In our last post Germany Dax Update on 6 September we were liquidating our short Dax as it approached 5000 and turned long from 5000:
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Our indicators are screaming BEWARE, markets rallied hard at the word go ! , DJIA is 10125 as we type (+2.2%), Spain up 4% at 9250, Dax 6075 (+1.4%). Japan remains the weakest, alongside FTSE (thanks to BP).
We were researching on BP’s misfortunes – being ignorant to it in the last few weeks. Is this the time to jump in? It makes about $14-16 billion per annum – with a market cap of 91b at the moment. It has over 10 billion barrels of oil reserves (over 5 billion under BP and >4 billion under its subsidiaries). A few factors we thought were important on top of the obvious legal repercussions of the spill.
1. How much oil is leaking per day? Does Deepwater Horizon form a large part of BP’s reserves?
We couldn’t find an answer to this. BP’s estimates are 1000 barrels a day, whilst “experts” from the US are estimating up to 95,000 barrels a day just by looking at the video of oil gushing out. Pick a number! If it was the highest estimate, thats almost 1 million barrels of oil every 2 weeks, or 28 million barrels a year. Is that a significant % of BP’s total reserves? Its “a drop in the ocean” if you look at their reserves below:
BP oil reserves
Which brings us back to the legal/financial impact. What is the final bill going to be? We’ve read that BP is self-insured, but other reports say they have reinsurance (probably do, but not much). The upper end of the bill so far in the media goes to 3.5 billion dollars – if that was the case, then we would jump head first to buy before it gets taken over. BP’s financial statement for the last few years summarised below:
BP Cash flow and Financial Statement
Now, for the most interesting (and unfounded) part of the analysis: look at the chart below.
IS BP leading the Dow Jones???
We put both on the same chart, Y-axis being the percentage change going back all the way to 1977. As we said, there is no basis for this, but BP and the Dow tracks each other very well in the last 33 years!
BP vs DJIA
We are going Short Dax $20 at 6070, stop loss 200 points.
(Note from Tim: it's quite important you carefully read the final portion of this post.)
All indicators, both technical and fundamentals have just confirmed a secular bull market.
The future has never been clearer to us. Forget every bearish analysis you have ever read – 1937, 2004, 1929…Great grand supercycle bull rally is upon us. Fundamentally the explantion is simple – money printing. Just like Zimbabwe's index went up 2000% when their currency devalued to nothing, the Dow is about to explode to the upside. Cross commodity correlation have also independently confirmed this uptrend. The market is at an inflection point, and the outcome is a burst higher. You will miss out if you are not loaded on the long side, and if you are short you should be very concern. As you can see from our very detailed charting using Prophet 5.0 charting software by Tom Night (contact us if you wish to buy a copy)
The inverse head and shoulder pattern has confirmed a secular bull market for at least the next 10 years. We are expecting a push higher as part of Wave C of 3. Fibonacci calculations are expecting at least a DJIA target of 21439 (ie 14150/21439 = 0.66).
We are going all in long!
Bulls and Bears, please post this on as many blogs as you can.
Note to bears, please highlight the rest of this post with your cursor:
We are NOT bullish, but as a contrarion we need to get the message out there that we bears have given up. If we keep telling everyone how bad the market is, Goldman and gang will continue to pump the markets higher. So lets all jump into a bull suit, and spread the bull propaganda! When you see the message above across Bloomberg, CNN, CNBC, etc, our mission is complete and the cataclysmic crash we expect is due.
Full cooperation is required especially from all webmasters (Tony Caldaro, Tim Knight, Guy Lerner, Corey Rosenbloom, Mish Shedlock). Do not forget to change the colour of the font of this section to blend in with the background so that it is completely invisible. If bulls are able to decipher this hidden message, our plan will fail and the Dow could go to 21439 with all the money printing!
Our last update on 1937 vs 2007 comparison was exactly two weeks ago, 7 Feb 2010 – when markets were in the pits. Dow was 9880 at the time of writing then – and our plan 2 weeks ago was: Our strategy going forward: We look to reshort at ~ 10400 +/- 50 points. Lets hope for a swift rally. Stops at previous high 10720.
Well, here we are now at that point – markets closed at 10402 on 19.2.2010. Here are updated charts, zoomed in to try to pinpoint the top (for new readers, we have never been able to do this so please proceed with caution). We will let the charts do most of the talking:
Series 1 (blue) : 1937 Bear Market
Series 2 (pink): Current Bear Market
X-axis: number of days from peak
Y-axis: Percentage from peak
Chart 1: 1937 vs 2007 Crash Comparison Chart (Big picture)
Just to remind readers and for new readers, our first post on this (ridiculous) series comparing 1937 and 2007 (two independent points in time 70 years apart!) was in Dec 5 2009: Using Fibonacci Numbers to Predict the Market. We have been tracking it since.
Our trading plan this week:
- + Hope for markets to rally early in the week. Looking at 1937, markets need to rally ASAP. This is the terminal part of the rally, so some good news on Monday would be good. Note that whilst 10500 is based on the same percentage retracement as 1937 at point "X" shown above, the rally could fall short of 10500. We have fired a miserly $2/point at 10400 – we will reserve our ammo for 10480 ($5/point) and 10540 ($10/point).
- + Small McClellan Oscillator change on Friday. Whilst we bears hope the large expected move is a DOWN move, lets hope its an UP move to hit our targets set above. A 140-point rally on the Dow (1.34%) would take us to 10540, setting off our highest short.
- + All shorts have a stop at 10700 (loss of: $600 + $1100 + $1600 = $4300) ($4300 is quite a big gamble~3.5% of our portfolio)
- + Potential upside: target 9600 (final target will be updated in the coming weeks) – ($800 + $4400 + $9400 = $14600)
- + We will be posting this analysis on as many blogs as possible – in hope of advice from readers who are familiar with options to provide an alternative trade plan based on the above scenario. We don't like our $4300: $14600 play. Thank YOU in advance.
For new readers, here are our previous posts comparing 1937 to 2007:
Quick Update 1937 vs 2007 Bear Market Charts:
(Blue: 1937 ; Pink: Current Bear Market; Y axis: percentage from top; X axis: number of days from start of bear market)
So are we at the first peak (A) or the second peak(B)? How far further can markets fall before the bulls will come in? We zoomed in to look at it closer:
– More room to fall before rally
– Expect a decent rally after the fall – the H&S level drawn on chart is the obvious target. However, if markets decide to fall further, then the second lower H&S level (not drawn) will be the next short entry level. However, looking at previous tops, the subsequent rally will usually get quite close to the top. We aim to release some of our shorts if markets fall further this coming week, and re anchor additional shorts after market rallies. Our trades in the coming week will assume that the market has topped (ie with a stop at the previous high)
– A stop at previous high – based on A and B in 1937, markets on both occasions did not break above the top at the subsequent (contiguous) rally. This will therefore be a safe stop to have in the unlikely event that markets have not topped.
– Our India NIFTY shorts remain the best shorts at this point.
Have a great weekend fellow traders. We need to be rested before next week. See you in the battle field.