Category Archives: Edson Gould

Transaction Alert

On February 5, 2016, we executed the following transaction(s):

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Review: Boston Beer Company

On February 25, 2015, we posted the following chart for Boston Brewery Company (SAM):

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Our summarizing commentary at the time was as follows:

“Our expectations for SAM are not very high as the last time that the stock was able to achieve the conservative downside target of $70.13 was in 2011.  Since that time, SAM has faltered but not fallen.  In spite of this fact, we’ve outlined the conservative downside target of $180.12 and the extreme downside target of $107.99.  Investors should note that a decline to the ascending $180.12 level is an ideal buying target with a follow-up purchase below $141.25.”

Fast forward nearly one year later and we’re looking at a pending recession and a declining stock market.  Everything is negative and going to get worse, according to some experts.  With this in mind, As SAM falls below $180, it is time to consider the investment fundamentals of the company.  Below is the updated SRL.

On Parabolas and Cycles

In looking at the stock price of Union Pacific Corporation (UNP) from 1980 to the present, we find the pattern of a parabolic peak and subsequent decline.  Parabolic peaks are generally alarming to market technicians because they generally indicate that a crash is coming.  Part and parcel with the idea of a crash is the view that such a stock  is either a sell or short-sell candidate, definitely not worth being considered for a long-term investment.

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Sometimes lost in this observation of parabolas is the importance of other factors that might be at work.  Observed parabolas are only as good as the experience of the analyst.  In the case of Union Pacific, we don’t believe that the mere presence of a parabola is as meaningful as the pattern of market cycles.

The rule with the above chart pattern is that no parabolic move goes unchecked.  This point has been made with the many charts that we’ve run Speed Resistance Lines (SRL) on, most recently illustrated in our April 26, 2012 chart of Chesapeake Energy (CHK) when the stock was trading at $18.10. 

In the case of Chesapeake Energy, we said that if history was any indication, the stock was on the cusp of repeating a previous pattern that suggested the stock would fall to $4.94.  After applying Gould’s SRL, we arrived at what we thought would likely be the most likely outcome ( as of January 26, 2016, CHK sits at a price of $3.19).  The work of Edson Gould helps us to assess the downside prospects of parabolic patterns in stocks.  However, the use of technicals like Gould’s SRL have their limits.

In assessing the parabolic UNP chart, we noticed a pattern that isn’t as obvious to the uninitiated.  Furthermore, it is a pattern that require a little work.  However, once drawn out, the pattern almost jumps out at you and becomes pivotal in deciding which pattern is more important, the single parabola or the repeated cycle.

Since 1980, all major peaks in the price of UNP have declined between –30% to –66%.  Below is the data that we’ve selected to demonstrate this fact (using Yahoo!Finance adjusted total return data).

Year of peak   % chg   where to from 2015 peak?
1980   -65.55%   $41.69
1983   -41.25%   $71.10
1987   -44.96%   $66.61
1994   -31.33%   $83.11
1997   -46.84%   $64.33
1999   -47.07%   $64.06
2008   -59.44%   $49.08
         
  Avg. -48.06%   $62.85
         
2015   -43.16%   $68.79

The repeated pattern of declines greater than –30% is no coincidence.  These are the apparent cycles that UNP happens to experience. Furthermore, the level of consistency for UNP to decline on average –48% over the period from 1980 to 2008 (7 data points) indicates that this is very useful in determining what is “normal” for the current decline in the stock price.  Already UNP has fallen –43.16% which is generally in the sweet spot as we believe that the 2008 and 1980 declines were outliers in especially painful recessions.

What distinguishes the difference between any stock price pattern is the history and consistency.  A stock like UNP has been around since the late 19th century to the present.  Most stock price patterns for UNP will reflect a deep seated adherence to the overall economy and investors.  A stock like CHK has been around since the late 20th century.  Any stock movement will reflect the recency bias of speculators.

