Chicos Fashion (CHS) was an ‘on-fire’ and in-demand stock a few years ago, but recently, the stock has soured along with the broader retail sector, driving many stocks to multi-year lows and wiping some out of the market completely.  Let’s take a look at CHS to note the full Elliott Wave progression, and then compare the arithmetic chart to a logarithmic chart to note chart-type differences.

Chicos Fashion (CHS) Monthly:

Price began the decade around the $2.50 per share level and it looks to be ending 2008 at that same level, but not after reaching a price high above $47.50 which could have given investors amazing profits.  Once again, which investors exited at the top?

Taking the principles of Elliott Wave into account, we see Wave 1 was a lengthy process that topped early 2002 before giving way to a standard “ABC” correction, none of which pierced the rising 20 month EMA (a sign of price strength).

Wave 3 was also relatively normal, and I’ve subdivided the waves into their appropriate fractals, complete with the also standard “ABC” correction in Wave 4 (also, which didn’t pierce the rising 20 EMA).

Wave 5 was extraordinary, taking price from $17.50 to $47.50, rewarding investors with a relatively clean and sustained advance into a final fractal fifth wave which formed on a negative momentum divergence… and the impulse (bull move) was over.

The recent ABC large-scale corrective phase has been extraordinarily damaging for investors, shattering their wealth almost completely.  Of interesting note in terms of the Corrective Waves is the clean “Bear Flag” which formed throughout most of 2007, suckering in investors who tried to call a potential bottom at that time.

Price was only able to touch the falling 20 month EMA before careening over the cliff as price plunged into a fresh “C-Wave” down as the EMAs crossed in a classic “death cross” (once again, if you waited for this signal, you were too late).

The bear flag has met its target and there’s a positive momentum divergence, but technical analysis can’t help if the company goes bankrupt, and some analysts claim that if Chicos fails to have a stellar holiday season, it most likely will file bankruptcy - but that’s another story.

I’ve been asked why I continue to use Arithmetic (default) charts when looking at long-term or large-price change data.  The answer?  I prefer analyzing pure price moves over percentage moves, and in addition, I feel more recent data (which is obscured by log-charts) is more important (to me at least) than past data (in terms of visualization).

Why do I stubbornly cling to my arithmetic charts?  Compare the exact same stock and exact same period below on a logarithmic chart with the arithmetic chart above.

Chicos Fashion (CHS) Monthly Log-Scale:

In fact, Chicos traded around $0.50 in 1998 which deeply compresses the chart as price reached all-time highs near $50.00, to a factor of 100 (in terms of price compression).

Logarithmic charts give extra emphasis to smaller (dollar) price changes and compresses price changes (dollar values) as the price continues higher.

From the looks of the chart, I’ve violated one of Elliott’s key three principles - that Wave 3 can never be the shortest - not to mention, the notion of wave proportionality is grossly distorted at first glance.

You have to sort of ‘over-rule’ the chart (visually at least) and realize that Wave 1 was roughly $10.00 in price change, Wave 3 was roughly $25.00 in change, and Wave 5 was almost $30.00 in dollar differences.  To me, it’s extremely difficult to ascertain that from a log-chart.

I emphasize that this is my personal opinion and my chosen way to conduct price analysis - I’m not trying to win you over, but to explain my preference.  It’s best to use both types of charts, and not to abandon either, for each has its advantages and disadvantates, which become more pronounced as you stretch out the time period and observe large price differences over time.

Chicos (CHS) and - as one reader observed - many stocks are showing similar Elliott patterns worth noting and interpreting.  We’re in very interesting times, and the potential for the genesis of fresh Elliott impulses remains just around the corner - for companies that survive this recession.