Great football quarterbacks not only can see the play unfolding in front of them but also the whole playing field. When learning and using model price charts you can see the whole playing field through our Economic Book Value (EBV) lines. You can ask yourself “What if” questions like “What if company ABC has a negative transit of an EBV line? Looking back over the last 7 to 20 years you can ask yourself “Has this company ever traded at this lower EBV line before?” The amount of questions – good questions – can be asked and answered with a high degree of accuracy with specific price levels with our model price charts. Keep in mind that EBV+2 in 2001 is the same EBV+2 of today. The constants are the same. You are comparing apples with apples (EBV lines of the past with current and future EBV lines of any company.) If this happens anywhere else in finance I am not aware of it!
By asking yourself these good specific questions, and you can now visualize the whole playing field where you can get a sense of probability of the price action of the individual company in question. For example, if company ABC usually bottoms at EBV+2 over the last 10 years, and ABC just had a negative transit of EBV+3, what is the probability of ABC bottoming at EBV+2 again. Very high, I would say. Not 100%, but very high. Would you buy ABC today, after the negative transit of EBV+3? No, of course not. You would wait for ABC to trade at EBV+2? Of course you would. You don’t know how long this will take, could take months, quarters but you are patient as you see ABC trade lower on a weekly or monthly basis. You see the probabilities of specific levels and specific prices where trading action can occur knowing the probabilities are on your side when investing your hard earned cash.
My first challenge in revealing this work was to convince you and others that these EBV lines and our Model Price calculations work and stock prices are influenced by these mathematical algorithms in real time. For some of you, I have succeeded. Knowing that our EBV lines have relevance we can take the next step together and strategize trading strategies on specific companies with a high degree of confidence of future price action.
Once you know or have a high probability of future price action, investment strategies can be worked out knowing your competence level with various investment instruments and the amount of capital in your investment account. That said, I must reiterate that while I can review in detail various price points and probable future price action, I’m NOT recommending specific stocks to anyone. Nor am I recommending buying or selling stocks at specific levels. Model price work stands on its own and how you trade and or apply this work in your investment account is yours to decide.
So with that being said, let me strategize about Barrack Gold (ABX). Why ABX? Josh asked me to. Thanks Josh for the question.
Barrick Gold (ABX)
Let’s start with our model price chart.
Barrick Gold with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of ABX subsequent to this post will be maintained on Facebook, here.
Let me know if the above chart looks too busy but I’m trying to point out all the relevant information for you to consider. I will break down my thoughts on ABX with a review of ABX’s past price history from July, 2012 up to the market close on April 19,2013. I will continue with my actual trading plan and strategize on an investment strategy for future price action of ABX.
Past Price Review of ABX
Back in July of 2012, ABX has its first negative transit of EBV+2. (Point A) Believe it or not my first thought was ABX was going to EBV or our green line. This was my highest probability outcome. Checking the long-term chart (monthly bars) ABX traded down to EBV (green line) in 2008, so in my mind this was likely future event. However at the end of August ABX had a positive transit of EBV+2. OK, I was proven wrong with my initial assumption but let’s see what happens. Bingo, a second negative transit at the end of October (Point B). Game on, EBV here we come! Yes, 16 weeks later ABX has a negative transit of EBV+1 (Point C). My high probability assumption is of course higher because of this event and it’s only a matter of time before ABX trades back to EBV and I will be ready. Again, 6 weeks later ABX is at EBV (Point D). Remember our multi colored EBV lines are more significant than our other EBV lines – grey – so I thought our EBV line (green line) would hold considerable price support for ABX.
Within a week ABX breaks EBV. Yes, this is shocking but more importantly what is the most probabilistic EBV level in play after this negative transit? The next colored line in our EBV spectrum is EBV-3 our blue EBV line. This specific price level (EBV-3) is $15.62. This EBV level has to be considered in your trading plan irrespective of the fundamentals of the company or its valuation history. This is a key consideration in my mind. What would your capital loss be if ABX trades to EBV-3? This number is easy to calculate. What would your trading account or RRSP (401K) look like after this hypothetical loss? If your loss is too great, sell the position. (You should sell the position anyway irrespective of the size of the loss because of the negative transit.) Remember knowing when to sell your losing investments can save you more money than what you make on your winners over different periods or market cycles. See blog here.
My Trading Plan
Once model price theory and our charts become familiar to you, you will realize there are many different trading strategies that you can employ. I have my own trading strategy, which is personal to my temperament, personality and time – yes I do have a full time job and I cannot see market quotes for long periods of time throughout the day. I must emphasize this personal trading strategy has nothing to do with Acker Finley Inc., Acker Finley Asset Management or any client(s) recommendations. I also have a full time compliance officer scrutinizing every trade I make to ensure my trading is free from any conflict, real or perceived – which I have no problem with by the way.
So after all this, may I further add I’m a long position trader only and my universe is large market capitalized securities which are household names. Very rarely do I short securities or use any exotics like call or put options.
If we are on the same page, here is how I traded ABX. As I stated back in July, I thought ABX would trade down to EBV (green line) and this is what occurred many months later. Once ABX traded at EBV I took a position in the company (Point D). As ABX traded down through EBV, I tried to be patient and that was a mistake. Yes, I do make mistakes. ABX quickly fall to almost EBV-1, so I decided to again be patient with the position to see if any bounce would occur at this level. The next day, ABX gapped down through EBV-1! Great. So I traded out of the position realizing my losses. This is very easy for me because I know, as I stated earlier, that EBV-3 is now a high probability. No thanks.
The Future Price Action of ABX
I want to remind readers of this blog that our EBV lines are fundamental analysis. Something is going on with ABX, fundamentally speaking, and the negative transits are reflecting this. As I have said before our colored EBV lines have more significance than our grey EBV lines. So the high probability future trade is for ABX to go to EBV-3 or $15.62. If and when ABX reaches this EBV-3 level three possible outcomes are likely. The first outcome is a tradable bounce in ABX’s stock price to EBV-2 or $18.18. The second outcome could entail ABX trading along EBV-3 for a period of time. How long? I don’t know. The third outcome is a negative transit of EBV-3 or “Going into the Blue” as we say in our shop.
So for fun, here is my guess. I believe the most likely event of the three scenarios will be a negative transit of EBV-3. If there is a negative transit of EBV-3 or $15.62 investors and traders should sell their positions outright.
My Future Trading Strategy
I want no part of any of these scenarios. ABX has been trading like a hot knife through butter and I want no part of this price action or negative transits. I will wait on the other side of EBV-3. What does this mean? Down the road when we the public have a full and somewhat complete understanding of what is going on with ABX and potential future corporate actions are reflected in the balance sheet of the company, ABX will have a positive transit of EBV-3 sometime in the future. We call this “Coming out of the Blue” or EBV-3 (which I have blogged about many times) and this investment strategy is the simplest and most profitable strategy using our model price work and these two attributes fit my investment style and personality. So I will wait.
If you want to do something different go ahead. If you think you are nimble enough for a possible tradable bounce off of EBV-3 be my guest. This price action could be a distinct possibility. Who knows?
Yes, our model price charts look so simplistic but there is more information contained in these simplistic charts than anything I have ever seen in conventional finance today. You can see the whole playing field. You can assess possible price support and resistance of any equity in our database for the foreseeable future. You can ask intelligent questions about stock price movements with a high degree of accuracy. More importantly you can match high probability market outcomes with your investable capital.
Want to know the most valuable feature? Model Price tells you when to sell your investment. I should have acted on the negative transit of EBV. I should have been quicker in selling ABX. Lesson learned (Again).