In the period from 2002 to 2009, the NYSE Oil and Gas Stock Index (XOI) presents us with a possible template for what to expect in the current decline in the same index. Below is Gould’s Speed Resistance Lines (SRL) for 2002 to 2009 of the XOI Index.
The above chart shows the conservative downside target of 1,326.48 and the extreme downside target of 543.36. The mid-point of the downside targets is 934.92. In the case of the XOI index, it managed to achieved the conservative and mid range for the index. However, the extreme downside target was not achieved. The full extent of the decline is indicated in red at the 761.30 level.
Our guess is that the XOI index will accomplish a similar pattern of “performance” on the downside in the current run as was the case in the 2002 to 2009 period. We’ve charted the progress of the XOI Index in the period from 2008 to the present with Gould’s SRL.
The conservative downside target of 1,454.79 has been constructed while the mid-point of 1,015.10 is also indicated. However, we did not include the extreme downside target of 575.41. We did indicate in red the 812.08 level which was the extent of the decline in the period from the 2008 high to the 2009 low.
Suffice to say that we expect the XOI index could easily fall to 1,015.10 and subsequently to the 812.08. Those interested in the oil sector should start initiating positions at or below the ascending 1,015.10 level. Two funds that trade in line with the XOI index are PowerShares DB Oil ETF (DBO) and Direxion Daily Energy Bull 3x (ERX). One ETF that trades the opposite of the XOI index is the Direxion Daily Energy Bear 3x (ERY).
On January 17, 2014, we posted Edson Gould’s Speed Resistance Lines for Best Buy (BBY) in an attempt to determine what the extent of the decline might be. From that posting we said the following:
“Best Buy has had a history of resting [at] the extreme downside target, currently at $14.78. However, we have split the difference and placed an intermediate downside support level of $22.34. Again, this is not a recommendation to buy or sell Best Buy, instead, it is an attempt to observe how closely the stock will adhere to the SRLs indicated in the chart.”
Nearly one year later, we can see that although the historical trend had been for BBY to decline to the extreme downside target ( at $14.78), the estimate of $22.34 was a fair assessment of downside risk as the stock has managed to vacillate at or above the ascending $22.34 level seen below.
The quality of Gould’s SRL has been fairly consistent and reasonably accurate. We look forward to introducing additional SRLs of stocks that have established a declining trend to determine downside targets. The conservative upside target for BBY is $44.85.
On December 3, 2010, we ran the numbers for Netflix,based on the work of Edson Gould’s Speed Resistance Lines, to determine what the downside risk might be for the stock. The projected downside targets are illustrated below:
Not long afterwards, Netflix stock price soared from $185.45 to $300. However, the goal of our site is to determine downside risk and the rise in the stock price of was of little interest. Our view is that if we missed an investment opportunity then we will consider investing only if the stock declines to any of the anticipated downside targets.
Naturally, there was considerable opportunity that we missed on the way from $185 to $300. However, our rule is to seek values and from our experience all quality companies become undervalued at some point. Finally and for numerous reasons, Netflix declined from the peak of $300 to as low as $53.80. Naturally, we were able to pick up shares of Netflix at $62, a price we felt was reasonable at the time. Our critical review of the downside targets allows us to accept our purchases for the long-term in case we happen to be wrong about the short-term upside prospects.
October 15, 2014: Netflix Downside Targets
We’re fascinated with the news surrounding GoPro (GPRO). The stock went public on June 26, 2014 at $24 per share and has since increase in price to $89.93 as of October 8, 2014. As public offerings go, the rise in price is considered a success. As recently as October 7, 2014, Barclays raised their price target for GPRO from $45 to $60, in spite of the fact that the stock is already trading well above the new target price. It seems that Barclays doesn’t want to appear over anxious to recommend the stock even though they are not confirming their expectation for the stock to decline.
“The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great ‘earnings’ – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. ‘Mark-to-market’ then turned out to be truly ‘mark-to-myth.’”
Buffett, Warren. Berkshire Hathaway. 2002 Letter to Shareholders. February 21, 2003.