Dissecting Trading Legend Jesse Livermore's Century Mark Rule

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Includes: TSLA
by: Chris Kacher and Gil Morales

Summary

The great trader Jesse Livermore discusses one of his "old trading theories" based on the movement of a stock through a century mark, such as $100, $200, $300, etc.

A stock from 1907 as well as modern-day stock Tesla are discussed.

Additional examples will be provided in future articles.

In the investment classic, Reminiscences of a Stock Operator, by Edwin Lefevre, the great trader Jesse Livermore discusses one of his "old trading theories" based on the movement of a stock through a century mark, such as $100, $200, $300, etc., for the first time. On page 104 of the John A. Wiley & Sons edition published in 1994, Livermore cites this rule in a narrative wherein he discusses his trading operations in Anaconda Copper during early February 1907.

At the time, he is long this "big stock" copper name of the early 1900s era as it passes up through the $300 price level. This triggers his rule, which he cites as follows: "It was an old trading theory of mine that when a stock crossed $100, $200 or $300 for the first time the price does not stop there but goes a good deal higher, so that if you buy it as soon as it crosses the line it is almost certain to show you a profit."

Intuitively, we can understand why this rule would work, since basic technical analysis theory often cites the idea of "psychological resistance" at "round" numbers where there is only one zero after the first digit, such as $40, $50, $60, etc. In the case of a century mark with two zeroes after the first digit, the psychological resistance might be more significant at such price levels.

Therefore, once a stock bursts through this "double-zero" psychological resistance, the impetus to move higher may have greater velocity. Livermore's expectations for Anaconda Copper once it cleared the $300 century mark were clear, "I figured that when it crossed $300, it ought to keep going and probably touch $340 in a jiffy." That implied a rapid movement of over 13% higher from the $300 price level, which we can call the "point of impact."

Does Livermore's Century Mark Rule Still Hold True Today?

Applying Jesse Livermore's Century Mark Rule to today's market environment likely requires more than just a rote application to any and every stock moving up through a double-zero round number or century mark. If we consider the example of Anaconda Copper in Reminiscences of a Stock Operator, we might recognize the fact that the company likely played a big role in what was known as the "Second Industrial Revolution."

This revolution, which is also referred to as the first "Technological Revolution," saw the enormous expansion of rail and telegraph lines after 1870 through the introduction of electrical power and telephones. Copper was a key input for these new industries, particularly in the form of copper wire for electric generation systems and phone lines. It would therefore stand to reason that Anaconda Copper, as a producer of copper, was positioned on the cutting edge of economic progress during its heyday.

In fact, the Anaconda Copper Mine was the largest copper-producing mine in the world from 1892 through 1903, and produced more than $300 billion worth of copper over that period. In 1899, the Amalgamated Copper Company, made up of two directors of Standard Oil Co., including William Rockefeller (brother of John D.), acquired a majority interest in Anaconda Copper Company.

Interestingly, John D. Rockefeller, the founder and chairman of Standard Oil, did not take part in the acquisition, as he didn't care to be involved in what he saw as a stock promotion operation. Copper eventually reached a "golden age" in the 1920s, but by 1899, the stage was set for Anaconda Copper shares to take a leading role in the stock market of the early 1900s.

There is no doubt that Anaconda Copper was a "big stock" leader of its era. This was where the action was, and where the big money was trafficking. So, we might conclude that limiting our search for modern-day applications of Jesse Livermore's Century Mark Rule to current big stock leaders might improve the profitability of this rule, assuming that it is valid in the first place.

Now let's look at Tesla (NASDAQ:TSLA) as we dissect Livermore's Century Mark Rule.

Tesla

One of the biggest big stock names in the mid-2010s, including the current market environment, has been Tesla. The company, with its illustrious, visionary, and Twitter-wielding CEO Elon Musk, has pushed the envelope of electric car development, and this, in turn, has caught the imagination of investors who have either loved or hated the company.

TSLA originally IPO'd in June of 2010, and had several fits and starts that went nowhere for a full 33 months before the stock finally broke out to the upside and began its now meteoric ascent. VirtueofSelfishInvesting.com first alerted members to the buyable gap-up move in May 2013, which correctly identified the start of a rapid price move higher from that point.

At that time, the general market was also starting to emerge from a prior six-month consolidation phase, so the stock had the general market's wind at its back, so to speak. Following the initial buyable gap-up, TSLA made a rapid move up through the $100 price level in late May 2013.

On May 28th, the stock opened at $101.55, made an intraday low of 100.30 and closed at 110.75. The next day, it opened at $113.55 and logged an intraday high of $114.90 before selling off. If Jesse Livermore was looking for Anaconda Copper in 1907 to rally from $300 to $340 "in a jiffy," a roughly 13% move, then TSLA, after pushing through $100, did precisely that in late May 2013.

The net move from the $100 price level was 14.9%, but the best one could have done based on where the stock traded was 14.6%, with something closer to 10-13% a more realistic outcome for a real-time trader.

Eventually, TSLA cleared the $200 century mark price level on February 11, 2014. It spent several days moving back and forth, above and below the $200 price level, before finally gapping higher on February 20th. The stock then rallied to a high of $265, thanks to a positive earnings report from TSLA on February 24th.

In this case, the Century Mark Rule worked again. However, from a practical standpoint, anyone taking a position near the $200 price level might have been stopped out or may have simply chosen not to gamble on earnings. Thus, this application of Jesse Livermore's Century Mark Rule gets partial credit for success.

Currently, in April 2017, TSLA is attempting to push up through the $300 century mark. So far, it has made two unsuccessful attempts at decisively clearing the $300 price level. At the time of this writing, the stock is making a third attempt following a continuation pocket pivot posted on Thursday, April 13th.

It remains to be seen whether TSLA will move substantially higher from here. However, with earnings coming up in about 2-3 weeks, there is always the potential for an earnings-driven gap-up move. For those who read this well after the date of publication, it is still instructive to see how TSLA played out.

In future articles at VirtueofSelfishInvesting.com, we will be looking at other stocks, including Nvidia (NASDAQ:NVDA), as another example of Jesse Livermore's Century Mark Rule in action. The articles will be placed into our report archives and, as usual, available to all.

Disclosure: I am/we are long UVXY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.