Schlumberger (SLB)

This analysis was requested from a special someone!

Schlumberger is an oil and gas service provider and sits in a strong sector. Its stock has been on fire lately and has made a lot of people happy. The good news is it looks like there is some more upside. The bad news is that it looks to be limited with some significant risk to the downside.

Here is the first chart, a long term look at the stock from its early days to the financial crisis, to now.



The chart is pretty much self explanatory just follow the comments in a counter clockwise fashion from left to right. Bottom line is the stock has been performing well over the last decade but has recently shown some weakness, especially in volume. The key for this stock going forward is to hold above the $73.25 high. The letters and numbers I have on the chart are a technique called elliott wave theory and help to point the direction of the next moves. The $73.25 price holds the key to this technique.

Another technique is to use trendlines to help find buy and sell points. Notice in the late 90's this technique worked pretty well as the midterm sell point around $39.00 would have saved you the entire downturn of the 2001 recession as price didn't reach that level again until 2005. This technique would have given a buy entry in 1999, a sell at the end of 2000 and another buy in 2003 around $23.00. These buy/sell lines aren't on the chart to keep it simpler, but you can imagine them by connecting major price highs and lows.

Currently the mid term green sell line is at $60.00 but rising fast. By June it will be at $68.00 and by the end of the year it will be at $77.00. Combine this with the $73.25 level and we have a pretty good profit taking point.

One final point on this chart is that volume has been declining even though price has risen. Typically this is a negative warning sign. The same thing occured at the 2010 top. Notice the green bars getting lower and lower as 2009 progressed. A similar thing is occurring now.

The next chart is a shorterm term closer look at the last 2 years. This chart helps point to the higher price levels that are expected. Be warned though, this elliott wave pattern looks just about complete and once finished prices should come back to the current $80 levels at a minimum. The blue box area is where very little volume occurred and could be a point the price could fall fast.



Trendlines are also used on this chart and there is a very steep one currently at $82. A break of this trendline would keep profits tight because of its steepness and should be considered if worried about whipsawing price. Another way to help look for a price top is thru divergences which I show on the indicators at the bottom. Similar to the topping that occurred at the 2010 new year, I will look for a lower high on the momentum indicators. If a top occurs in one of these indicators that is lower than the one in early December, then that is a good signal that momentum is waning and a high could be in.

Why the Dollar Matters Most

In the attached chart you will see how the dollar and the stock market are tied at the hip. Except for the late 90's (an anomaly in so many ways), the dollar and the stock market lead each other inversely.

Even more than the stock market, the dollar is tied to the debt market (which also leads stocks). The reason is interest rate parity, or lack thereof.

When a country has a high interest rate, other people in countries with lesser rates will park money in the higher rate country. This raises the price of that currency (demand up) and thus lowers the rate of their home currency (demand down). When the lesser rate country returns the money back home, its fx rate is now weaker and it wins on both accounts (higher int. rate and gain in currency). If you are familiar with the carry trade that was so popular in the 2000s, then that is similar. This market "arbitrage" also goes against the interest rate parity theory that states that countries with higher interest rates must have lower future currency rates to offset that gain.

People flock to currencies with high interest rates and that is why the dollar hit its peak in the early 80s (as interest rates peaked) and is now at an all time low (as interest rates are at an all time low). During the early 80's stocks rallied hard (the 80's bull was actually bigger than the 90's as the dollar fell 30-40%). The chart above explains why, and I will explain in an example as well.

Most items are sold "in US Dollar terms". This means that the price (denominator) is the dollar. The toy you buy your kid for xmas can be translated as toys per dollars to come up with what it will cost you to purchase it. If you could trade a blanket for that toy it would be denominated as toys per blankets to come up with its value. The same is true for the stock market.

If the stock market's earnings in 1985 were $10/year and people were willing to pay 10x for those earnings then it is priced at $100s per 1 S&P500. This can be translated as $100/1 USD (with the "1" meaning 1 US Dollar which happens to be trading at an all time high of $1.65). Assuming earnings and multiples stay the same, if the $USD then weakens to $1.00 (which it did), then the real value of your stocks just jumped 39% (translating $1.65 down to $1.00), and in order to remain whole and offset that change, the S&P500 would go to $139, just by updating the reporting unit!

