When Fundamentals Fail Us Point & Figure Technical Analysis Enron: The Anatomy of A Collapse

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Our Basic Philosophy Fundamental analysis plays an important role. Fundamental analysis plays an important role. It tells us WHAT to buy. It tells us WHAT to buy. Technical analysis is just as important, however. Technical analysis is just as important, however. It tells us WHEN to buy. It tells us WHEN to buy. Using only one without the other is like playing the piano with just one hand; you can make much better music with both hands on the piano. Using only one without the other is like playing the piano with just one hand; you can make much better music with both hands on the piano.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Enrons Credentials The worlds foremost power and gas trader. The worlds foremost power and gas trader. Ranked 7th in the Fortune 500. Ranked 7th in the Fortune 500. Ranked 16th in the Fortune Gobal 500. Ranked 16th in the Fortune Gobal 500.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Enrons Fundamentals Then... Revenues: $100.8 billion. Revenues: $100.8 billion. Profits: $979 million. Profits: $979 million. Assets: $65.6 billion. Assets: $65.6 billion. Stockholders Equity: $11.5 billion. Stockholders Equity: $11.5 billion. Market Value March 15, 2001: $49.7 billion. Market Value March 15, 2001: $49.7 billion. EPS (year 2000): $1.12. EPS (year 2000): $1.12.

Point & Figure Technical Analysis © Dorsey, Wright & Associates And Now Close, Dec. 3, 2001: $0.26 Close, Dec. 3, 2001: $ week Range: $ $ week Range: $ $81.78 Earnings Per Share: $0.21 Earnings Per Share: $0.21 Market cap: $220 million Market cap: $220 million

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Enrons demise was swift...

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 And though trouble was looming... August 14, 2001, CEO Jeffrey Skilling resigns. August 14, 2001, CEO Jeffrey Skilling resigns. October 12, 2001 Andersens Enron Chief Auditor begins two-week document destruction effort. October 12, 2001 Andersens Enron Chief Auditor begins two-week document destruction effort. October 16, 2001 Enron reports first quarterly loss in more than four years. October 16, 2001 Enron reports first quarterly loss in more than four years. October 22, 2001 SEC opens investigation into Enron partnerships. October 22, 2001 SEC opens investigation into Enron partnerships. November 8, 2001 Enron restates earnings dating back to 1997 by $600 million. November 8, 2001 Enron restates earnings dating back to 1997 by $600 million.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Analysts were slow to react... On November 25, 2001 more than half of the fundamental analysts following Enron rated it a Buy. Six rated it a Strong Buy, and two rated it a Buy. On November 25, 2001 more than half of the fundamental analysts following Enron rated it a Buy. Six rated it a Strong Buy, and two rated it a Buy. Now, lets take a look at what the fundamentals AND the technicals showed as Enron stock fell from its 52-week high of $84.87, to a low of $4.14 on November 27, Now, lets take a look at what the fundamentals AND the technicals showed as Enron stock fell from its 52-week high of $84.87, to a low of $4.14 on November 27, 2001.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Well begin in March 2001, well after Enron raised earnings estimates for the year...

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 March 12, 2001 $61.27: Price Target cut at Prudential. March 12, 2001 $61.27: Price Target cut at Prudential. March 12, 2001 $61.27: Reiterated Strong Buy at Lehman. March 12, 2001 $61.27: Reiterated Strong Buy at Lehman. March 14, 2001 $62.75: Raised to Accumulate at Commerzbank. March 14, 2001 $62.75: Raised to Accumulate at Commerzbank. March 21, 2001 $55.89: Reiterated Near-term Buy at Merrill Lynch. March 21, 2001 $55.89: Reiterated Near-term Buy at Merrill Lynch. March 22, 2001 $55.02: Reiterated Accumulate at Commerzbank. March 22, 2001 $55.02: Reiterated Accumulate at Commerzbank. March 26, 2001 $55.02: Lets go to the chart... March 26, 2001 $55.02: Lets go to the chart... Fundamentally, things looked ok...

Point & Figure Technical Analysis © Dorsey, Wright & Associates | X X Relative Strength chart already 83 X B X X O X O X * in Os after reversing down in 82 X O X O X O X X O X O X O X * December X O X O X O X O X O | 1 X O X O * 80 X O X O X O X O X --| O --- X O X O - * X O X O X O O X X X | O X O X O * 78 O X O X O X O X O X | O X 2 O * Bearish Resistance line 77 O X O O X O X O X | O X O Double Bottom at $77 after 76 O O O X O X | O X O hitting strong resistance O --- X O ----| O --- X --- O -- in the lower 80s – Supply 74 O X | O X O is gaining the upper hand 73 O X X | O X O while demand is weakening. 72 O X O X | O X O 71 O X O X | O X X O X O X O | O X O X --- O X O Sector goes to Bear Confirmed 69 O X | O X O X * O X O at 70% - high risk area. 68 O X | O O X * 3 O 67 O C | O * O Another sell signal after a 66 O X | * O lower top at $67 on March 26! O X | O O | O 63 | O 62 | O 61 | O | O |1 Meanwhile, the Point & Figure Chart showed...

