a corporation, is a holding company and the general partner of Crosstex Energy, L.P. Its equity is traded in common shares.

Let’s take a look at the following chart showing XTEX quarterly distributions and stock prices:


From November 2004 to November 2007, XTEX price was between 21 and 27 and the stock was yielding over 7% in yearly distributions. On 8/15/2008 the stock closed at 22.91 yielding at the time over 10% in distributions. Then on 11/14/2008 the stock closed at 5.24 with a yearly dividend yield over 45%, of course that was a warning of bad things to come and on 3/2/2009 on its 10K for the period ending 2008-12-31 the company announced that they will not be able to make distributions to unit holders in future periods until their leverage ratio does not improve and the PIK notes are not first repaid.

More than a year passed without distributions to unit holders from the payment on 02/15/09 to the next payment on 11/12/2010. Right now at 17.94 the stock is yielding 4.46%. The last quarterly distribution on the Partnership’s common and preferred units will be $0.29 per unit payable May 13 to unitholders of record May 2. If we assume at least an equal distribution for the following quarter, at current price the yield would be 6%, a little bit below the 2004-2007 yields above 7%.

Anyway, a stock breaking above its 8 week channel is worth some following. If entering the trade, the 16 level should act as support.


EMC Corporation (EMC)

On April 20 this IT company maker of storage computers, reported a 28 percent gain in first- quarter profit as companies increased spending on data centers capable of delivering tasks through the Internet.

Net income rose to $477.1 million, or 21 cents a share, from $372.7 million, or 17 cents, a year earlier, EMC said today in a statement. Sales rose 18 percent to $4.61 billion last quarter, exceeding the $4.5 billion average estimate. EMC reiterated its full-year profit forecast of $1.46 a share, excluding some items.


For nearly three months EMC traded in a range between 25.50 and 27.50, breaking above resistance on April 20 along with the strong quarterly results. The crossover of the ma(10) above the ma(30) accompanied with above average volume give us some hope of price increasing in the following weeks. The price should hold above 27.50 but a penetration below is a warning sign. A move below 25.50 definitely is a get out signal.

Quick Short Idea

This set up is only for January 13.

Olin Corp is set to announce on January 31.

Short at the close or very near, at 15 minutes or less to the close, at a price between 20.10 and 19.82, that’s a range of -0.99% to – 2.36% from Jan 12 close.

If you made the trade be aware of your stop loss level, at 20.35 is a range of 1.2% to 2.7% loss and the stock should not close above that level in the following two or three days.

Quick Review

I started shorting beginning November because the markets were showing what looked like the beginning of a down or consolidation period, on November 12 the SP500 closed below its ma(10) and on Nov 26 a clear downtrend line was formed suggesting more down prices to come.


Things didn’t work out as planed as the markets broke above the down line beginning December. My shorts didn’t perform so I started covering and opening long positions.


As markets continue going up, this Monday I have 4 profitable longs and one losing short. A quick graphic review of my longs follows:

Roc was bought on November 4 on the strength of the basic materials group. Roc held up great the November downtrend as it stays within an ascending channel. Beginning December Roc started a steeper tighter channel. As of today it is my best performing stock.


I entered CPNO on November 22 and right after I bought it started going down. CPNO held above the down line of the up trending channel. Let’s see where this canal takes the stock. I will start to worry if cpno closes below the low up trend line.


WMS was bought on December 3 as the ma(50) crossed above the ma(150) producing a very positive long term signal. The stock looks a little blown up now after it traded for five days above the upper Bollinger band. The ma(20) should acts as support.

My latest addition is CELL. I got Cell on December 8 as the stock broke above the bullish flag-type consolidation pattern.

If the markets don’t throw us a split finger ball again, those longs have good potential. For adding to my longs I am considering MGI and AKRX on the new strength of financials and the ever interesting health sector respectively.

On fundamentals and technical

“With a common stock, few of us are rich enough to afford impulse buying.”
Philip Fisher

Two companies came to my attention last week after both posted solid earnings and revenue:

Rockwood Holdings, Inc. (ROC) is a global developer, manufacturer and marketer of high value-added specialty chemicals and advanced materials used for industrial and commercial purposes. ROC products consist primarily of inorganic chemicals and solutions and engineered materials. They are often customized to meet the complex needs of customers and to enhance the value of their end products by improving performance, providing essential product attributes, lowering costs and/or making them more environmentally friendly.
On Tuesday October 26, 2010, Rockwood Holdings, Inc. reported earnings per share from continuing operations of $0.52 for the third quarter of 2010 as compared to $0.14 for the same period in the prior year. Rockwood’s adjusted earnings per share from continuing operations increased to $0.55 in the third quarter of 2010 from $0.19 for the same period in the prior year. In addition, Rockwood reported Adjusted EBITDA of $169.1 million for the third quarter of 2010 as compared to $151.1 million for the same period in the prior year.

DIGI INTERNATIONAL INC. (DGII) operates as a device networking company that develops products and technologies to connect and manage local or remote electronic devices over a network, via the Internet or via satellite.
On Thursday October 28, 2010, Digi International Inc. reported revenue of $47.3 million for the fourth quarter of fiscal 2010 compared to $40.0 million in revenue for the fourth quarter of fiscal 2009, an increase of $7.3 million, or 18.1%. Revenue for the year-ended September 30, 2010 (fiscal 2010) was $182.5 million compared to $165.9 million for the year-ended September 30, 2009 (fiscal 2009), an increase of $16.6 million, or 10.0%.

The following table shows fundamental data for both companies and their related industry:

DGII P/E indicates an overvalued company vs its peers, however analyst estimates a forward P/E of 18 for the company, in line with the industry. DGII has very favorable price to cash flow compared with the sector and the industry. ROE for this year suffered because of revenue decrease primarily due to weakened economic conditions and changes in product mix. From 2005 to 2008 the company incremented sales in a 48% but from 2008 to 2009 sales decreased 10%. It can be expected that profit margin and ROE improve going forward along with the economy.
Low points: High P/E, low ROE, low profit margin.
High points: No debt, High cash flow generating.

With a 15 forward P/E, ROC looks undervalued. The company shows high ROE and a fair P/Book. The price to cash flow is very positive and the profit margin is in line with its peers
Low points: High debt, earnings growth estimate below industry.
High points: Good P/E, High ROE and lots of cash.

And for the fun part of this analysis we’ll go through the market, sectors and individual stocks.






The Nasdaq continues its ascent started in the first days of September.





Looking at the 10 days momentum chart I see a decelerating rate of ascent. Despite the fact that a positive reading means the uptrend is still in effect, I would like to see the momentum breaks above the downtrending line.


The index 10-30 days moving average histogram continues on positive territory with a pause recorded around mid October. As long as this oscillator continues with a positive reading the uptrend should stay.





The basic materials and technology sectors represented by the iShares Dow Jones US Basic Materials (IYM) and the Technology Select Sector SPDR (XLK) ETFs, continue going up in line with the general market, they are both at a four month high.




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Rockwood managed to close above 36 last Friday and is now in a new four month high. The moving average oscillator stopped the descent that started around mid October and looks ready to begin going up again. A positive market next week should result in rapid gains for ROC.




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DGII has yet to make a new four month high, the stock paused from 10/20 to 11/2 and then started going up possibly fueled by good earnings news. The 10-30 indicator looks neutral, a positive reading next week will indicate a good entry point.