An easier way to think about this is thru inflation. When the value of the dollar falls, one way to conceptualize this is to think about there being more of them out there representing the same one thing, aka now worth less per dollar. This is basically inflation. If the denominator falls, the numerator is now instantly worth more (going from 10 toys/2 blankets=5 unit cost down to 10 toys for 1 blanket=10 unit cost).

The practical way to think about this is to replace the $USD with something more tangible like milk, or a house, or a gold bar! Why measure wealth in the $USD anyways? The $USD is only as good as its purchasing power, so why not replace it with something of more consistent purchasing power? If you replace the denominator with the more tangible asset like the price of gold (which many people do), you will see that stocks have actually lost a ton of "real" value since the 2000 top. At that top stocks were worth about 5.6x an ounce of gold. Today they are worth less than 1 ounce. Chart attached below. So basically you used to be able to sell your stocks for 5.6 ounces of gold but now it will only buy less than 1 ounce of gold. Assuming an ounce of gold today has the same utility as an ounce of gold in 2000, stocks have fallen in value significantly. You can do the same with oil, commodities, water, shelter, or any other valuable, measurable necessity. Most of them will show a decline in the value of stocks over the last decade. Chart of the S&P priced in Gold, below.



The key takeaway is that stock prices are only one component of their worth (numerator). Don't forget the denominator piece (the US Dollar) as that is just as important in establishing a stock's true value. Thus, if you can get a sense of where the dollar is heading then you are 50% of the way to finding out what your stock's true value is. Another takeaway is that as long as the dollar is falling, then items priced in dollars should be going up in price, stocks included...and viceversa.

Supple this to my previous blog post on the bottoming US Dollar and we might be in for a beating in the stock market depending on the size of the move. There haven't been that many periods since the early 80s where the dollar has risen in value (except the bubble 90's where everything went up - stocks, bonds, dollar), but there are many when the dollar has fallen hard...and most of those times saw stocks rally. We got a glimpse of what a dollar rally can do to stocks in the early 2000s as well as 2008. We also know that the dollar rallied with interest rates in the 70's and early 80's when stocks were flat to down. In 2005 the dollar rallied and stocks stayed relatively flat (compared to surrounding years when the dollar fell hard and stocks rallied hard). The math also works to support this thesis. Right now (previous blog post), the dollar is looking ripe for a rally. It will be interesting to see what effect that has on stocks.

Pay close attention to that dollar!

$USD - Very Interesting Right Now

The US Dollar right now is the center of the world! Bearishness seems to be at an ultimate extreme. Everyone keeps talking about how the dollar is doomed, how the spending in Washington is never ending, how the Fed is determined to monetize the debt (thru inflation) yet there is one glaring piece of evidence that I continue to look at and maintain contrarian and at least a little bullish...

Why is the price of the $USD not at an all time low? You would think with the demise of America as we know it that people would be dumping the dollar more than ever. But, the price today is $77.82 (up 1.61%) which is higher than last year's low after the QE1 announcement of $74 which is higher still than the 2008 low as the stock market started to tank of $71 and before all QE. That is still over 10% away from where we are now. That is a HUGE percent in the largest market in the world (currency).

From a charting perspective we are at a very interesting point. There looks to be a potential triangle forming (which would be longer term bearish) but there are issues with that triangle. There are 5 wave moves within the triangle, which is typically a no no. Plus the extreme bearishness isn't indicative of another move in the same direction. However if this is a triangle the final E move up of the A-B-C-D-E pattern should last at least a few months which will likely ease any bearishness. There also exists a potential that the move down from June is impulsive and that high was the top of a corrective flat pattern except there exists structural issues with that pattern as well (no new low at the end of 09, for one).

The other side of the coin has this baby in a potential bull move. The rising trend from the 08 low is still in tact and if nothing else we should get a bounce here (which looks to be already occurring). The final key to this would be to take out the 09 high of $90. If that happens, jump on the rally.

