A Look Back at US Steel

Mar 3, 2009: 10:16 PM CST

US Steel (X) was a grand beneficiary of higher commodity prices in general, but just as its share price ran up in the commodity bubble that ended in 2008, price fell to levels few thought possible.  Let’s take a look at the monthly chart – containing a near ideal Elliott Wave pattern – and more recently on the daily chart.

US Steel (X) Monthly:

Price began an initial move up off the 2003 lows which took price up 600% from $10 to $60 in a Wave 1 advance that gave way to a 50% correction into EMA support in 2005.  The powerful 3rd Wave advance began that took price from its $30 price up $100 to $130 before falling back into a second large (Wave 4) correction back down into support via the rising 20 month EMA.

Price retested this rising average three more times (giving good, simple buy/entry signals) as price climbed $100 again – this time from $90 to $190 before price peaked in a final 5th Wave advance as commodities peaked in mid-2008.  Since then, price has fallen an astounding 90% in almost a year’s time – astounding for such a steady company.

While eyes of investors have focused on the wealth destruction in the Financial sector, they may have missed a similar destruction of investor capital that has taken place in many stocks tied closely to commodities.

Let’s drop to the daily chart to see the structure.

US Steel (X) Daily:

Price fell in almost a steady waterfall decline after breaking the 200 period moving average – also known as the “Line in the Sand” – in September.  Generally, the 200 SMA is the last line of defense for buyers.

After falling 50% from $140 to $70 in just over a month, price began to form a positive momentum divergence, but this is a lesson that because we see a divergence does not mean we should be an aggressive buyer.

Price retraced back to the falling 50 EMA three times into the New Year, all of which set-up excellent short-sale trades… or long-liquidation zones for those who were trying to play counter-trend rallies.

Dojis – which often precede short-term price reversals – formed at each test of the 50 EMA.

The momentum oscillator recently broke a trendline in mid-February and price has fallen to a new low not seen since the beginning of its move up in 2003.

Studying the price action in US Steel (X) shows us that it doesn’t benefit us to seek to buy bottoms, and  that even solid, strong companies can suffer greatly (beyond what most people can imagine) in a down-market.

Corey Rosenbloom
Afraid to Trade.com

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Resolution of the 1937 Dow Bear Market

Mar 3, 2009: 8:14 AM CST

What happened directly after the Dow Jones Index completed its 5-Wave downwards pattern from 1937 – 1938?  And might the same thing unfold in today’s market?  Let’s take a look.

We had an ABC Up retracement that lasted about seven months that resulted in a 62% gain for the Dow Jones.  It also took prices up to the 61.8% Fibonacci retracement from the 1937 price high to the 1938 price low.

I’m certainly not saying this will unfold in mirror-image fashion today, but that an “ABC” corrective pattern is expected to follow 5-Wave Impulses so it’s certainly not out of the question or realm of possibilities in today’s market.

As great as a 62% gain is in seven months, was that the absolute price low?  Unfortunately no, as price actually peaked where I have drawn the “C” Wave (and blue line) and then began chopping around, never to exceed the 160 peak before breaking eventually to new lows in 1942 before the bottom was firmly in place and a massive rally began without looking back.

Let’s get some broader context and see what happened before and after 1937-1938:


(Click for full image)

I didn’t take the time to label each wave, because I wanted to show you the larger picture both before and after the specific 5-Wave structure in 1937 that seems to look eerily identical to today’s 5-wave decline off the October 2007 highs.

In this case, the 1938 low was wave (A); 1939 (or late 1938) high was Wave B; and finally the 1942 price low was Wave C.

The question now becomes IF history repeats itself, then the 5-Wave structure we are seeing might be part of a larger bear market… perhaps Wave 1 of the C wave (as in A=2000-2003; B=2003-2007; C=2007-20??).

I’m not ready to make that call yet, but I did want to reference the past for possible clues.  The key word is “possible” clues, or guidance from years past in the stock market.

We’ll have a better picture as more price data comes in, but for now, let’s take it day by day and try to manage risk and seek high probability (trading) opportunities as they develop within the unfolding structure as best we can.

Corey Rosenbloom
Afraid to Trade.com

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With SP500 at New Lows the VIX Has Room to Run

Mar 2, 2009: 8:07 PM CST

With the S&P 500 at new lows not seen since 1996 – clearly surpassing those lows made in October and November 2008, you would expect the Volatility Index – or VIX – to be making new highs as well.  It’s not.  Let’s look at the VIX and see what clues it might be telling us.

VIX

In such an environment of fear and new price lows, one would expect a spiking Volatility Index, indicating that volatility is at correspondingly high levels (and that put and call options are thus more expensive to provide protection).  This non-confirmation is odd.

