Wednesday, September 10, 2014

CVX: Not all downtrends are created equal

Chevron Corp. (CVX), the world's third-largest oil company, gave a bear signal on Tuesday and confirmed it by trading still lower today.

As it turns out, CVX is an example of the ancient wisdom: Appearances deceive.

Or, as Arthur Conan Doyle put it in his 1891 Sherlock Holmes short story The Boscombe Valley Mystery, "There is nothing more deceptive than an obvious fact."

How so? Read on.

The Chart

My initial framing of CVX, on the 20-year monthly chart where my Elliott wave analysis always begins, was quite straightforward: Five waves in an uptrend, which ended last July, the terminus of wave 5 {+3}.

I had, in sorting through the finalists (see "Wednesday's Finalists"), pegged CVX as an obvious downtrend on the three-year daily chart my virtue of the strong strong zig-zag that followed that peak. It absolutely screamed downtrend, and given its momentum, a powerful one.

Yet, not all downtrends are created equal.

A downtrend following a 3rd wave rise, the middle wave in an uptrend, is in the course of things inevitably followed by a move to a still higher high. It may be a downtrend, but it's not an attractive trade.

A downtrend following a 5th wave rise, by contrast, is a wonderful bear play. The 5th wave is the final wave in an uptrend, and the decline that follows can, in some circumstances, have no lower bounds.

A framing of the internal structure of wave 5 {+3} shows that the July peak is not the end.

Click on chart to enlarge.
CVX 20 years monthly bars (left), 3 years daily bars (right)
The peak completes a middle wave, 3 {+1} within 5 {+2} of 5 {+3}. The ensuing decline, wave 4 {+1}, will be followed by wave 5 {+1} to the upside, which will move above the $135.10 peak, perhaps far above it.

It is true that the present counter-trend correction, to give wave 4 {+1} its proper description, is still in its early days. It has just pushed below the 23.6% Fibonacci retracement levels. Major Fibonacci stopping points that lie ahead are 38.2% at $120.06, 50% at $115.42, and 61.8% at $110.77.

There is no way to say under the Elliott rules how far wave 4 {+1} will fall. Nor can it be said how long the correction will last. The wave being corrected lasted a bit over three years. The wave 2 {+1} correction lasted slightly under three months.

Corrections in the 4th wave position tend to endure longer than 2nd wave correction do. But in any case, there are in Elliott no guarantees regarding the duration of waves.

At this point, I can short-circuit my analysis and go straight to the judgement.

Decision for My Account

I don't like to play 4th wave corrections unless they are of very high temporal degrees. The degree at question here, {+1} on the CVX chart, is of a magnitude that typically lasts months rather than years. That raises the odds of a reversal to the upside happening soon.

Based on the chart alone, I decline to open a bear position in CVX.

-- Tim Bovee, Portland, Oregon, Sept. 10, 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.

From time to time 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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