LOCKIT Trading Application Example

LOCKIT Trading example “CMS Energy Corp”

Opening a long equity position

The date is 03/31/2006.
The stock we are looking at is CMS Energy Corp.
We already know from the S&P500 index that the long term trend is up.
We are therefore looking to buy CMS Energy Corp.

 

Figure 2.1: Monthly chart CMS Energy Corp in a long term up trend.

In figure 2.1 a monthly chart of CMS there is a long term up trend since 2003, but now we notice a reaction phase.
Introducing an Elliot wave count, it looks like we are in a consolidation phase for wave 4. We have an impulse wave up with waves 1, 2 and 3. Wave 3 has an extension with waves 1 to 5.

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Looking at theoretical values, we know that wave 4 retraces usually 23.6% up to 38.2% of wave 3; many times this is also the level of intermediate wave 4.
Here this would mean that we must be close to a price reversal. However, do not forget we are looking at a monthly chart so it still might take some time!

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Weekly Chart

Looking at the weekly chart of figure 2.2, we have confirmation that we must be close to the end of correction wave 4. Price is moving below the 50-weeks simple average, but above the 200-weeks simple moving average, which is still moving down but less steep.

Figure 2.2: CMS weekly chart confirms possible end of reaction phase.

A pitchfork (dash-dotted line), touching price at different levels, gives a good idea of the directional move of the price. However, price has not yet touched the median line; we are expecting a further move down to penetrate the median line.

One week later:

Figure 2.3: CMS 1 week later, price now touching the median pitchfork line

04/13/2006: in figure 2.3 the low price is now touching the median line of the pitchfork. We have a bullish engulfing signal in de candlestick chart. We are at a bigger distance from the 50-weeks average. A retrace to this average is probably the first step creating an Elliott impulse wave 5.

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