Category Archives: Edson Gould

Review: LinkedIn Corp.

On April 30, 2015, we presented downside targets for LinkedIn Corp. (LNKD) when the stock was trading at $199.  In our concluding commentary we said the following:

“Those interested in LNKD should consider the stock in stages at or below the ascending $139 level with an acceptance of a decline to the ascending $92.06 level.”

Between the closing price of $192 on February 4, 2016 and the opening of February 5, 2016, LinkedIn Corp. had declined nearly –30% in after-hours trading.  The opening price on February 5th was at $125.  Below is an updated price chart applying Edson Gould’s Speed Resistance Lines.

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As indicated nearly one year ago, at nearly double the price, the extreme downside target of $92.06 was a distinct possibility.  Additionally, anyone willing to take the risk at $139 or below has had favorable prices from which to choose. What should be noticed is the fact that LNKD managed to hit the extreme downside target and then bounce above it, for the time being. 

There is incredible pressure for this company to be turned around or absorbed.  It is with luck that the stock has managed to bounce at the level we outlined.  However, further marginal failures by the company could result in a retest of the $59.07 price.

Quick Take: Ecolab Inc.

According to Yahoo!Finance, Ecolab Inc. (ECL), “…provides water, hygiene, and energy technologies and services for customers worldwide. The company operates in three segments: Global Industrial, Global Institutional, and Global Energy. The Global Industrial segment provides water treatment and process applications, and cleaning and sanitizing solutions primarily to large industrial customers within the manufacturing, food and beverage processing, chemical, mining and primary metals, power generation, pulp and paper, and commercial laundry industries.”

Since the bottom that occurred in the stock market in March 2009, Ecolab Inc. has outpaced the recovery in the Dow Jones Industrial Average by +94% and the S&P 500 by +66%.  At some point the pendulum needs to swing in the opposite direction.  It is our goal to point out the potential scenarios that are most plausible for the reaction that is to come for ECL.  First, we’ll cover some important fundamentals and what they indicate and then we’ll cover the topic of technical aspects of downside risk.

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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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