In a previous posting titled “Goldman Plays with Numbers,” we did a side-by-side comparison between Bitcoin and Ethereum in two different periods. The periods in question happens to have the same percentage change, approximately +13,400%.
As with the same percentage increase, it is reasonable to expect the same percentage decreased that followed. For the price of Bitcoin, it plunged –93.07% from June 8, 2011 to November 18, 2011. Below is our charting of three scenarios for downside risk to Ethereum.
Based on the work of Edson Gould, the conservative downside target for Ethereum is at $617.09 (blue line). However, due to the extremely volatile nature of cryptocurrencies, we have to expect that the extreme downside target is more than likely. The purpose of putting the conservative downside target at all is to demonstrate that it will be achieved after a given peak in price is established and the trend is clearly to the downside.
In addition to the conservative downside target, we have indicated the level Ethereum would be at if it lost –93% (red line) as Bitcoin did in the period from June 2011 to November 2011 (yeah, it took only five months). Such a decline in Ethereum would bring the price to $96.95. We don’t expect this but must be realistic about the prospects regardless of our own personal expectations.
Finally, we have included our own worst case scenario (green line) based on one half the difference between Gould’s extreme downside target at $461 and the –93% experienced by Bitcoin in 2011. This would bring the price of Ethereum to $279.31. Although this seems like a dire call for Ethereum, in reality it is not unusual to see an –80% decline in price from such extreme parabolic moves. Additionally, we don’t expect Ethereum to succumb to the same amount of pressure that Bitcoin did as the concept of blockchain technology is more salient to the general public today than it was in 2011.
“A mob’s a monster; heads enough, but no brains.” –Benjamin Franklin
On September 1, 2016, Craft Brew Alliance was trading at $19.41, we said the following:
“…we have the following downside targets:
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 (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%?
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.
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
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
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
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