How we know where to place our bets...
1) If the price exceeds $90 then the triangle is invalid and the wave count I have labeled is the most likely (3rd wave beginning now).
2) If price drops below the triangle and breaks $74 then the likelihood is that the triangle (or flat correction counts) were correct and we should see new lows (potentially a huge move down if the triangle measurement is confirmed -19 points from the breakout point which will put the dollar in the 50's).
3) In the meantime, prices are rallying, this is either the E wave of the triangle, the 2 wave of the new move down (flat correction), or the mega 3rd wave of the new bull market that started in early 2008.

This chart is so important because the dollar is involved in all asset classes. Stocks, Bonds, and Commodities all have dollar denominators. So, if the dollar rallies, expect stocks and commodities to fall (especially commodities) ceterus paribus. The dollar is the daddy and leads all other asset tops and bottoms. It also trumps all the other markets in the world. People need to remember that the dollar is 100% RELATIVE in a fiat currency world. It will go up in price if it is better than the alternative (Europe, England, Japan, other major nations). So it can be easy to justify a dollar rally, especially if Europe continues to have problems and Japan decides the Yen is way too strong (which Im sure they already are saying).

Good Luck. This chart is very important and will be very telling.

Do fundamentals really matter? Convince me after seeing this chart...

The price of oil is the line and the price of the S&P500 are the candlesticks, but it doesn't really matter cuz they are so alike!

This one chart should be all that I need to convince people that technical analysis really does matter. The only explanation I can think of to explain this chart from a fundamental standpoint is that oil prices and the stock market must be driven by about 90% the exact same fundamentals. So somehow stock price earnings, cash flows, and oil prices are driven by the same thing to the tune of 90%? The $USD obviously is the denominator for both of these, so is that the answer? Maybe it's just the discount rate that matters. In that case, macro analysis is all that should be needed. I don't know, but this chart alone convinces me that knowing the P/E or forward earnings or dividend payouts of the S&P right now doesn't mean *!#^!

If so then how does that translate to the price of oil, because they are obviously driven by the same thing. Technical analysis would say that they are driven by emotions and/or something other than fundamentals, or it would at least attempt to capitalize on the correlation regardless of the reasons. Oil and stocks have rallied almost the exact same percent since their March 09 lows. What are the odds of that?

The other answer I will get is that they are driven by fundamentals over the long run, not the short run...well if this is a "bull market" and all is right in the world then shouldn't we be "in the long run" right now? That is to say if things mean revert, then shouldn't we be on the positive side of that reversion since we are in a "bull market"? Even if we aren't and things aren't "right" right now, then obviously fundamentals aren't working right now, nor over the last 1.5 years and that is what we care about...making money right now.

I have a bet with a friend of mine that says oil will reach $40/barrel before it reaches $100. I might as well add that the $SPX will need to make new significant highs for oil to reach $100, at least while they are tied at the hip as they have been the last 1.5.

I love this chart.

5 wave structure turned out to be just a correction - 2, not 3 waves down; The Fed's Open Market Activities in September

And the wait continues...The five wave move I blogged about on the 30th did in fact pan out with another five wave move down 2 days later as expected. Unfortunately, we did not get a 3rd 5 wave down to confirm a more bearish trend has started. Now we must wait for this larger 2nd wave from August to continue to frustrate more bears and do the most damage to the most people.

By looking at the chart above you can see that by Monday's close, things looked ripe for a final fifth wave down. This would have kicked off a much larger correction down and potentially confirm the top. However, the market wasn't ready for some reason, so we march along and I continue to feel the pain.

I read an interesting piece today about the Fed's Open Market Operations not to mention the Bank of Japan's statement that they will start buying etfs and other assets the Fed has yet to purchase. Supposedly the Fed has been buying 5-10 year treasuries about twice/week between $550MM and $5B throughout September. This theory suggests that almost each day the Fed was buying treasuries the market was up and those days it did not, the market was flat or down. Those days that saw $3-$5B of treasury purchases the markets were up significantly (props to Lighthouse Capital). These purchases are now supposedly finished until at least October 13th. So, the next few days will no doubt be interesting.

The Fed so far has not been purchasing stocks, but the theory is that the primary brokers of the Fed then use this knowledge to buy stocks. I am not sure if the treasuries are bought thru the primary dealers or not, but nevertheless someone has seen a correlation between the Fed's purchases and market up days.

