11/28/2013

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.

2013-11-28_Bitcoin4yDaily

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).

2013-11-28_Bitcoin6mDaily

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.

2013-11-28_Bitcoin10dHourly

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.

4/16/2013

Opps… down 80%, a week later

4,100% up in a year. Being the fastest bubble I’ve ever seen, it makes sense that bitcoin fell fast. But 80% in 7 days is even faster than I was expecting. Amazing!

2013-04-16_Bitcoin_daily

4/12/2013

GLD correction nearly over

Gold made headlines today dropping about 6%. I think this drop is more of a stop-run then a breakout because it happened so rapidly and on massive volume. Gold has bounced off the $1,500 level for a couple years now so it makes sense that it would drop below this level to knock out the weak hands.

2013-04-12_gld_daily

From an Elliot Wave perspective, gold has been tracing out a nice 3-wave flat correction. Wave A is 3-waves, Wave B is 3-waves, and Wave C is 5-waves, making the drop to new lows appear as the start of a new downtrend. Furthermore, there is quite a bit of negative commentary about gold so we could be near a temporary low, and possibly a large swing low. Gold should recover and move back above $1,500 within the next month or two or else the downtrend could continue.

4/09/2013

Silver vs NASDAQ vs Bitcoins

Here are three bubble charts for your review.

The first one, silver, rallied from $1/oz to $41/oz at the peak of the bubble in about 8 years, an annual growth rate of about 60%. Note that the metal subsequently lost about 90% of it’s value. Selling at any part during the bubble phase ($10-41) would have been prudent in the long run.

2013-04-09_si1600_daily

 

Here’s a more well-known, but less severe bubble. This second chart, the NASDAQ composite (internet bubble, anyone?) rallied from about 150 to 5000 in just over 20 years, an annual growth rate of 6-7% per year. Because the bubble was less severe than gold, the NASDAQ ended up losing only 80% of it’s value. However, once again, selling at any point in the bubble phase (2000-5000) would have been prudent in the longer run (i.e. you could have bought back at lower prices such as $1000).

2013-04-09_compq_daily

 

Now, take a look at the Bitcoin bubble. It’s up from $5 to $210 (as of 4/9/13) in about one year for an annual growth rate of 4100% or so. As you’ve seen above, the more severe the rally, the more severe the decline, so I would not be surprised to see this drop 90-95% over the next few years. Therefore the strategy is this: if you’re up 100%, sell half you bitcoins to lock in your cost basis. The remaining bitcoins are pure profit, so even if bitcoins drop to $0, you haven’t lost any money. If they keep rallying, you can choose to sell a few to lock in profits.

2013-04-09_Bitcoin_daily

The conclusion is clear: bitcoins are no less vulnerable to being a bubble than silver was in the 1970s and the NASDAQ was in 2000. The both had amazing fundamentals at the time, and they both crashed 80-90%. Fundamentals change, as well as investor perceptions.

4/23/2012

The biggest rallies happen in bear markets!

Do you think AAPL’s bubble has popped? I think so and here’s why: the biggest one-day rallies in a stock normally happen in a bear market as short covering rallies draw in lots of followers who believe that the stock is back on it’s path to new highs. Well, last week we had the biggest one day gain ever, much larger than any normal day and larger than the gap up after Q1-2012 earnings! This tells me that the market has peaked at 644 and we’re on our way to a downtrend!

042312_aapl_daily

3/27/2012

Final thrust?

AAPL appears to be tracing out a final ending diagonal to end it’s rally from $580. Look for a very sharp decline in the next week, leading to a test of at least $570 in the next couple weeks.

032712_aapl_1h

3/14/2012

And the bullish drum beat continues…

AAPL has truly gone parabolic in the past few days. If the stock touches $590-$600 today, I would be willing to predict that its run ends this week, and subsequently AAPL starts a 2-4 year downtrend. I predicted a similar outcome with NEP in the face of massive criticism. The pattern on AAPL is almost identical, so I am as confident now as I was back then.

031412_aapl_1h

2/28/2012

Divergence Forming on AAPL… Buyers beware

I posted a cautionary article about AAPL a few weeks ago, but it continues its massive rally. Take a look at the chart below, and then throw caution to the winds. Its 5-wave small-time-frame rally appears just about finished, and there is ominous MACD divergence.

022812_aapl_4h

2/09/2012

Dare to short AAPL?

These days, you’d be crazy to even think about shorting AAPL, right? They just had killer earnings and are on track to earn $40+/share in 2012, giving them a nice, comfortable valuation. However, the charts point to the notion that a long-term top is right around the corner.

020212_aapl_monthly

First, on the monthly chart above, note that AAPL appears ripe to complete a 5-wave rally that started in 1998! I would expect a multi-year correction to ensue soon based on this chart alone.

020212_aapl_weekly

On the weekly chart, you can see that Wave-V from the first chart has subdivided nicely into 5-waves as well. Even on this shorter timeframe, the wave pattern indicates that upside is limited.

020212_aapl_daily 

The daily chart shows a typical parabolic blow off to finish Wave-V. Importantly, recent price action is confirming that a top is very near:

During a climax top, a stock leader that has risen for many months will suddenly take off and run up much faster than it has in any week since the start of its original move. On a weekly chart, the spread from the absolute low to the absolute high of the week in almost all examples will be wider than any price spread in any week so far.

- William O’Neil in The Successful Investor, pg. 80

This weekly candle is on track for being the largest weekly gain in dollar terms, ever. Furthermore, we’ve seen 5 straight days of gains, with today’s price action including a large gap up followed by a large rally. This is typical blow off action, and it implies that the market is becoming too one-sided to sustain further long-term price rises. Look for a multi-month or multi-year correction to start soon.