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 And Dorsey, Wright & Assoc. said... March 26, 2001 $55.02 DWA Comment: Shares of ENE fell out of bed quickly after violating the trendline at $68. Rallies have been useful for selling into or initiating short positions. See little on the technical side to disrupt that pattern going forward. RS is in a column of Os and main trend is negative. Initial resistance is at $60, the $67. Support $52. March 26, 2001 $55.02 DWA Comment: Shares of ENE fell out of bed quickly after violating the trendline at $68. Rallies have been useful for selling into or initiating short positions. See little on the technical side to disrupt that pattern going forward. RS is in a column of Os and main trend is negative. Initial resistance is at $60, the $67. Support $52.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Still, the fundamentals were slow to develop... April 16, 2001 $59.44: Reiterated Recommend List at Goldman Sachs. April 16, 2001 $59.44: Reiterated Recommend List at Goldman Sachs. April 17, 2001 $60.00: Reiterated Near-term Buy at Merrill Lynch. April 17, 2001 $60.00: Reiterated Near-term Buy at Merrill Lynch. April 18, 2001 $61.62: Reiterated Recommend List at Goldman Sachs. Reiterated Accumulate at Commerzbank. April 18, 2001 $61.62: Reiterated Recommend List at Goldman Sachs. Reiterated Accumulate at Commerzbank. May 21, 2001 $54.99: Price Target cut at Prudential. May 21, 2001 $54.99: Price Target cut at Prudential. June 8, 2001 $51.13: Reiterated Attractive at Bear Stearns June 8, 2001 $51.13: Reiterated Attractive at Bear Stearns Lets go back to the chart... Lets go back to the chart...

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Enron Point & Figure Chart March 26 – Sep. 6, O X O * 65 O X O * - Bearish Resistance Line 64 O X O X * 63 O X O X O * 62 O X O X X O * 61 O X O X O X 5 60 O - O X O X O O X O X X O X 58 O X O X O X O X O 57 O X O X O X X O X O 56 O X O X 4 X O X O O X O X O - O X O X --- O X O O X O O O X O 53 O X O X O 52 O O 6 51 O X Major Bearish Catapult at $51 after trying O to build a base in the 54 to 60 area. 49 O X O 48 O X O 47 O X O X 46 O X O X O O X O X O O X O X 8 43 O O X O 42 O O Another Double Bottom at $ O Another Double Bottom at $ O O 38 O O O 35 O O 32 O

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 And Dorsey, Wright & Assoc. said... April 4, 2001 $56.57 DWA Comment: Remains below the Bearish Resistance Line and well into oversold territory at present price ranges. Still, recent action has formed a consolidation pattern on the trend chart, whcih can be broken on a move to $54. That move would break a double bottom and complete a Bearish Triangle pattern. RS is in Os here and we would continue to avoid ENE here. Those looking for a tight trade to the downside may initiate a short position on the breakdown at $54, but keep in mind that we are already oversold. April 4, 2001 $56.57 DWA Comment: Remains below the Bearish Resistance Line and well into oversold territory at present price ranges. Still, recent action has formed a consolidation pattern on the trend chart, whcih can be broken on a move to $54. That move would break a double bottom and complete a Bearish Triangle pattern. RS is in Os here and we would continue to avoid ENE here. Those looking for a tight trade to the downside may initiate a short position on the breakdown at $54, but keep in mind that we are already oversold.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 And... June 8, 2001 $51.13 DWA Comment: ENE broke a spread triple bottom at $51 and remains below the Bearish Resistance Line. This stock has underperformed while the utilities sector rallied, and now that the group is beginning to look suspect, this stock is one to fear. Continue to avoid positions in ENE until we can see some clear signs of a bottom near-term. The bottom of the trading band is $45. June 8, 2001 $51.13 DWA Comment: ENE broke a spread triple bottom at $51 and remains below the Bearish Resistance Line. This stock has underperformed while the utilities sector rallied, and now that the group is beginning to look suspect, this stock is one to fear. Continue to avoid positions in ENE until we can see some clear signs of a bottom near-term. The bottom of the trading band is $45.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 And... August 13, 2001 $46.56 DWA Comment: Stock is making lower tops and lower bottoms. The move to $42 in July took ENE below its March lows though the market remains above those lows. This divergence is typically negative. Also negative is the trend and ENE is underperforming the market. Avoid this one. August 13, 2001 $46.56 DWA Comment: Stock is making lower tops and lower bottoms. The move to $42 in July took ENE below its March lows though the market remains above those lows. This divergence is typically negative. Also negative is the trend and ENE is underperforming the market. Avoid this one. August 16, 2001 $38.93 DWA Comment: Shares of ENE have fallen well below the initial bearish price objective of $44 and are now trading a point shy of the bottom of the 10-week trading band. Still no convincing sign of a bottom here... August 16, 2001 $38.93 DWA Comment: Shares of ENE have fallen well below the initial bearish price objective of $44 and are now trading a point shy of the bottom of the 10-week trading band. Still no convincing sign of a bottom here...