I continue to wait for this most painful top!

The Big Picture - Current Count

The market's wave 2 could have topped in August as a complex flat correction, but it didn't. The count was there, the indicators were there, the volume was there, the ending diagonal was there, but for some reason it reversed in late August after only 3 legs down. This was a corrective move down and foretold of this rally to new recent highs. What this did was make the count into a more complex double zigzag instead of the simple single flat that we had ending at the August highs. This is what the market does...it toys with you. We have been in the same price territory since May.

However, all this does is delay the inevitable and cause more pain for the bears (like me) in the short term and more pain for the bulls in the long term. The market will always try to cause maximum pain to the most people, but there is hope for the shorts (like me). Here is what I see.

We once again have a potential completed count with today's pop and drop. I also see 5 waves down since 9:45 this morning, so at a minimum after a retrace there should be another 5 waves down. What we hope for is at least 3 of these over the next few days. That will be a good start to show that the top is finally in. Another way to look at the past 5 months of price action is of a bear flag with a false breakout to the upside the last 2 weeks. However, let's not get too excited yet. This is only one day.

Months like the last 5 are reasons why we don't try to pick tops and gradually move in and out of positions...always leaving some dry powder for the rainy days (as September has been).

I am completely wrong if the market moves above the April highs.

Good Luck.

Total Volume Indicator continues to hit "dangerously" low levels

Today I was browsing thru my stockcharts.com folder called "Market Top 2007". These were the 80 or so charts I created back in 2007 and 2008 as the market tanked. I came across this one that continues to look like a great indicator.

This is a chart of the moving averages of the total volume of the markets (colored lines). The S&P is also on the chart in black. You can see the last time I updated the chart by the vertical black dashed line. Notice that before this line the market pretty much topped when the colored lines bottomed (where I have the horizontal dashed line). This is where volume is the lightests. You can see a noticeable downtrend in the volume since then. But, you can also see that the colored lines continue to bottom at market tops, at least for a short while.

Excluding the holiday time frame of 2009, the April top is where this indicator was the lowest (at about 1,000). We hit that point again during the August decline and are meandering that way again these past few weeks.

Buyer Beware!!! Low volumes have not been associated with bottoms these past few years and in fact the opposite has occurred in a kind of capitulation event of very high volumes at shorter term bottoms.

I continue to love this chart!

June 15 Blog Update - On track

I wanted to throw up an update to my June 15 blog that first called for the top in the wave 2 retrace of the April top...

The chart was on the right track and the top that occurred in June was actually what looks like an A wave of a complex "flat" correction with the "semantic" top occurring early August as a double top. This complication happens and should be expected. Corrective waves change all the time. It's a way for the market to balance price and time. What we did know is that a 5 wave move down occurred and a retrace was happening against the primary trend. This all occurred, just a little more complicated than initially projected. That's why we don't try to play counter trend moves, because they are so complicated. The trend is your friend and that trend is and is projected to be down for awhile. That's what we will be playing for awhile.

Now the market has started its 3rd wave down which should make it well into the triple digits as I have and have been directionally labeling on this chart and others.

The updated chart shows the 3rd wave just starting in early August as we enter the historically weak months of September and October. December to January of 2007 to 2008 should be a guide to what I am expecting of this next move. Of course if you have read some of my other blogs comparing 07 to now then you know that these moves already are larger than those of 07-08.

I expect the 1010 low to be taken out very soon if this all is the case. If that gets taken out by mid September, I will be a very happy camper and very confident with this count! I may even get 100% short.

As always, good luck and keep in mind your own risk tolerances.

Short Term Hedge to drop in stocks?

One safe spot during this turbulent market has surprisingly been Gold. The chart above shows the SPX/Gold ratio which divides the S&P into the price of gold to show relative strength. Notice that the S&P since mid 2009 has been underperforming gold. This had a significant change at the April market top when stocks fell harder than gold.

The 2nd section of the chart is Gold by itself. You can see the up trend it has been in since late 2008. At the end of July Gold touched this long term trend line and has rallied since. This turnaround could be a signal that the markets are about to resume their underperformance. This also could signal a good hedge play to the shorts that I have suggested in the market. A long gold/short stocks strategy could be a positive way to utilize capital.

