Category Archives: entropy

Craft Brew Alliance: Ebb and Flow

On September 1, 2016, Craft Brew Alliance was trading at $19.41, we said the following:

“…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.”

Since September 1, 2016, BREW declined as much as –38% to the $12 level on April 18, 2017, on an intraday basis.  On April 7, 2017, we said the following:

“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”"…”

Since April 7, 2017, BREW has increased by as much as +46%.  Anyone contemplating a purchase of BREW, barring a takeover by another company, should consider the exceptional increase in 8 months as a warning to protects your profits.

Below we have charted the price action for BREW and suggest that if the 2016 peak is not exceeded then the April 2017 lows will be retested and possibly violated by as much as –24% or falling to as low as $9.31.

China Lodging Group Downside Targets

China Lodging Group (HTHT) is primed for downside action.  The only issue is, will the stock really achieve the conservative downside target of $59.24 or –52.72%?

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We can say with a high level of confidence that the $92.27 level is a certainty.  While it is normal for a stock price to retrench –50% or more after a parabolic rise, there are potentially outside sources to mute the downside reaction.  In spite of any effort to hold the stock up market realities will set in and bring the stock price close to the conservative downside target.

Lam Research: Downside Targets

Review

The following is the pattern of price appreciation and decline for Lam Research (LRCX) from 1990 to 2017 with the application of Speed Resistance Lines [SRL].

1990 to 1998

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In the period from 1990 to 1995, Lam Research (LRCX) increased more than +3,470%.  From the peak of 1995, LRCX declined by –87.70% by 1998.  Based on the peak at $23.92, all of the Speed Resistance Lines [SRL] achieved their downside targets.

In addition, we’ve included the scenario for if the peak in the price were to have been the $13.13 level.  We included this because much of the analysis is based on parabolic moves to the upside.  Because we couldn’t possibly know where the peak in the price would be in real-time, we attempt to take the view, “what would happen if we were wrong about the peak?” Amazingly, even if we had chosen the $13.13 peak and used the downside targets based on the SRLs, we would have seen all of them achieved and would have been otherwise pleased if only the conservative target was met.

1998 to 2003

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In the above chart, from 1998 to 2000, LRCX increased +1,789%.  in the following decline, LRCX fell as much as –87.90%. 

There weren’t many “fake peaks” to initiate “what if” scenarios.  However, let’s assume that along the way up we had run the SRL and tried to project downside targets.  Any price above $14.00 would have generated a conservative downside target that the price action later achieved.  Also note that the period when LRCX rose from $2.94 to $12.79 and then fell to $9.04 would have generated a conservative downside target of $9.72.  This would have easily achieved the downside target.

2002 to 2008

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In the period from 2002 to 2007, LRCX increased +777.67% and later declined as much as –74.56%.

Not much can be said other than all downside target being achieved of the course of a six year period.  Again, in an attempt to prove our calculations wrong, we ran the $35.40 peak to see if the $19.80 number would have been an expected downside target. In the short term, the conservative downside target and mid range targets would have been accomplished.  In the long term, from the $35.40 level to the $15.00 in 2008, the low in 2008 would have met the SRL parameters for downside targets being achieved.

2008 to 2017

Activision Blizzard: Downside Targets

Review

The following is the pattern of price appreciation and decline for Activision Blizzard (ATVI) from 1993 to 2017 with the application of Speed Resistance Lines [SRL].

1993 to 1996

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In the period from 1993 to 1996, we can see that Activision Blizzard (ATVI) increase from $0.27 to as high as $1.50 or a gain of +455%.  The decline that followed saw ATVI fall –58%, achieving the conservative downside target of $0.80 and the mid range downside target of $0.65.  Although the chart doesn’t show it, ATVI did not rises above the 1995 level and subsequently fell as low as $0.43 by 2000 and ultimately achieving the extreme downside target of $0.50 in the process.

1999 to 2003

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In the period from 1999 to 2003, ATVI rose from $0.43 to as high as $3.96, a gain of +821%.  The resulting decline saw ATVI drop –63%.  In the chart above we do note a possible scenario that the SRL is run on the stock at the $3.12 peak, assuming you don’t know where the ultimate peak would be.  In such an instance, a conservative downside target of $1.83 and a mid range target of $1.44 were calculated. 

In the big scheme of things, the conservative downside target was achieved and the mid range target was one penny short of the mark in 2002. The point of this exercise is to see, what would have been the outcome if there was an error in the timing of the calculation of the downside targets.  As we shall see, these situations are all too real with outcomes that are generally surprising. However, in the immediate decline after the $3.12 price peak, the conservative downside target of $1.83 was $0.02 cents short of the $1.85 low set in September 2001.

2002 to 2009

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In the period from 2002 to 2009, ATVI increased in price by +1,084%.  The decline that followed brought the stock down as much as –56% before a recovery ensued.  Again, we have marked off the points where an error of early use of the SRL could have been applied.  In each of the three examples, the conservative downside target was achieved.  Suffice to say, in the case of the SRL and price peaks, the conservative downside target is a reasonable point of reference for consideration of ATVI.

2012 to 2017

The price action of ATVI has seen the stock price increase from a 2012 low of $10.08 to the 2017 high of $66.16.  The gain in the stock price has been +556%.  Our SRL has the following downside targets:

Bitcoin: How Much Pain Before Fear Sets In?

Bitcoin is going through the customary pullback in the price.  The new threshold to watch for is –35.77% on the downside.  This was the amount of loss that speculators and investors were willing to accept from the June 11, 2017 high of $3,018.55 to the July 16, 2017 low of $1,938.94 before a new bull run to the upside ensued.  Most traditionalist say that a bear market starts at or near a decline of –20% or more.  At which point, it takes some time before the “investment” gets back to the previous high (example: Nasdaq Composite took 15 years to get back to the 2000 high). 

In this case, we’re not talking about a stodgy technology stock index, we’re talking about a potentially new currency mechanism which will likely supplant many existing currencies.  Bitcoin is only one among many competing to be the final choice of a new money.  However, in order to get that prize, Bitcoin will need to survive the high risk phase of speculative boom and bust.

Right now, we’re watching Bitcoin investors test their tolerance for pain as the price swoons from the high of $4,950.72, as report by Coindesk.com, to the current level of $3,390.  As we said in our August 21, 2017 posting:

“…participants will accept even larger declines if the expectation is that it will exceed the prior peak.  So far, Bitcoin participants accepted a –14.94% decline followed by a –35.76%.  In each instance, these declines were followed by new highs in the price of Bitcoin. By our rationale, Bitcoin will now fall as much as –35% and possibly more as participants become inured to the pain of loss in anticipation of new highs.”

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