January 9, 2012
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There are always many questions on the EBV lines. Why have them may be the most frequent. As we say in the “Key Concepts”/”Economic Book Value” section, these lines act as support and resistance lines for equity prices. As an example let’s look at NFLX. As the long-term chart illustrates, (right hand chart), the stock blasted off at the beginning of 2009. NFLX went from EBV+7 to EBV+10. While at EBV+10, one can see the equity price using the EBV+10 line as support. Now shifting to the short-term chart, (left handed chart), you can see NFLX on the way down and where the stock received short-term support (short-term meaning weeks). NFLX stayed briefly at EBV+9. Once breaking EBV+9, NFLX quickly went to EBV+8. Stayed 5 weeks at EBV+8, when NFLX broke down to EBV+7. Where did NFLX find support? For 7 weeks it found EBV+7. Before blasting off upward, in the last few days.
The important point is that these EBV lines are calculated from the balance sheet. Yes, predetermined. This helps investors better understand the price dynamics, certainly in terms off where the price action could go next. As for NFLX expect price resistance at EBV+8 at $133.44. Support is still $74.13. Let’s see how this works out?