Wednesday, July 2, 2014

NGG: An extended wave

National Grid PLC (NGG) continues its rise that began in July 2010 from $36.72. The price pattern remains quite bullish, but there are hints suggesting that NGG may be close to overstaying its shelf life.

I last covered NGG in April, in an analysis, "NGG: Whipsaw candidate".

The Chart

Elliott wave analysis shows that NGG has been in wave 5 since December 2013 and continues to act as an extended 5th. 

Such extensions can last quite some time. In wave counting, an extension happens when a wave continues to subdivide into waves of lower degree without a clear distinction in magnitude. The parent wave keeps marching onward without, seemingly, ever reaching an end. 

The rise in the broad indexes following the sharp crash of 1987 up to the 2000 peak is an example of an extended 5th. Analysts far more experienced than I am were suckered in by the pattern, urging people to exit before the Bear attacked, only to see the market continue to rise.

So age is in itself not a signal to exit when it comes to extended waves.

Click on chart to enlarge.
NGG 1 year daily bars (left), 3 months 2-hour bars (right)
The present wave on the NGG chart is a 5th wave for three degrees from the smallest wave I counted, and that wave, 5 {-2}, could extend further into a {-3} degree with similar magnitudes without doing violence to the Elliott rules.

On the other hand, wave 5 {-2} could end today, and in the process usher in a correction of wave 3 {+1}, which began in August 2013 from $57.12, which is 25% below today's high so far.

There is no way to calculate the odds of one outcome or the other. That being the case, I find it to be a very risky position. At this point, I can break off the analysis and make a decision about the trade.

Decision for My Account

I'm willing to assume risk, but I like to be able to calculate the likelihood of failure. That's not possible with NGG, and I won't be opening a bull position in the stock.
-- Tim Bovee, Portland, Oregon, July 2, 2014


My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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