The bottom line shows the S&P 500 and the three corresponding lows that occurred in October and November (along with today’s swing low).

The VIX is trapped in a sort of triangle or rectangle consolidation, hinting that a break (to the upside) would carry prices to higher levels after forming this base, but honestly what is it going to take to cause the VIX to spike up to levels one would expect it to do so?

Look closely – though the S&P closed lower in November than it did in October, the VIX failed to spike to a new high.  Are investors becoming complacent and just accepting that lower prices are here to stay?  Is the VIX about to spike to new highs?

Traditional thinking states that we won’t see a (short-term) bottom until the VIX spikes and fear takes over… and if that’s the case, then it clearly hasn’t happened yet which implies prices have further to fall to the downside.  One observes VIX spikes (or peaks) at market turning points (however short-term in nature) and it doesn’t appear we’re likely to get a reversal off the levels the VIX rests at currently.  A 14% single-day gain is impressive, but not enough to break us out of consolidation.

For more context, Bill Luby at VIX and More details the VIX Index and the S&P 500 over the last two years, with a special overlay of new events and how both the VIX and S&P reacted.

To learn more about the construction and specifics of the VIX, brush up on the Wikipedia Article on the VIX.

Bottom line:  If classic interpretation on the VIX still ‘works,’ then we’re set for lower S&P 500 prices in the short-term and need to see a spike up in the VIX (‘fear’) before we put in any sort of price ‘bottom.’

Corey Rosenbloom
Afraid to Trade.com

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Amazing Similarities in Dow Jones 1937 and Today

Mar 2, 2009: 2:15 PM CST

In charting, sometimes past is prologue.  There is a distinctly eerie similarity in the 5-Wave decline from the October 2007 highs today with what happened – almost identically – as the Dow peaked in early 1937 and bottomed out in April 1938.  It’s something you probably should examine, as it could resolve the same way today as it did then.

Dow Jones Index Daily from 1937-1938 with Elliott Wave:


(click to enlarge)

Reference the prior blog post:  “Full Scale Wave Count on the S&P 500” which included this chart:

Looking at the charts side-by-side shows a chilling reflection of similar Wave structure progression that unfolded.

The structures contain the expected progression of 5-waves which properly subdivide into corresponding fractal waves as the big picture develops as the bear market progresses.

Keep in mind, there were no computers in 1937, no online brokerage accounts, no hedge funds, etc.  What’s stayed the same – arguably – is human psychology as investors’ fear and greed interact to create these patterns.  Also, Mr. Ralph Elliott almost certainly saw this 5-wave decline develop in the Dow during his time which perhaps was further confirmation of his “Wave Principle” he was developing at the time.

In the case of 1938, the circled 5 wave was the bottom (at 100) at that time before an ABC corrective rally launched.  If past is prologue, then we have yet to complete the final circled Wave 5 to complete the pattern, though we’re much closer now than we were.

What exactly happened after I cut-off the chart in 1938?  Stay tuned for an update!

Corey Rosenbloom
Afraid to Trade.com

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(A special thank you to reader Couns for bringing this similarity to my attention in the comment section)

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Longterm View of Crude Oil since 1990

Mar 2, 2009: 11:11 AM CST

Crude Oil has come into a potential support area most traders might not be aware exists, but it’s evident from the long-term monthly chart.  Let’s see this structure and what might be in store for crude, barring any further unforseen developments.

Crude Oil Monthly Chart:


(Click for larger image)

Crude Oil ($WTIC as the benchmark index) has completed a seemingly perfect Elliott Wave pattern to the upside with a complete fractal 5-wave structure (not labeled) unfolding in the terminal 5th wave into mid-2008.  Price peaked at $147 a barrel and began a shocking plunge that took hedge funds and the general investing community by surprise (which was happily a boon to the economy in the form of lower gas prices).

Under this count, prices has completed a violent Wave A (correction) into a level of confluence support.  First, the rising 200 month moving average provided a floor that halted the downside pressure temporarily.  Second, this level – the $38 range – has served twice as key resistance (in 2000 and 2003) and according to the “Polarity Principle,” old resistance becomes new (future) support.  It’s possible that’s happening now.

In addition, the monthly close formed a bullish hammer candlestick on top of those support zones.  Is support certain to hold?  Absolutely not but Crude Oil is probably due some sort of counter-swing up perhaps to the $55 or higher level at a minimum.

Sometimes looking way back into price history can provide markers for possible support/resistance zones today.  Crude has the potential to do that from these levels.  Crude is experiencing sharp downside pressure today, so it’s possible the downtrend is just too much to overcome or that the economy is expected to be worse than expected… and it’s quite difficult to fight downtrends so do further analysis on your own.

Corey Rosenbloom
Afraid to Trade.com

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