Another important factor when considering the validity of a parabolic move in a stock is the relative movement of a corresponding stock index.  In this case, the corresponding index is the Dow Jones Transportation Average.  As seen in the chart below, Union Pacific has tracked very closely to what a diversified mix of related companies would do.  In fact, UNP has only recently caught up, in terms of performance, with the index that it has been in since inception.

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Finally, we’d like to close with a parabolic chart of UNP ranging from 1910 to 1987.

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This chart is dynamic because, for anyone in 1987 alarmed about a parabolic pattern, it should have indicated that a collapse was due.  However, that was hardly the optimal way to view Union Pacific with the compelling fundamentals to support the rise in the stock price over time.  This is contrasted with the absence of fundamental for Chesapeake Energy, which explains why the stock has fallen nearly –90% from its prior peak.

Gould’s SRL for Union Pacific

Below is the Speed Resistance Lines for Union Pacific (UNP) based on the move from 2009 to the present.

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Apple Inc.

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Reference:

Shanghai Composite Index: Broken Breakers & Downside Targets

In our last posting of the Shanghai Composite Index on September 15, 2015, we applied Edson Gould’s Speed Resistance Line (SRL) in an attempt to see where the support levels are and downside risk.  At the time we posted the following chart.

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We had asserted that a decline below the ascending 2,867.34 level would likely mean that there would be a good chance of the index falling to 2,294.73 and 1,722.12.

A Short Circuit in the Regulation

Since our September 2015 posting, it appeared that with government intervention, the stock market was on the road to recovery.  The institution of rules like no short selling, banning of corporations selling stock and government investment funds being required to buy Chinese stocks and limit down or circuit breakers were thought, by the Chinese government, to be a cure to the market decline.  However, such interventions, while well intended, usually treat the symptoms and not the actual problem.

The first obvious failure of the intervention policy has been none other than the circuit breakers as the start of 2016 has not been easy for the Shanghai Composite Index.  Already, trading has been suspended in two of four trading days with circuit breakers being triggered at intraday declines of –7%.  With half of the trading days halted in the new year, Chinese regulators have decided to suspend the use of circuit breakers until a better plan has been formulated.

The way that the circuit breakers were supposed to work was that they would halt trading for 15 minutes after a –5% decline in the Shanghai Composite Index and suspend trading for the remainder of the day after a decline of –7%.  These circuit breakers are modeled after those in place in other markets around the world.  For example, in the U.S., stock exchanges are halted when the market falls –7% and –13% and trading is suspended if the market declines –20%.

The failure occurred when Chinese market authorities and regulators created a narrower band of declines in a market that is less liquid than an exchange like the S&P 500.  If circuit breakers were to be put in place, they should have been at percentages that are much wider than that of the U.S., like halts at –10% and –20% and suspended trading at –30%.

There is a distinction between what the Chinese authorities are doing with circuit breakers as compared to what the U.S. regulators have in place.  The Chinese hope to stop a stock market decline with their narrow band for circuit breakers.  It seems that U.S. regulators want an “orderly” decline with their rules.  Stopping a massive decline in stocks is not possible while an “orderly” decline is a goal that has can be achieved, as demonstrated from October 2007 to March 2009.

Intervention of any sort is not ideal.  However, the perception of having control cannot be avoided by regulators no matter the country.  Since intervention is the rule, the best that Chinese regulators can hope for is to set the expectation that they’re only trying to accomplish an “orderly” decline with circuit breakers rather than stop a decline from happening.  Also, Chinese regulators should acknowledge that their market is young and illiquid relative to other markets.  This means that volatility rules and circuit breakers should reflect this fact.  Make the circuit breakers much wider than the most liquid and oldest markets.

Downside Targets

Based on the recent market activity since the December 22, 2015 peak, the support level of 2,867.34 has been broken on the downside.  This suggests that the next stop will be 2,867.34 while 2,294.73 is waiting in the wings.

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A bounce between 2,867.34 and 2,292.73 should be expected before a continuation of the declining trend.  Any reversal to the upside should experience resistance at the ascending 2,867.34 level.  Historically, a decline to 1,437.70 is not out of the question.