7/13/2011

USD/CHF Long-term Update

I’ve been quite wrong about the USD/CHF. From my initial entry, I’m down about 1200 pips.

However, if you think the USD/CHF will continue dropping forever, think again. On a very long-term time frame, it is approaching very strong support.

071311_usdchf_monthly

On the 20y monthly chart above, notice that from 2004 through 2010, USD/CHF consolidated in a picture perfect triangle. Each subwave was in a 3-wave structure, and price held within accurately defined trendlines.

Since 2010, we’ve seen the characteristic “thrust” out of the triangle to the downside. A typical target is normally the 100% extension of the height of the triangle, which is around .8000. Also interesting is that the 50% extension of the previous down wave from 2000-2004 is right @ .8200 or so. Because triangles are precede the final move in a trend, I believe we’ll see a basing pattern and subsequent reversal in the coming months. Price should stay above .79-.80 for this thesis to pan out.

6/06/2011

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.

060611_nep_daily

5/14/2011

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.

051411_spy_daily

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!

4/14/2011

Email to NEP management

I've written an email to NEP in the hope that management address the two valid points in Bigfish's reports when they come out with a more detailed statement in a few days.

To whom in may concern,

I have been a China Northeast Petroleum shareholder for 3.5years now and am very happy to see how the company has grown. The report by Bigfish yesterday was clearly an attempt to profit from the fact that many other Chinese companies have lied to investors. I argued against many of Bigfish's arguments here: http://themarketbrothers.blogspot.com/2011/04/is-bigfish-right-or-wrong-about-nep-is.html


Still, Bigfish did bring up a couple good points about errors in some of your SEC filings, including the recent 10-K report. I do hope that you will explain these discrepancies so that investors can feel more confident.


1. If you add up the quarterly drilling depth performed by Tiancheng, the total comes to about 306,000 meters, but in the 10-K you list the total depth drilled as 374,000 meters.


2. As Bigfish pointed out, the amended Q3 2009 report shows what I believe to be an incorrect combined revenue number when including Tiancheng in your operations on page 18. You seem to have corrected the revenue amount on your 2009 10-k. Still, it would be nice to have an explanation as to why the error was not caught by you or your auditor.


Thanks for your time and I look forward to hearing about the new acquisition when it goes through.


Aurelien Windenberger




BigFish disappoints with 2nd post, NEP should be fine

Yesterday a new blogger named Bigfish came out with a very negative report on NEP, which I responded to here. Later he said he was going to come out with something this morning which was even worse, and so he has...or at least tried really hard to. Unfortunately for him, his argument today was much weaker then the one yesterday, and is much easier to counter. At least yesterday he pointed out a couple obvious and specific errors in some of NEP's filings. I pointed out that neither error is in the company's favor.

In any case, yesterday he argued that the drilling business must be a fraud because NEP paid too little for such a successful business. I agreed that the price did seem quite good, but also pointed out that NEP added additional value by buying the company (namely the ability to sign more drilling contracts with PetroChina), allowing it to increase its revenues and profit margin.

So today, Bigfish comes out and argues that NEP is a fraud because they are going to pay TOO MUCH for the rights to explore and produce on the Durimu oilfield over the next 24 years. I guess Bigfish is like Goldilocks and needs every deal to be "just right."

Bigfish does do a good job showing how many companies are going to be between NEP and the original owner, but I don't understand why this is terribly unusual. Yahoo user stinky6987 explained it well in reply on this post:

Not much here, but buying a company (Shengyaun) that owns the right to drill an oilfield doesn't sound the least bit suspicious to me. Also, while the report asserts that Shengyaun didn't pay for the right to drill and is turning around and selling that right to NEP, there are many reasonable explanations for this, none of which involve fraud:


(1) Exploratory drilling is inherently hit-or-miss, once Shengyaun hit oil with their exploratory wells, the value of their contract with Jiangyuan went way up.


(2) As the price of oil goes up, the value of Shengyaun's contract with Jiangyuan also goes up.


(3) "State-owned" Jiangyuan didn't get a good price when making the agreement with Shengyaun.


(4) The people in charge of "state-owned" Jiangyuan wanted to steal money from the government, so they gave a no-bid contract to Shengyaun and took bribes or have an ownership interest in Shengyaun (note this does not affect the actual value of the contract to NEP).

All four of these are great reasons why NEP would pay the $43mil. I can think of a couple more as well:

5. Bigfish didn't show any proof that the previous owner didn't pay anything for the rights. Its possible they didn't, but not guaranteed.

6. Obviously business in China is done somewhat differently then here in the US (although I'm sure not that differently), so I wouldn't be at all surprised if at least part of the $43mil is a bribe to certain people somewhere along the supply chain. Bigfish makes a good point asking why NEP didn't try to get the rights directly from the state owner enterprise. Obviously that would have been better, but perhaps there wasn't any way to do so. The oilfields are located in a different state then NEP, so perhaps only companies from that state were allowed to receive the rights directly from the government. I unfortunately have no idea if my postulations are true or not, but this seems just as plausible as Bigfish's arguments.


The bottom line for NEP stockholders is that this $43mil acquisition would tremendously increase the potential production capacity of NEP, and as such represents an excellent long term direction for the company. The biggest concern in my mind, and one that I can't believe BigFish didn't mention, is that there is the possibility that the field isn't actually close to as productive as NEP tells us it should be. This is a risk that investors take when putting money with any oil company.

Also note that most of the transaction is being done in stock ($10.6mil in cash, the rest in stock when it was trading around $5). Personally, I think this is a good sign because it indicates that the previous owner believes in the strong potential of the field and wants a share of the profits.