Watch that gold up trendline currently at 1115 to know when this trade may come unraveled.

2007 versus 2010 Update

I have updated my 2007 versus 2010 chart for the recent market activity. There is a lot going on so it's probably easiest to just go top to bottom. Not much has changed from the long term perspective, though. Wave 3 is imminent and the end of this wave 2 bounce is quickly approaching (if not finished this week).

The key takeaway is that if the bottom of wave 1 was in fact in early July instead of early June as initially thought, then that means we should expect an even larger sell off than that of 07-09. I compare the top of 2007 with the top of 2010 on the chart and there is a significant difference in the size of the first waves down. These moves in theory are of the same "degree" both kicking off a wave of similar nature and "size". Wave 3s are always the largest in their degree, so at the least we should expect this wave 3 to be larger than 2010 wave 1's 21% down. 2007's comparable wave 3 was 20% from Dec 2007 to Jan 2008. This would theoretically put the S&P below $950 from today by the time this next sell off is complete.

Another thing of note, which I have spoken of plenty before, is the low volume on all the up moves since the 2007 top. Again we are in a low volume move up. I am just waiting patiently with my TZA for the sell off!

See my bond post below as well and click on the title to see an updated chart. Bonds (price) continue to rally (yield falls) and the 10 yr is now ALMOST 2.8% from a 3.8% high just a few months ago. This is a SIGNIFICANT move in bonds in such a short period. And, by the way, the bond market is way smarter than the stock market! It knows something the stock market doesn't, perhaps that inflation is a term we won't talk about for a long long time???

Now, I am just waiting for the dollar to start to rally for all the pieces to be in place and the selloff to start and pick up steam.

I will work on a post for a good hedge against your shorts during this market sell off. I for one am surprised at what I am going to say ;-)

Good Luck!

Bonds leading stocks?

Aug 3 2010 Update: Stocks have rallied 11% and bonds haven't moved. I see this as another warning that the bond market is not confirming the stock market rally and short is the better play than long... This same thing happened at the 2007 top as can be seen in the chart.



Markets are all interrelated, including the stock and bond markets. In the world of assets these two securities are the most popular with many 401ks, savings, etc invested in each. Many people make investment decisions choosing between the two in a zero sum game.

Over the past 10 years there seems to be some correlating relationship between bond yields and stock prices. As the chart shows they pretty much move up together and down together. This makes sense since there is that zero sum game trade off between the two. There is a very interesting scenario at market turning points. Bonds look to turn before stocks.

In the 2000 top, bonds topped in January and stocks in March. At the July and October 2007 stock top bonds peaked over a year earlier in June 2006. At the 09 stock market bottom, bonds had already bottomed in Dec 2008. And now, at the April highs, bonds have peaked at about the same level 4 times since May 2009. All of these situations set up divergences with the stock market. Bonds signaled turning points ahead of the stock market turning points!

What this means now is that bonds will need to make a new high above the 3.8% level in order for the stock market to have a chance at taking out its April highs. In fact the sell off since April in bond yields has been hard and fast more similar to 2007 and 2008 than any other time in the past 10 years. This is cause for concern and may tell us that the market is likely to fall from here rather than rally and make new highs. This also supports my general theory that the market is likely to continue to fall hard from these levels.

What this also means is that we should look for an upturn in bond yields before we get too excited about any stock market rally.

Good luck!

Baltic Dry Index Breakdown

One good economic indicator (potentially leading) similar to the railroad stocks and other transportation indices is the baltic dry index. This index measures the cost to ship dry goods by sea averaging the price over several worldwide routes. As you can see by the chart, the index tanked hard during 2008 along with everything else. This index was also dear to my heart, because although not a dry good tanker, GMR is an oil tanker stock I used to follow and invest in (several blogs on this site).

Recently the index has broken down from a triple top and/or potential head and shoulders pattern and is tanking hard...as hard and fast as in 2008. This goes along with the theme that the market has peaked in a wave 2 and we are about to have another crazy ride south, eventually taking out our 2009 lows.

