Category Archives: entropy

Craft Brew Alliance Meets Our Target

On September 1, 2016, we said the following of Craft Brew Alliance (BREW):

“Although there is no assurance that the stock needs to decline to the referenced downside targets, any parabolic move must be watch closely as entropy will kick in at some point.  In this case, we believe that the ascending conservative target [$12.57] is a lock.  With established history as an indication, the mid-range target [$10.02] looks to be a safe “bet” as well.  We’ll check back in on this as more time has passed.”

We don’t necessarily believe it but here we are, with BREW at a price of $13.15 and well within the range of the conservative downside target set at $12.57 as established in our piece dated September 1, 2016.


The September 1, 2016 article lays the groundwork for what a person interested in BREW should look for and expect.

Market Speaking Volumes

Volume Review

In a Dow Theory Q&A piece dated April 8, 2013, we said the following of stock market trading volume:

“The lack of trading volume in the stock market since 2009 reflects little or no participation on the part of the public.  If this is true, then any meaningful rise in trading volume (on the buying side) due to added participation from the public could result in tremendous gains.  This thought sits in the back of our mind as we strategize the best way to take advantage while not being over exposed.”

The story on trading volume is somewhat murky, sometimes it matters and sometimes it doesn’t.  Learning to discern the two can be frustrating.  However, it is hoped that our work on the topic will help provide proper perspective.

Taking a step back, our prior work in trading volume should be reviewed critically.  Below are key articles that touch on the topic with the March 13, 2013 piece being, in our view, the most important real-time article on the subject:

Taking the Plunge

What is the best way to describe how trading volume has changed in the last eight years?  We would equate trading volume to the preparatory stages of what would be considered a successful competitive dive into a swimming pool.  There are three stages to a successful dive: 1) touchdown 2) maximum depression 3) takeoff.


In the stock market, the “touchdown” in trading volume occurred in late September 2009 as the Dow Jones Industrial Average was in the recovery stage of largest stock market decline since the 1973 fall of –45%.  The “maximum depression” stage of trading volume lasted from the period of late September 2009 to mid-September 2014.  In terms of “liftoff” in trading volume, nothing has rivaled the amount of change that has occurred from mid-September 2014 to the present.


On One Hand…

From all appearances, the stage is set for takeoff from a volume standpoint.  And yet, the stock market, as represented by the Dow Jones Industrial Average, since the 2009 low is already ranked seventh on the list of recoveries from prior crashes since 1835.  Can the market achieve the vaunted heights of 10 times the prior low as was the case in 1942 to 1966 or 1982 to 1997?  Considering that the period of the interest rate cycle corresponds to the 1942 period, we think there is a distinct possibility that “takeoff” is a possibility.

…On the Other Hand

As this has been the most hated bull market in history, which has seen it rise from 6,547 to as high as 21,115, or +223%, there are some elements that are cause for concern.  First, fulfilling the above three stages to takeoff are ultimately for successful dives.  Is the stock market setting up for a dramatic and steep dive?  Why would the stock market rise increase for 8 years on declining volume and suddenly spike on volume 3 times the 90-day average (No, it is not because of the Fed) in the last 4 months?

(Not So) Final Analysis

What would eliminate our questions about the nature of the current “liftoff” stage of volume? Well, we would have preferred a continuation of the stealth increase in volume that began in August 2014.  A stealth volume increases is far better because it would have continued the level of suspicion of the market increase.  Instead, parabolic increases fall into the category of pending and inexorable declines of large magnitude, after years of market gains.

How does an investor cope with the mixed signals of the market?  We believe that a concentration of assets is in order.  Pare down the non-staple holdings, focus on income and accept downside risk (we’re thinking semis, insurance and dollar stores).

Downside Targets for Craft Brew Alliance

The latest run for Craft Brew Alliance (BREW) from the low set in November 2015 to the most recent peak on August 2016 requires that we check for the downside targets.


 A parabolic peak is one thing.  However, having them play out in a consistent fashion is something else.  In the case of BREW, we’ve had two prior parabolic peaks since 2008 that were true to form and function.  In the period from the 2008 low to the 2010 peak, BREW declined to below the mid-range Speed Resistance Line [SRL].  In the period from the 2008 low to the 2013 peak, BREW declined below the extreme downside target.  In the chart above, we have the following downside targets:

  • conservative: $12.57
  • mid-range: $10.02
  • extreme: $7.47

Although there is no assurance that the stock needs to decline to the referenced downside targets, any parabolic move must be watch closely as entropy will kick in at some point.  In this case, we believe that the ascending conservative target is a lock.  With established history as an indication, the mid-range target looks to be a safe “bet” as well.  We’ll check back in on this as more time has passed.

WD-40 Co.: Downside Targets

Below are the downside targets for WD-40 Co. (WDFC) based on the work of Edson Gould’s Speed Resistance Lines (SRL).


The assumption by many momentum investors is that WDFC will continue to rise further.  However, prior experience suggests that a parabolic rises usually end in a breakdown in the price.  Regardless of any further rise in the price of the stock, the conservative downside target is the minimum downside target to watch for.  At this time, the conservative downside target is $72.49.  We’d become interested in reviewing the fundamentals when WDFC falls at or below the $72.49 level.

Shanghai Composite Index: Where To Now?

On August 23, 2015, we said the following:

“The next move in the price to the downside should confirm the downside move or indicate the ongoing battle between buyers and sellers.  The point indicated as the critical support will reveal the overall short-term direction of the index.  Although the move up or down is academic, it is the size of the move that will be most fascinating as we believe it will be massive.”

So far, the Shanghai Composite Index (SSE) has confirmed that the direction of the index is down, now it is only a matter of magnitude.  Already the Shanghai Composite Index has reached the mid-range downside target of 2,867.34.


A large bounce at this level is hoped for as a continuation of the declining trend could spark a genuine panic.  If an upside bounce were to occur at this level, the SSE would face resistance at the ascending conservative downside target of 4,012.56.   It would be a +48% rise to the 4,400 ascending conservative downside target from the close of August 25, 2015. 

The flip side of a reversal to the upside is a decline to the extreme downside target of 1,722.12.  Our breakdown of the potential reversal points are as follows:

  • 2,450
  • 2,100
  • 1,722

The actions of the Chinese government have not been constructive for a change in the declining trend of the market.  The sooner restrictions intended to stop prices from falling are lifted the better the chance for Chinese stocks to fully recover.  The more involved the government becomes in the stock market the more we believe that 1,722 on the SSE is likely to occur.