March 11, 2006

Donate to Mr. Wave Theory

posted by MR WAVETHEORY at 3/11/2006 08:02:00 PM
To fulfill my mission of becoming a big time blogger, I give you the opportunity to make a donation to me. Since my favorite short is Google right now, my favorite number is $337.50. You can donate to me and make my life better. To make things fun, I will update the total count of donators and the donation amounts. I am a big believer in free markets so people will vote with their wallets. Vote with your donations if you think Google will stay at $337.50, fall to $248, $100, $85 (IPO Price) or God forbid $50 per share. In return for your donation, I will analyze a stock of your choice using the Wave Theory. OK, let the donating begin.

Donate $337.50 if you think Google will stay at this price
Donate $248 if you think Google is worth this price (This is my target!)
Donate $100 if you think Google is worth this price
Donate $85 if you think Google is worth its IPO price
Donate $50 if you think Google is worth less than its IPO price
Donate any amount you think Google (for those who are independently minded)

Google Today = Yahoo September 1998. Why Google Will Drop to 270.

posted by MR WAVETHEORY at 3/11/2006 08:49:00 AM
Google's current trading pattern reminds me of Yahoo's chart in September 1998.


Yahoo September 1998 Chart


1) Back in the fall of 1998, Internet stocks had finished an incredible run.

Many had doubled following their IPO and investors could not buy enough of them. Then, capital markets tightened suddenly due global financial crisis - the Russian default and failure of LTCM. In the last week of September 1998, Yahoo dropped from 12.00 to 10.50 prior to the weekend losing around 15% of its value. Investors went into the weekend thinking that the worst was over.

2) Yahoo lost 37.5% wipeout in 3 days.

Boy were they wrong. On Monday and Tuesday, it dropped to 7.50. Yahoo has split 8-1 since then, so If you multipled the price by 8 (the split adjusted multiple), that means Yahoo actually fell from $96 to $60 in 3 days. This is the type of volatility you should expect.

Google 2006 March Chart


Fast forward to 2006.


Why can Google do possibly worse? First some technical reasons.

1) Google broke below its 200 Day EMA (343.85) for the first time ever on March 9th.

It is here that I introduce the #1 Rule of Wave Theory: Never buy a stock below its 200 Day EMA. Why is this important? It is simple. Institutional traders defend the 50 Day EMA and 200 Day EMA religiously when they are buyers. They buy the EMA when they like a stock. On the other hand, they sell into the EMA when they do not like the stock.

2) Google failed the test of the 200 Day EMA.
On the following day, Friday March 10th, Google tried to regain that the 200 Day EMA and breached it briefly, making a high of 344.50, at 10:57 AM ET. However, institutional investors didn't buy it. Google failed to hold. If an investor likes a stock, he will buy moderately at the 50 Day EMA. At the 200 Day EMA, it is super strong buy. Unfortunately, there was no bounce.

Next, some fundamental reasons.

1) The founders of Google have much less faith in their stock price that the founders of Yahoo.
Larry and Sergei have sold stocks since day 1 of their IPO. Jerry and David never did until recently. Jerry and David locked up most of their wealth in Yahoo stock and believed rightly that it would appreciate.

2) Google has just had its first earnings warning that left everyone guiding down growth projections by 50%.

Earnings estimates were in the high $9-10 EPS prior to the latest earnings announcement. Today, some are estimating $6-7 EPS. This is the type of guidance that means a growth story is over. Google is no longer generating accelerating revenue and earnings growth. The hockey stick is over.

3) Google is a Dot-com stock.
The good news is that it can make investors a fortune when they buy before the hype. Dot-com stocks can go up $20-30 points in day. The bad news is that they can also go down $50-100 in one day. Just check the chart of Yahoo. If you multipled all the numbers by 8 (the split adjusted multiple), that means Yahoo actually fell from $96 to $60 in 3 days. This is the type of volatility you should expect.

Google Price Target $248.

As previously noted, Yahoo dropped from $12 to $7.50 in 3 days. This was a loss of 37.5%. Based on the analog chart, my price target on google is $248.31. It is based on a 37.5% ($148.99) decline of Google from its high of $397.31. It is the same percentage decline as Yahoo which is close to a Fibonacci retracement. The stock should bottom on Tuesday on significant volume (expect it to be around 100 million shares) and rebound strongly on Wednesday.

I welcome any comments.