One other thing this index was good for is at the 2009 lows, there was positive divergence on this chart, helping to get comfortable that a bottom in the market may have been in place in March 2009 as this index didn't make a new low and in fact didn't see much selling at all that first quarter of 09. Dont put too much weight on this though, as the 2007 top wasn't confirmed by the BDI

Market Wave 2 top potentially complete

July 22 2010 Update...

Market continues to play out a wave 2 bounce...the question is which one? So far it looks like this is the wave 2 of the 3rd wave down I talk about below with wave 1 of 3 starting late June at $1131. The new low below $1041 in early July solidified the count and helped me get comfortable that the market is impulsing downward. I maintain my TZA holdings at roughly 90%. However, there is a chance that this early July low is actually where the Wave 1 (marked in blue) should be located. This, is pretty much just semantics at this point. What it means is that the market could make a move above the June $1131 high and not violate any wave rules. Once that move finishes, though, then it is down hard flying past the $1011 low. No matter what, unless something is completely wrong with my analysis, the market won't breach its April $1220 high and patience may be needed in the meantime.

If the 1 needs to be moved out to the $1011 low, basically it is because the market is just buying more time before it falls in the 3rd wave. However, the count I have labeled is still valid until $1131 is taken out.

Either way, if you are okay with taking a little pain in the short term, now is a fine spot to start shorting. Alternatively, you can wait until closer to $1131 but a break below yesterday's low likely means you should jump on that train!




After the relentless sell off from last Monday's gap top, it is getting safer to say that the Wave 2 bounce that I blogged about 2 weeks ago has completed. The move only lasted 2 weeks from the beginning of June to the 21st compared to the almost month long move in 2007's comparable position.

That would mean we are currently completing our smaller wave one of the larger wave 3 as I have labeled on the attached chart. The black arrow points to roughly the comparable 2007 position. Notice the selloff that occurred a week after that black arrow bottom.

When this current wave from the 21st bottoms we will once again get a wave 2 bounce (albeit at a smaller degree). This will be a final spot to get out of longs as the following move down will be at least 80 points down, at a minimum. These levels also should be levels we will not see again for a long time assuming the counts are correct (and they are playing out more and more as expected which gives more and more confidence that the counts are correct).

Hold on to your hats as things should get uglier from here. You can see that already the moves down in 2010 are larger than those that occurred at the top of 2007, although they are of the same "degree" and "size" in the wave count. This supports the theory that a new low below 666 will occur as this count plays out.

2007 Top versus 2010 Top

Attached I show the 2007 top compared to the 2010 top and compare where I believe we are at the current moment. We are currently in a wave 2 bounce from the first move down similar to where we were in December of 2007. The blog post from earlier this week states why I think the top is in.

Notice that the wave 2 bounce of Dec 2007 was a 61.8% retrace of the first move down, so a move in the S&P up to $1150 is not out of the question. What would be out of the question is a new price high above $1220. If the market gets to $1150, this would be an excellent spot to add to shorts. Longs should be exited this week thru the week after July 4 as this bounce could last a month similar to Dec 2007.

S&P Top looks to be in - Big Wave 2 bounce in progress

6-15-2010
The S&P has fallen below its 200 day moving average, completed its final "C" Wave, and has formed the 5 waves down needed to get comfortable that a top is in place. The index has also broken down below its trendline and encroached on its previous ranges setting up a very high probability that the top in the S&P is in.

Currently, it is correcting its entire move down since the April high and will try to suck in as many bulls as possible. In reality, this is the point where bulls should be selling out of positions and adding shorts. A large wave 3 of 1 of 3 of 3 of 3 or however many 3rd waves we are in is forming and what this means is that it should be one of the biggest moves with very little relief and bounces to get out of longs in history. Notice on the chart below I have it knocking a few hundred points off the S&P in likely only 1-2 months time.

Bottom Line is the market has shown a pretty clear 5 waves down and is now correcting up in overlapping "corrective" waves that could potentially go as high as 1200 on the S&P (but it will not make a new high). Currently the S&P is flirting with the 200 day moving average, from the bottom, for the 2nd time in two days and a handful of times since breaking below it in mid May.

Now and the next week or two would be a good time to get out of longs and add to shorts!

Good Luck!