In this posting, we’ll covered the topic of downside targets for Tesla (TSLA). We’re going to apply Speed Resistance Lines [SRL] and George Lindsay’s “Three Peaks and a Domed House.”
The SRL downside targets are fairly conservative, in our view, while the 3 Peaks and a Domed House model (3PDh) appears fairly drastic. We’ll do our best to introduce the 3PDh concept in the most general way possible, leaving out some of the nuances that we believe inhibit the qualitative elements to the overall concept.
Speed Resistance Lines
Below are the Speed Resistance Lines [SRL] for Tesla (TSLA).
Already, the conservative downside target of $272.00 has been achieved. Waiting in the wings is the mid-range downside target of $200.17. The extreme downside target of $128.33 would be the last stop before a retest of the $100 level. In all the prior history of stocks that we’ve tracked using the SRL, 80% eventually go back to the extreme downside target before the bottom drops out or the stock attains new highs. Based on this observation, we’re highly confident that given the nature of Tesla, declining to the $150 to $127 level is a lock.
Offsetting our confidence on TSLA is the SRL that we ran on July 11, 2013. To this is day, Telsa is one of the few stocks to not decline to any of our estimated downside targets.
Three Peaks and a Domed House
As followers of Richard Russell of the Dow Theory Letters (1958-2015), we have tested as many of the analysts that he has mentioned in his newsletters. One analyst that we have examined in relative detail is the work of George Lindsay and more specifically Lindsay’s “Three Peaks and a Domed House.”
The first mention of George Lindsay’s work by Richard Russell was in the December 29, 1982. In that reference, Russell said the following:
“Another successful veteran analyst has come up with a forecast not too different from Space-Time ["Space Time Forecasting" (PO Box 772, Setauket, NY 11733)]. This is George Lindsay (Lindsay’s Opinion, Ernst 61 Co., 100 Wall St., NYC 10005). Lindsay believes the market is going into an extended trading-type formation which has occurred 17 times since 1898, a formation which he terms ‘the three peaks and domes house.’ I illustrate this formation here. Lindsay expects a choppy market while his formation works its way. He is looking for a trading range of around 200 points in the Dow (Russell, Richard. Dow Theory Letters. December 29, 1982. page 2.)."
The example provided by Russell gives a general outline of the “Three Peaks and a Domed House” concept compared to the Dow Jones Industrial Average in the period from October 1966 to July 1969. However, Russell’s more generalized reference wasn’t enough for us to better understand the work of Lindsay.
The follow-up work by Ed Carlson, in his book George Lindsay and the Art of Technical Analysis, provides the appropriate level of detail in attempting to understand the work of Lindsay and the “Three Peaks and a Domed House.” According to Carlson:
“It is very easy to find the Three Peaks formation on a chart given the Separating Decline that follows. Once you understand the Three Peaks formation, you will begin seeing it everywhere.”
We must confess, we have not had the success of “…seeing it everywhere.” However, we admit that our “standard” for what qualifies as a 3PDh either reflects our lack of understanding in some way or an over emphasis on the details. As stated by Carlson:
“…the challenge will be to make certain that the Three Peaks pattern you have identified fulfills the requirements, or characteristics, of the 3PDh formation.”
How do we determine if the requirements for the “Three Peaks and a Domed House” has been fulfilled? We’ve taken the examples that have been provided below and tested them out. Starting with the very first example from the October 1966 to July 1969 period in the Richard Russell reference, we’ve generated the following outcome.
DJIA: 1968 – 1974
Based on our work of the Three Peaks and a Domed House (3PDh as referred to by Carlson) for the period from 1968 to 1969, we came up with the following observations.
The chart above clearly outlines the pattern that matches the model with the three peaks as cited by Richard Russell. However, in our view, there is a specific formula to calculate the downside that should be expected based on when, and if, the “domed house” materializes. Our rendering of the data tells us that if you were to calculate a downside target based on the 985.21 peak (applying the 3PDh model), the downside target would be 777.85.
As we can see, in this example, the downside action that followed was to the 769.93 level within the year of 1969. However, this was not the end of the declining trend in the Dow Jones Industrial Average. Although Russell had the data for the ultimate conclusion of the decline, as the reference to Lindsay was done in 1982, it was possible to highlight the actual conclusion of the decline before a new rising trend ensued, as outlined below.
