LOCKIT Application Example Part 3

Open buy

In figure 2.7 we can see how wave 4 completed exactly by touching the upper side of the trend channel and the upper side of the pitchfork. Wave 5 down started and is now making a lower bottom than wave 3. Wave 5 is a fact now.

 

Figure 2.7: CMS daily, down wave 5 complete, opening the trade.

05/15/2006: price reaches a short term Fibonacci target and the candlestick chart has a bullish engulfing reversal pattern. Is this the end of wave 5, wave C and wave 4? If so, we are looking at a bright future. We are now starting the up move for wave 5 which must bring us minimum above wave 3 or above $16.8.

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After the “L” and “O” of LOCKIT and before we decide to buy, we must take into account “K” of LOCKIT and have a look at the risk/reward ratio and of course we must take into account good money management dividing our investment capital among 20 fixed stocks.

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With the doji low of the bullish engulfing pattern, together with the longer term support of the line through sub wave 4 of impulse wave 3, we have a solid and close initial stop. If we are wrong, the loss will be very limited giving a very good risk/reward ratio.Buying at $12.52 with support at $12.33, we can put a very small initial stop, the “I” of LOCKIT. This initial closing price stop is only 1.6%! Taking into account a rather low volatility of this stock in the recent past, we can also keep a relatively low trailing stop of 5%.

With a starting capital of $25,000, divided among 20 stocks, we have a starting capital for one stock equal to $1,250. We buy 1250/12.52=99 shares of CMS Energy Corp.

Figure 2.8: CMS daily, up wave 3 started; projection for medium term targets.

07/03/2006: In figure 2.8 closing prices remain above the initial and trailing stop. Price now breaks the resistance of the top of wave 1. We have an Elliott impulse wave 1 and the correction wave 2. Wave 3 seems to be started with an extension wave 1 and 2, with wave 3 on the way.

A pitchfork between the points 1 and 2 and the bottom of the big wave 4 gives an up move that is too sharp. If however we use a previous bottom a few days before, we get a much more acceptable slope, much more in line with the present price trend.

Drawing a trend line from bottom C through the bottom of wave 2, we expect the impulse wave to move within a channel. To create this channel we draw a parallel line through a previous bottom (3). The slope and the width of this channel is acceptable and apparently completely in line with the pitchfork.

Possible price targets are given by a Fibonacci price projection from bottom C and top 1.

Target_1 at $13.8 looks quite logic with the crossing of the first Fibonacci target with the upper side of the pitchfork and the 200-days simple moving average giving resistance at that same level. This would be a sharp move up, but could be somewhat expected after the longer period of the flat consolidation.

Target_2 at $14.85 gives a more moderate price acceleration and will probably reach the upper side of the trend channel. This is possibly the end of wave 3, so there is enough room for wave 4 to fall back to the lower side of the channel.

Target_3 at $16.6, could be anywhere in the channel at that level. We rather expect the price to move even a bit higher to finish the longer term wave 5 above the previous top of the long term wave 3, meaning above $16.8.

10/31/2006: Price targets and time periods follow quite well our estimates.

Figure 2.9: CMS daily, a critical point are we reaching the end of wave 5?

Looking at figure 2.9, we are now at a critical point in our Elliott wave count.
We can not exclude that wave 5 has been reached and that a bigger reaction will follow. But, we are not yet reaching the longer term wave 5 top, this means that there is still a big chance for a continuation of the up move.

Additionally there is also a possibility that the current wave 5 has an extension and that we are now seeing correction wave 2 of this extension. In that case, the correction will probably be limited to the lower side of the trend channel. Here there is additional support from the lower side of the pitchfork and from the 50-days simple moving average. All of this support is also close to the 5% trailing stop.

Because we are close to the stop level it will certainly be worthwhile to believe in an extension of wave 5. Anyway, keeping to the rules, we will sell if the closing price would break the trailing stop level unless we are able to give a very good explanation why not!

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