GE update

To summarize, GE should trade roughly in line with the broader markets because GE is such a big part of the US economy.  Thus, when I have questions like in this post it pays to dig in to see if there is a model which explains it.  I think I might have found something interesting on this front.

While I expect GE to trade in line with the markets in terms of daily moves, the bigger picture can be out of phase.  For example some stocks could be down because they are in wave 3 down while others are down because they are in wave 1 down.  The advance decline ratio gives us a picture of how in phase the markets are. When the AD ratio high, most stocks are in 1 and 3 or in 2 and 4.  When it is low, the individual stock chart waves are mixed in count.  I'm not sure how I will leverage this understanding fully in the future but part of the reason for this blog is to postulate and develop theories that can extend the EW baseline in order to improve odds.  If you think about it, the EW rules are concise but lightweight.  In other words, they are like the "C" language or the US constitution.  They set the baseline but then other factors (like standard C libraries or like federal laws added on top of the constitution) can significantly color the baseline.  For example, EW clearly defines triangles as penultimate waves (Bs or 4ths).  This makes them very useful as way points in the count stream.  But earlier this year I postulated a "proprietary" corollary which is that wedges are likely Cs or 3rds.  Anyone following this blog for more than a few months knows I have already used that to significant advantage in the TVIX count.  

In any case, here is what I am thinking.  The orange lines in the model below were drawn Sept 17th, just before the broader markets peaked.  I have not changed them since.  The orange triangle was in place even before that in my models.  The fact that GE played out like that suggests that I could be on to something.  My recent fear was that it would be a full wave higher as shown in orange.  The fear came from the fact that there is no way GE is going up that much without the DJIA and S+P 500 doing something similar.  Of course, that would trey dread for TVIX.

But on further inspection I see that there is another interpretation which would fit my broader views (market has peaked) and you can see that interpretation in blue below.  EW says that wave 5 should be about the same length as wave 1 if 3 is extended (which it was).  My first thought was that wave 1 was as long as the rising orange line in the model below but in looking just now (see rightmost chart below), wave 1 could have been a puny little thing and if that is the case then wave 5 will only go as high as the blue line in the model.  In other words, this model says that GE hasn't really reached its peak count yet even though it has likely reached its peak share price. 

 I think this market internal conflict (i.e. some but not all major stocks have actually hit their EW peak) is why the breakdown on the DJIA is so choppy, so unfocused.  Compare this against the $COMPX which is falling like a stone.  The $COMPX was down almost as many points as the DJIA even though it is only 1/4 the numerical size.  This divergence is not difficult to understand from a fundamental perspective.  When "risk off" hits, large cap blue chips have more staying power and few are larger than GE.




In the short term I am cautious but not scared about trading TVIX while knowing that one more sizeable pullback is possible before it really breaks out to a higher high (than $4.20) and begins to fly.  I think that the DJIA can rally and re-test the lower rail of the breakdown from below as out of phase stocks like GE actually play out their 5th and final wave of the bull market of 2009-2014.  I think the proof that this is what is happening will be found in two things:

1. If GE rallies back up into the channel of the triangle, it will happen in 5 waves, NOT a 3 wave move because it will have been a motive, not corrective wave. This is likely the single most important indicator of my model's validity or non-validity.
2. If the rally can only reach the height shown on the GE model before reversing and falling back through the lower rail, I am calling the bull market dead with no reservation because that will mean I fully understand what is going on.  Nobody can just randomly predict things and be right very often.  Being right about the future outcome of things is the ultimate measure of the full understanding of the current state of a matter.  I'm not saying I'm going to be right.  I'm saying I have a model which follows the EW rules and which makes sense in a broader market context.  So IFF it turns out to be right then it should be not just good but rather excellent extreme confirmation of my current model.  Winning gamblers know when to increase their bets: when the odds are in their favor.   Just sayin'.

