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  • Apple Meets NLO Upside Target

    On August 19, 2014, Apple (NASDAQ:AAPL) stock price rose as high as $100.66. When Apple was trading at $61.61 on March 9, 2013, we said the following with the accompanying chart:

    "Apple Inc. (AAPL) is at the top of our watch list as it is within 5% of the one year low. In our April 14, 2012 test of the quality of Edson Gould's Speed Resistance lines, Apple fell from $636 [adjusted price of $90.85] to our projected level of $424.15 [adjusted price of $60.59] (found here). Now that the stock has achieved our downside target, we expected that a reaction to the upside is likely."

    (click to enlarge)

    On July 17, 2013, when Apple was trading at $61.47, we re-affirmed our view of the upside potential for Apple with the following commentary:

    "Currently, Apple is demonstrating a basing pattern that if successful, could result in a breakout to the upside. At the current levels, we wouldn't be opposed to buying some shares of Apple with the expectation that the stock could decline an additional -25% to -35%."

    The work of Edson Gould has proven to be astounding when considered in its context. On April 14, 2012, we posted an article titled "Considering the Downside Prospects for Apple". At that time, we were revising the previous estimates of downside risk done on February 5, 2012 (third party source available here).

    What was mentioned on February 5, 2012 is critical to understanding how Edson Gould's downside projections work. At the time, we said:

    "The very first thing that we look for, to determine speed resistance lines, is the most recent peak in the price. Because AAPL is continually making new highs, we only need to use the latest price of $455.68 [post split price of $65.09] as our starting point….As the price of Apple increases, so too does the SRL lines based on the work of Edson Gould."

    This means that as long as the price of the stock increases to a new high the speed resistance lines are expected to increase as well. Only when the stock starts on a declining trend can we expect that the stock price might go to the conservative and extreme downside targets.

    (click to enlarge)

    On April 14, 2012, when Apple was trading at $90.89 (pre-split price of $636.23), we said the following:

    "…we believe that, based on the current speed resistance lines, no one would expect Apple to decline to our conservative downside target of $424 (post split price of $60.57)…"

    The strength of Gould's downside risk estimates is that we didn't even have the peak price of $100.71 set on September 18, 2012 but we were still able to see the conservative downside target of $60.57 achieved. Had we used the peak price, we would have achieved the $67.14 conservative downside target much earlier than the $60.57 level

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AAPL
    Aug 20 11:16 AM | Link | Comment!
  • Berkshire Hathaway Meets NLO Target

    On May 7, 2012, we proposed in a Seeking Alpha article that Berkshire Hathaway (BRK-A) was trading at a price that was well below its true value. At the time, BRK-A was trading at $164,990 per share. However, we proposed that Berkshire Hathaway should have been selling at much higher prices with upside targets of $175k, $197k and $219k in a 2-3 year timeframe. As BRK-A sits within 1% of our mid-range target of $197,190 after two years, we believe it is time to reassess where Berkshire Hathaway sits within the context of Edson Gould's Altimeter.

    In the chart below we can see the price movement of BRK-A from May 7, 2012 to August 8, 2014. Also in the chart is the upside targets from the May 7, 2012 article.

    (click to enlarge)

    The first thing we'd like to draw your attention to is the fact that from May 7, 2012 to July 2013, the price of BRK-A went into a steep run-up in price. However, as soon as BRK-A got to the $175,000 level the stock price stalled in a trading range from July 2013 to February 2014. While we don't know the reason why the stock price stalled, the $175k level proved to be a substantive technical resistance level.

    As we approach the second of the three upside targets at $197,190, BRK-A seemed to be running out of steam as the stock price has been trading in a range from $187k to $194k from March 2014 to August 2014. However, the recent rise above $194k would be considered a major breakout for the stock. We're on the lookout to determine whether or not BRK-A is going to make the $197k level a meaningful support or resistance level.

    Finally, a review of what Edson Gould's Altimeter indicates about the relative value of BRK-A. Below is an updated Altimeter for BRK-A.

    (click to enlarge)

    Based on the assumptions outlined in the May 2012 article, BRK-A now has an undervalued level at $190,869.16 and trades at an overvalued level at $241,863.61 and above. Where the $219,100 price once was the height of overvaluation it is now merely the fair value level for BRK-A according to Edson Gould's Altimeter.

    As each new year brings higher fair value levels, we have to reconcile our primary concern, downside risk, with where the stock is trading presently. Although the prospects for BRK-A are looking good going forward, the possibility exists that the $197k handle ($197,001-$197,999) may experience significant upside resistance.

    We can't resist giving BRK-A the benefit of the doubt on concerns of downside risk as the compounding of income alone pushes the valuation of the company higher every day. Suffice to say that investors should accumulate BRK-A at $191k and below. Keep in mind that while investors could achieve much greater gains in many other stocks, the remote prospect of a substantial one-time dividend is not out of the question and makes these shares worth holding for the long term as a quasi-bond component of the portfolio.

    Disclosure: The author is long BRK.B.

    Tags: BRK.A, BRK.B
    Aug 10 3:20 AM | Link | Comment!
  • Chip Sector Cycle Says Sell

    On December 6, 2012, we said the following of our Nasdaq 100 Watch List:

    "We've highlighted the chip sector stocks to put emphasis on the fact that, as an industry group, the sector may be at or near a low."

    After a year and a half, the chip sector stocks have achieved all that we had anticipated when we wrote about them in late December 2012. As seen in the chart below, all of the stocks except Altera (NASDAQ:ALTR) achieved gains that beat the Nasdaq Composite growth of +46.22% in the same period.

    (click to enlarge)

    The chip sector does run on a cycle and it is our belief that while this may not be the top it is time to sell the principal in those stocks that have had a decent run. The profit portion should be allowed to compound until new relative lows are achieved.

    We've been fortunate to successfully identify two chip sector cycles lows on March 20, 2010 and December 6, 2012. As we have in the past, we will notify subscribers of investment opportunities at the next cycle low. Investors may want to consider rotating into sectors that we've identified as worth accumulating using the proceeds from the sell of chip sector stocks.

    Disclosure: The author is long KLAC, AMAT, INTC, ALTR.

    Aug 09 12:41 PM | Link | Comment!
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