Friday, November 7, 2014

RSX: Bearish on Russia

The Market Vectors Russia Exchange Traded Fund (RSX) has been in a downtrend for years. The short shows signs that the Russian bear is lumbering back to its cave for awhile before resuming its downward slide.

The Chart

Much like the western economies, Russia's was hit hard by the global recession, with stocks hitting a low in early 2009.

Since then prices have worked their way higher, up to $43.16 in April 2012, before declining again in a correction that has taken back half the value of RSX, with the present possible final wave of the correction, wave C {+3} enduring far longer than its companions of the same degree.

Click on chart to enlarge.
RSX 10 years weekly bars (left), 3 years daily bars (right)
The core question of my Elliott wave analysis of RSX is how far advanced wave C {+3} is. It began March 2, 2012 from $33.74 and has so far reached a low of $30.45. It has been around for quite some time, leading me to suspicions that it is nearing the end of its run.

The reason wave C {+3} has endured for such a long time is that the internal waves are poorly differentiated in length and magnitude, down to the {+1} degree. When all waves are equal, then the Elliott wave analysis resolves into a series of divisions into child waves of still lesser degree, barely distinguishable from their parents.

By that analysis, wave  C {+3} is in the middle wave, 3 {+2} of its run. The middle wave is in turn in  its final downtrend, wave 5 {+1}, which itself in the midst of its own grand finale as wave 5 of the base degree.

Wave 3 {+1} began Jan. 28, 2013 from 2013, wave 5 {+1} on June 24, 2014 and wave 5 on Oct. 30, 2014.

From the chart I conclude that the Russian bear from 2013 is nearing its end, to be followed by an upward correction that will take back part of the decline from $31.16 before resuming its retreat.

The channel on the left-hand chart that contains the present downtrend suggests wave 5 and its parent, wave 5 {+1} may have some distance to go before reversing. Typically, the price could be expected to bounce off of the $18.80 level or so as it begins its upward course.

The key point to remember is that the bounce will be a counter-trend correction within an uptrend. The reversal won't mean that wave C {+3} is over -- far from it. There will be much opportunity for bearish profit once wave 4 {+1} has run its course.

At this point I know what I want to do. Before reaching my conclusion, though, I shall speak briefly of the fund.

The Fund

Market Vectors Russia puts its money in a portfolio of Russian blue-chop stock. Its top holding is the giant fossil-fuels company OAO Gazprom and its investments run the gamut of Russian business sectors.

The fund has a high carrying cost, with an expense ratio of 0.63%, compared to 0.09% for the most-traded symbol on the U.S. markets, the exchange-traded fund SPY. The companies in the portfolio are selling at a discount to sales; it take 74 cents in shares to control a dollar in sales.

The portfolio turnover is 27%, compared to 3% for SPY.

RSX pays an annual dividend yielding 3.58% at current prices. It goes ex-dividend in December for payout of 74.2 cents per share.

Decision for My Account

The downtrend from January 2013 is so far advanced that making a bear trade tat this point makes little since to me, despite the possibility of an additional 10% to the downside. There are no guarantees that the price won't reverse above the channel boundary, leading to a loss.

I judge the risk to be too great for my taste, and I shall pass on the trade.

-- Tim Bovee, Portland, Oregon, Nov. 7, 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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