So let's say this plays out as I just mentioned; GE does a short stroke 5th while the DJIA rallies back up to kiss the lower rail from below.  The trade-able implications of this are:

• The DJIA has not really shown panic selling yet because major players still have a final spurt of technical strength.  When that peters out, the late-arrivers will turn down into their wave 1 down while the early arrives to the decline begin their 3rd waves.  With everyone in phase going in the southern direction, the likelihood of that 500+ down day (and I am being generous here, it could be much higher) increases to the level of almost being a certainty.  Needless to say, traders will want to be in some kind of shorting mechanism at that time.  TVIX could go up 50% in a day.   In fact, in an extreme case as seen in the past where the DJIA is down 7-22% in a single day, there really is no telling how high TVIX could fly.  It was up 21% on Friday as the DJIA went down only 100 points...
• If options are your bag, consider deep out of the money GE puts for 2016 as soon as those 5 final waves up transpire.  TVIX will have pulled back by then and GE chart will have 5 waves up printed.  The combination of bullish looking chart and reduced VIX will confuse the odds makers.  They could easily have missed the tiny glitch that made wave 1 wave 1.  That means they might think that a motive wave has begun instead of realizing that this 5 wave sequence was the sounding of Taps for GE shares.  That means that leaps will be as cheap as you can get them and that risk will be incredibly under priced in the options.  Mark my words, these GE puts will rise 30x or more before this is over.  I am being conservative there.  The best bet I ever made on options was a similar deal: AIG.  Everyone thought it was the pillar of insurance strength. I knew it was a Ponzi.  I made 66x on my AIG LEAP puts, the highest single trading percentage win of my career.  GE could easily be the same.  Nobody in the mainstream media talks about GE's Altman Z Score which predicts BK within 2 years.  But I am on record saying GE will BK. It will essentially be the AIG of this wave of the crash (one of them at least, there will be many.  This is a C wave and that will have the power of a 3rd..../).  GE is a leveraged shadow bank running a failing vendor finance scam.  How's that for real fundamentals?

Note that I initially mentioned the GE 2016 $13 puts in this post when the ask was 11 cents.  Today they last traded at .16 on pretty good volume (for leaps that is...) and the ask is way up there now.  I did not get them at $0.11.  I waited a bit and paid $0.15 and have been holding them for months.  But they have plenty of time value in them and I am going to make a killing on these before the crash is over.  If my model is correct, the ask will come back down a bit from $0.23 as GE prints 5 more small waves up.  In other words, the handicappers will get it wrong.  They will think the risk is reducing where in reality the bull trap is being set.  I will probably pick up another block of these if the model plays out even if I have to average up from my first block. 

Why?  Because I want to be massively short the market. I think GE will BK eventually and it would be smart to diversify from TVIX in case the ETF manager goes BK.  By doing this, my single point of failure is limited to TDAmeritrade, my broker.  Also, I need some short that I can fire and forget.  It's too difficult keeping up with too many different day trade or swing trade bets.  With the wide spreads on these options you do not go in and out.  You buy and hold for months or quarters.  At $0.23 these puts are a super bargain but I want more at something like 0.17 if I am lucky enough to get it.  Remember, these few pennies are large percentage deltas and those percentages work in your favor as the value goes up.  A double from 15 is 30 whereas you have to go to 46 to double from 23.  Well that 46 would be a triple from 15.  So if you are going to do this, grub for every penny because it does matter later on.  Don't pay the ask. Put in a low bid and see if they will bite.  And wait until 5 of 5 when, seeing that 5 waves up have transpired and imagining more are coming, they think you are stepping into quicksand.  That's when prices will be lowest.  If you want to trap a wolf you have to think like one...

• GE has not been falling as hard as some other blue chips since Sept 19th.  That is likely to  give people the false idea that GE is a powerhouse of a stock, an oak in a storm, a large boulder in the stream.  But if the real reason for relative strength is that it simply hasn't finished its bull market count yet then there will soon be a rude awakening for GE because a short stroked 5th is actually a sign of huge weakness.  This out of phase relationship of the wave count could really fool a lot of institutional investors.  When GE finally enters its bearish wave count (i.e. wave 1 down begins to transpire), the hidden weakness will show up in spades.  It will take everyone by surprise which, of course, is the intent of the market at the turns.
• Bottom line is that if this model is right, GE is about to take an sizeable dump which will catch the market by surprise and line the pockets of put options holders.  GE should stop trading flat to sideways and begin moving down with conviction as soon as 5 small waves up are done.