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 But still the fundamentals lagged the technicals... Sep. 6, 2001 $30.49: Raised to Buy at Sanders Morris Harris. Sep. 6, 2001 $30.49: Raised to Buy at Sanders Morris Harris. Sep. 26, 2001 $25.15: Upgraded from Accumulate to Buy at A.G. Edwards. Sep. 26, 2001 $25.15: Upgraded from Accumulate to Buy at A.G. Edwards. Oct. 3, 2001 $33.49: Reiterated Recommend List at Goldman Sachs. Oct. 3, 2001 $33.49: Reiterated Recommend List at Goldman Sachs. Oct. 4, 2001 $33.10: Downgraded from Strong Buy to Buy at A.G. Edwards; price target $40. Oct. 4, 2001 $33.10: Downgraded from Strong Buy to Buy at A.G. Edwards; price target $40. Oct. 9, 2001 $33.39: Raised to Long-term Buy at Merrill Lynch. Oct. 9, 2001 $33.39: Raised to Long-term Buy at Merrill Lynch. Oct. 19, 2001 $26.05: Cut to Hold at A.G. Edwards. Oct. 19, 2001 $26.05: Cut to Hold at A.G. Edwards. Oct. 22, 2001 $20.65: Downgraded from Buy to Hold at Prudential. Oct. 22, 2001 $20.65: Downgraded from Buy to Hold at Prudential.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 Meanwhile, the technical picture was unchanged... October 23, 2001 $19.79 DWA Comment: ENE falls amid SEC inquiries, the chart breaks yet another bottom at $24 and moves to new chart lows. Best to let this dog sleep outside until some sign of a bottom is shown. October 23, 2001 $19.79 DWA Comment: ENE falls amid SEC inquiries, the chart breaks yet another bottom at $24 and moves to new chart lows. Best to let this dog sleep outside until some sign of a bottom is shown.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 And finally, some on Wall Street capitulated... Oct. 24, 2001 $16.41: Cut to Sell at Prudential. Cut to Long-term Buy at JP Morgan. Reiterated Strong Buy at Lehman. Oct. 24, 2001 $16.41: Cut to Sell at Prudential. Cut to Long-term Buy at JP Morgan. Reiterated Strong Buy at Lehman. Oct. 25, 2001 $16.35: Cut to Market Perform at Banc of America. Reiterated Buy at Salomon Smith Barney. S&P changes Enron outlook to Negative. Oct. 25, 2001 $16.35: Cut to Market Perform at Banc of America. Reiterated Buy at Salomon Smith Barney. S&P changes Enron outlook to Negative. Nov. 1, 2001 $11.99: Cut to Near-term Neutral at Merrill Lynch. Nov. 1, 2001 $11.99: Cut to Near-term Neutral at Merrill Lynch. Nov. 7, 2001 $ 9.05: Cut to Sell at A.G. Edwards. Nov. 7, 2001 $ 9.05: Cut to Sell at A.G. Edwards. Nov. 9, 2001 $8.63: Cut to Hold at Commerzbank. Nov. 9, 2001 $8.63: Cut to Hold at Commerzbank. Nov. 12, 2001 $9.24: Raised to Hold at Prudential. Nov. 12, 2001 $9.24: Raised to Hold at Prudential. Nov. 13, 2001 $9.98: Raised to Maintain Position at Edward Jones. Nov. 13, 2001 $9.98: Raised to Maintain Position at Edward Jones.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 While some held out until the bitter end... Nov. 21, 2001 $5.01: Cut to Market Perform at Goldman Sachs. Cut to Hold at CIBC. Cut to Sell at Edward Jones. Nov. 21, 2001 $5.01: Cut to Market Perform at Goldman Sachs. Cut to Hold at CIBC. Cut to Sell at Edward Jones. Nov. 28, 2001 $0.61: Estimates reduced at Prudential. Cut to Hold at UBS Painewebber. Cut to Sell at Commerzbank. Nov. 28, 2001 $0.61: Estimates reduced at Prudential. Cut to Hold at UBS Painewebber. Cut to Sell at Commerzbank. Nov. 29, 2001 $0.36: Cut to Hold at CSFB. Cut to Underperform at RBC Capital Markets. Nov. 29, 2001 $0.36: Cut to Hold at CSFB. Cut to Underperform at RBC Capital Markets.

Point & Figure Technical Analysis © Dorsey, Wright & Associates 2001 What Weve Learned... Sometimes the technicals collapse well in advance of the fundamentals. Sometimes the technicals collapse well in advance of the fundamentals. Fundamental analysis is necessary to tell us What to buy, but it can only do so much when companies hide their fundamental problems, or give analysts bad information. Fundamental analysis is necessary to tell us What to buy, but it can only do so much when companies hide their fundamental problems, or give analysts bad information. Technical analysis tells us When to buy, and can help us manage the risk of stock ownership. Technical analysis tells us When to buy, and can help us manage the risk of stock ownership.

© Dorsey, Wright & Assoc. Copyright © 2001 Dorsey, Wright & Associates, Inc. Dorsey, Wright & Associates, Inc. Keep in mind that there is no assurance that this or any strategy will ultimately be successful or profitable.