As seen in the chart, and later determined with the benefit of significant hindsight, the downside target from the 985.21 high was right about the direction but wrong about the extent. The 3PDh projected a decline of –21.85% but the actual decline was –35.94%.
After the Dow Jones Industrial Average reached the 631.16 low in 1970, the index went as high as 1,051.70 before correcting to a lower low. Along the way, there were two other 3PDh formations which gave the following downside targets:
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from the 950.82 peak, downside targets of 582.92 & 543.60.
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from the 1,051.70 peak, downside targets of 843.11, 817.10, & 774.77.
In the period from the 950.82 peak, the 3PDh projected a decline of –38.92% but actually declined –16.07%. Finally, from the 1,051.70 peak, the 3PDh projected a decline of –26.33% but the actual declined was –45.08%.
DJIA: 2012-2016
On February 13, 2014, we wrote an article titled “’Scary’ 1929 Chart Says Little About the Future” where we proposed that Mark Hulbert’s Marketwatch.com article titled “Scary 1929 Market Chart Gains Traction” was mainly about fearmongering and less about reasonable assessments for how much the market could decline. We said the following at the time:
“If we were to take artistic license on the chart presented in Hulbert’s article, we’d swear we could see a distinct pattern known as a “Three Peaks and a Domed House (3PDh).” This pattern, 3PDh, was described in detail in the book George Lindsay and the Art of Technical Analysis by Ed Carlson. For a breakdown on this pattern, we recommend that you read Carlson’s February 11, 2014 article titled "Stock Market Three Peaks and a (Complex) Domed House". Carlson projects a minimum downside of -42% from the December 2013 peak. While we agree that this sounds much better than what is implied in the Hulbert article, our own interpretation of the 3PDh numbers suggest that the downside target is between -16% to -19% from the peak.
“We love a declining stock market as much as the next value investor. However, implying that an -89% decline is in the works because the pattern appears similar to 1929 is ignoring the path to far more achievable downside targets.”
The chart below is a reflection of what actually happened since that “scary” chart was posted by Mark Hulbert.
At the time of our estimated –16% to –19% downside target using 3PDh, the Dow Jones Industrial Average was at 16,154.39. Ultimately, the DJIA peaked at 18,312.39 before a substantive decline in the index ensured. Applying the 3PDh prior to the top would have generated a worst case downside target of 16,530.94 while the actual low was 15,660.18, or –14.48%.
In either peak in the DJIA, 16,576.66 or 18,312.39, there was no indication that a drop of –30% or more was on the horizon. Naturally, 2016 was the low that set the stage for a tremendous rebound in the DJIA going forward.
XAU Index : 2009-2018
On January 7, 2014, we ran the model for the 3 Peaks and a Domed House on the Philadelphia Gold and Silver Stock Index (XAU). This was done after we had already ran the Speed Resistance Lines on the XAU Index on April 14, 2011. At the time, we said the following:
“Based on the most recent high of 228.95 the downside target for the XAU index is 76.32. We recommend that whenever the XAU index falls at or below the speed resistance line drawn on the chart, between now and just before 2028, as part of the secular rising trend in interest rates/inflation, we would expect that the stocks in the index are underpriced. Confirmation of fair values should be determined for possible speculative positions at these times.”
When we saw that the downside target for two very different indicators are so close in alignment from such lofty heights, we started to believe that the numbers were accurate. However, as we saw in the calculations for the 1968 to 1974 period, there is the risk that the calculations isn’t low enough or the projected downside is never achieved at all. These calculating errors should act as a warning not to accept that the downside targets are set in stone.
With these caveats out of the way, we are posting what we believe to be the 3 Peaks and a Domed House for the stock price of Tesla.
Tesla: 2010-2018
When we run the numbers on Tesla (TSLA), we arrive at three downside targets based on the 3PDh model. Those numbers are:
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$76.46
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$70.19
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$35.26
These numbers are far more extreme than the numbers provided by the SRLs above. However, we would not put it past TSLA to decline to the $76.46 level as we have seen a similar decline, –80% or more, in a diversified gold and silver stock index.
We have intentionally left out the “timing” element that is assumed to be a critical piece of the 3PDh model since this has been far less reliable than the actual downside targets that we have run in the past. For a thorough detailing of George Lindsay’s 3 Peaks and a Domed House, it is worth obtaining Ed Carlson’s book George Lindsay and the Art of Technical Analysis.