I had prepared the following article for publication in Seeking Alpha on Sunday, but I decided to share it here with you folks directly. Meanwhile Chevron Corp is already moving nicely.
Chevron Corporation is an integrated energy company with operations in countries located around the world. The company produces and transports crude oil and natural gas. Chevron also refines, markets, and distributes fuels as well as is involved in chemical operations, mining operations, power generation and energy services.
Let me be honest about one thing upfront. I don’t have a Dividend Growth Portfolio at the time of writing this article. I have been involved with the financial markets for over 30 years, and have always been in the thick of action in a variety of markets. But I neglected building a DGP. Yes, it is a serious lapse! But it is never too late to start. The goal is to reach an yield to cost of 10% within 10 years. Perhaps, Elliott Wave Analysis would help me reach that goal in a shorter time frame!
The stock had a closing price of $112.05 on Friday, 7th February 2014. If I were to buy this on Monday at $112, my own yield will be 3.59% which looks good. My Bloomberg screen shows that the 5-year Net Growth rate for dividends is 9.04% and the 3 year and 1 year dividend growth rates are respectively 11.15% and 11.11%. The P/E for the stock is 10.09. As many fundamental analysts have done adequate research on Chevron Corp and awarded it high marks, all I wanted to know before I placed my buy order was whether Elliott Wave Analysis offered me some additional clues. Is it time to add Chevron Corp to my brand new Dividend Growth Portfolio?
Let me give you a quick summary about Elliott Wave Principle. The theory was put forward by Ralph Nelson Elliott in the 1930s and has stood the test of time. Elliott discovered that all market moves in the direction of the main trend developed in a five wave pattern. Two of these five waves served to correct the first and third waves. But once the fifth wave completed, the next correction served to correct not only the fifth wave, but also the entire sequence for five waves. Hence that correction is usually bigger and lasts longer than the two minor corrections seen on the way up.
With that introduction, let us take a look at the first chart below. You can see that starting from the significant low posted in the early 1980s, Chevron Corp has a clear five wave move to its recent top. The third wave traveled a distance of 161.8% of the first wave, a classic measure for third wave moves. Some of you might recognize this ratio as a Fibonacci number. You will also notice that wave 4 and wave 2 were alternating in length and complexity. This too is as per Elliott Wave Principle.
I then zoomed in to view the fifth wave to see if that had its own five minor waves. And sure enough, I could make out a clear five wave pattern there too.
So does this mean we will now experience a decline that will be longer than wave 4 seen during the great recession of 2008? If that happens, won’t the price go down to around $79?
This is where one more important guideline from the Wave Principle will help us decide. According to the theory, we should expect at least one of the three impulse waves to extend, i.e. travel an unusually long distance. From the above two charts, it is evident that both waves 1 and 3 were of ‘normal’ proportions. Hence, it is likely that wave 5 will be extended. That means what we have seen in the second chart above is not the end of wave 5, but probably only the first sub-wave within an extended fifth wave. Seen from that angle, it would be very tempting for the investor who seeks dividend income to get a full exposure of his/her maximum position size that the portfolio would allow. It is true that we could still get a dip under $100, but that dip should be used to add some more exposure to CVX. I am going to buy my first lot on Monday, before the stock goes Ex-Dividend.
what happen to wavetimes.net? I signed up on 1/31.thanks.
Robert, wavetimes.net is a paid subscription where members get to see specific low risk trade ideas. This blog, however, exists to TEACH people how to use EWP.
When you zoom into 5 wave,dont you think one level down of lower timeframe (Weekly) should provide enough evidence and clarity on formation of 5 subwaves?
Prabh, Zooming down to a lower degree will often provide clarity and how many smaller levels you wish to go depends on your trading time frame.
Please Update with Elliott Analysis on Long Term and Medium Term trend on COTTON and SOYABEANS…
This is regarding the formation in NIFTY spot. I have noticed that during the recent recovery from the lows the wave 1 has been formed as an expanding diagonal. Oddly it appears that wave 1 itself did not go past the reflex point (4 of wave C) but the irregular B of wave 2 did go past it. I have posted an illustration of the 10 minute chart where this formation is seen here http://postimg.org/image/totzi6eix/ for your kind reference. I trade the hourly and use the lower time-frame charts such as the 10 minute chart for spotting 1st wave and 2nd wave. Thought I could share it with you.
Mahesh, I looked at it briefly but it doesn’t seem to fit in with what I would call a diagonal. Perhaps you should read up that section again.
I am unable to find any reference to a leading expanding diagonal. Could it be that such a thing does not exist as such formation does not confirm to any valid market psyche? I found a brief mention in prechter’s book “we have recently observed that a leading diagonal can take an expanding type” but found no examples. In my example wave1= wave3 and wave5 = 127.2 % of wave3. Also I could gather that the retracement after an expanding diagonal is generally deep whereas in my example the retracement (wave 2) is just 61.8%.
Mahesh, Expanding diagonals have been covered in my book FWTFF. Also, Fibo ratios are tools that aid your wave analysis, not the other way around
Hi Ramki, I have question regarding extensions. How do we determine that wave 1 is extended or not? I have read the section in your book dealing with this aspect but I am confused. Imagine a 1st wave in which the subwave 3 and subwave 5 is ‘normal’. Then is wave 1 to be considered normal? What if the subwave 1 was extended? For a bigger wave to be termed as an extension any one of the subwaves 1,3,5 should be extended, Right? Then how do we determine whether subwave 1 is extended or not. You see we are then going into a recursion (loop). hope i am able to explain my question.
Mahesh, if you see any subwave within a first wave to be extended, you start off with the assumption that wave 1 in the bigger degree is extended.
Ramki, That’s were the confusion lies. Any one of the subwave always extend within a given wave. Then that would mean all wave 1’s are extended.
Mahesh, We were speaking specifically about the first wave at that time. I also said we start off with the ASSUMPTION that wave 1 had extended. When the dust settles down, it is of no consequence whether our wave analysis was right or wrong. Who cares! It is more important whether we made money or not. I use Elliott Waves to trade (as can be seen from wavetimes.net). My goal is not to be right with the wave count.
RAMKI SIR , Please update NIFTY as it had broken all time high . THANKS.
I believe the rally is not over yet