Upside Target

4 December 2016 By PDSNET

A general feature of the capitalist system is that economies grow. Consumers and businesses are always striving to improve their financial situation by whatever legal (and sometimes illegal) means that they can. It is also true that, in the end, the stock market must always follow the growth of the economy because it constantly discounts the profits of the largest listed companies. Thus the stock market also always trends upwards over the long-term.

Sometimes, the market enters an extended period of sideways movement where it oscillates up and down, usually between an upper resistance level and a lower support level. Because of the inherent tendency of the economy to grow over time, a long sideways movement usually means that there is a build-up of growth which is not reflected in share prices. Sooner or later, however, there must be an upward move to reflect this growth - and the longer the period of sideways movement, the larger and stronger that upward move will be.

From the chart below you can see that the S&P500 index of the largest companies trading on Wall Street has just ended a protracted period of sideways movement which had been going on for almost two years - since November 2014:

Chart by Metastock

There is a method in point and figure (P&F) charting which you can use to determine roughly how far up the move is going go - once the "consolidation phase" like this ends with an upside break out. It is known as the "Horizontal Count" method. P&F charting is one of the oldest methods of charting in technical analysis and it has generally fallen out of favour in recent years.

P&F charts are one-dimensional in that they do not really measure time - only changes in direction. The logic of that is that investors only really make money when the direction of the trend changes.

Now let us continue with our discussion of the S&P500 index and the application of the horizontal count method to the extended sideways market there.

The chart below shows a point and figure chart of the S&P500 index over the time same period as the line chart given above.

Chart by Metastock

You will note that the rising market which is shown before the start of the sideways market (which began in November 2014) is depicted simply as a single column of "X's" on the extreme left-hand side of the chart. The subsequent sideways market then shows how the S&P entered a period of "backing and filling" (columns of alternating "X's" and "O's") which lasted until a few weeks ago - when there was a clear upside break out.

If you count the number of boxes in an unbroken horizontal line on the chart, you will see that there are nine, in an unbroken row. To get the upside target, this "horizontal count" is multiplied by the box size used in this chart (which was 40 index points) and the reversal (which was 3). The result (9 X 40 X 3 = 1080) is then added to the lowest point on in the sideways period (which was 1947) and that gives you an upside target of 3027 for the S&P.

So the extended horizontal movement portends a 38% rise in the S&P500.

Given that all stock markets around the world follow what happens on Wall Street, this implies that the JSE should also grow by 38% - or probably more since it is a more volatile and usually moves further and faster than Wall Street.

The only problem is that the horizontal count method offers no indication of how long it could take to reach this target - it could be months or years (most likely the latter).

In our experience, the horizontal count method in P&F charting is approximately 70% accurate.  

 


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

Gold and Harmony

In our last Confidential Report, published on 6th March 2024, we drew your attention to the fact that the US dollar price of gold was about to break up through a critical resistance level at $2060. Gold has now moved up to $2166 so this observation provided an opportunity for private investors to make a significant capital gain, either in actual gold

Reverse Takeover

At the end of October 2023, Mix Telematics (MIX) was a relatively small fleet management company with a market capitalisation of just R2,3bn listed on both the JSE and the American NASDAQ. Its shares on the JSE were wallowing at a low of 380c. This compares with its competitor, Karoo (KRO), also listed on the JSE, but which was at the time, more

Rare Opportunity

You may not have been aware of it, but last week, between Monday and Friday, there was an opportunity to make an 80% profit on your capital. This opportunity occurred because of insider trading on a little known and traded share called Quantum Foods (QFH) in the poultry and animal feeds business.

Generally, the poultry business is

Excessive Bullishness

On Friday last week, the S&P500 index posted yet another new record closing high, but this time just one point higher than the previous day at 5088. This means that the index, which measures the progress of the 500 largest companies on Wall Street, has been climbing without a significant correction for nearly four months. Consider the chart:

Lessons from Transcap

As a private investor it is very important that you study what has happened in the past and learn from it. The progress of Transaction Capital (TCP) has provided us with an excellent opportunity to examine and learn from a complete cycle in an institutional favourite share. We can examine the entire cycle and see how to profit from it. In this regard, it is important

Sasol

Sasol is a company originally established in September 1950 by the National Party, to counter the possibility of petrochemical sanctions against the old South Africa. Essentially, Sasol used South Africa’s enormous coal reserves to generate about one third of its fuel requirements. Subsequently, Sasol became involved in the chemical industry which now accounts for about

4Sight

The world has, in the last twenty years, entered what has been characterised as the 4th Industrial Revolution (4IR). It has been described as “... the biggest structural change of the past 250 years — a transformation of scale, scope and complexity unlike anything humankind has experienced before.” In simpler terms, 4IR refers to the digital convergence of

The Great Bull Resumes

On the 12th of June 2023, we published an article, headed "Bull Trend?". In that article we suggested that, after a 25% correction, the great bull market on the S&P500 which began in March 2009 was still intact and would, in time break to a new all-time record high, above the high

CA Sales

In recent years, the JSE has not seen many high-quality, exciting companies listing on the exchange. One of those few is CA Sales Holdings (CAA), which offered both fund managers and private investors an excellent opportunity to make a significant capital gain last year.

CAA is a company which has grown

Two Elections and Two Wars

As the New Year begins, private investors should consider the most important factors which are likely to impact on the prices of shares and the profits of companies listed on the JSE. Some of these factors are local, like the general election which is expected to take place sometime in May, and some are international like the oil price, the