It is clear that the commodity market is in the dumps. The chart below outlines the course of the Bloomberg Commodity Index since the July 2008 peak.
With the decline that has occurred in the index, it would be obvious to any long-term investor that there are values to be had. Yeah, there are risks but we’re investors not savers (anyone confused about the difference between saving and investing? Savers expect the money to be there no matter what, investors are taking the risk that more or less will be there, after the passage of time). One idea that we think is worth entertaining (or researching) is a stock that we’ve followed for many years.
It’s that time again. We’re going to see what the effectiveness of Gould’s Speed Resistance Lines (SRL) is in predicting the downside for Netflix (NFLX). But first we’re going to review the last time that we ran an SRL on Netflix. The very first time we ran numbers on NFLX was on December 3, 2010 when the stock was trading at the pre-split price of $185.45.
At the time, we were testing out the quality of Gould’s work. We came up with a conservative downside target of $117.76 and an extreme downside target of $68.63. The most challenging part of the assessment was the fact that Netflix increased +50% before achieving the first downside target.
A follow-up review of the SRL on Netflix was done on September 22, 2011 where we had the following to say:
“…in reviewing the chart pattern of Netflix (NFLX), we have the peak of NFLX at $298.73. The conservative estimate for the stock is that it would fall to $148 which has already taken place. The extreme downside target would be $99.58. Because of the nature of the rise, we believe that Netflix (NFLX) is slated to fall at least to the $99.58 level.”
At the time, we proposed that NFLX would decline at least -66% from the peak of $298.73. The actual decline was -79.89%. Will it happen again? We don’t know. However, if it does, there will be good buying opportunities ahead.
On January 6, 2015, we said the following about the NYSE Oil and Gas Stock Index (XOI):
“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. ”
At the time, the NYSE Oil and Gas Stock Index was trading at 1,287.66. The September 4, 2015, XOI close was 1,085.81, down –15.67%. At least from the perspective of the last posting, the SRL achieved the expected downside target.
However, lurking in the background is the extreme downside target of 575.41. Since our experience has been that the extreme downside target is commonly achieved, we hazard to guess what would happen globally to the oil market in order to decline to such a low point.
For now, we’ll resign ourselves to the idea that the 812.08 is the next downside target. If that target is achieved we believe that the 575.41 level is highly achievable. Given our concern for the downside risk, oil sector stocks should be bought in three stages at 958, 812 & 575.
On April 27, 2013, we wrote a short piece on Baidu (BIDU) that concluded with the following remark:
“The conservative downside target of $93.43 has been achieved and we are now sitting at the extreme downside target of $54.79. All indications, based on the SRL, are that Baidu is worth considering in a two stage purchase plan, once at the current level and again at $67 or lower.”
The chart that we included for the above assessment was based on the work of Edson Gould’s Speed Resistance Lines (SRL) and is shown below.
Since that recommendation to buy at $85, Baidu had increased to as high as $251. What was not included at the time was the upside targets based on the work of Edson Gould. At that time, the upside targets were:
Baidu was able to achieve two of the three upside targets that were indicated for the stock based on the interpretation of Gould’s work. With the Chinese stock market experiencing significant turmoil, Baidu has declined from the $251 level to the current price of $144 making a review of the technicals useful.
Baidu Downside Targets
Below is the updated Speed Resistance Lines based on the work of Edson Gould:
On August 26, 2015, the Shanghai Composite Index traded as low as 2,850.71. While the most recent rise may only be a bear market rally, we think that resistance to the rise might kick in around the 4,400 level. Rising above 4,4oo would suggest that a run to the previous peak of 5,166.35 is not out of the question. Keep in mind that a bull market in this index is not confirmed until the index exceeds the prior high, until that time the Shanghai Composite is in a bear market rally.