NEW LOW OBSERVER

A reader asks:

“What could trigger this downside? Just a technical ‘reversion to the mean’?”

Our response:

We are not sure of the catalysts that could trigger the move to the downside.  As an example, this from September 7, 2015 on the prospects of where the price of oil would go:

"...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."

At the time, we had no clue that a pandemic was on the horizon.  The only thing we had was the price and the potential for the downside bases on the work of Edson Gould.  We can’t dispute the reversion to the mean reality.  However, Gould's work on PRICE points to situations that are far beyond just mean reversion.

Another example was our April 26, 2012 posting titled “A Warning for Chesapeake Energy Stockholders.”  Based on the work of Edson Gould, the indication was that:

“If CHK falls significantly below the $4.94 level, then the stock has a high likelihood of going all the way $0.67.”

At the time, Chesapeake Energy was trading at $18.10 and ultimately filed for bankruptcy on June 29, 2020.

Gould’s work on price highlights what S.A. Nelson (coined the term Dow’s Theory) has alluded to in the work of Charles H. Dow regarding the tendency for prices to not only mean revert but go to an extreme after achieving the mean.  Nelson called it artificial advance and artificial depression.  Our 2009 examination of this concept, which has developed greatly since, can be found here.

Thanks for the great question.  We really appreciate the feedback.

see also:

• XOI Index Review September 7, 2015
• A Warning for Chesapeake Energy Stockholders April 26, 2012
• Values According to S.A. Nelson November 28, 2012