Determining Profit Targets

Hi Dave,

Would you mind sharing your approach in determining profit targets?

Thanks.

Kyle R. – Jackson Hole, WY

Kyle,

Thanks for the question.

As you are likely aware there are two ways to determine a price target:

  • From a fundamental perspective
  • From a technical perspective

While thorough, fundamental analysis can allow one to come up with an objective value for a stock or other asset/asset class, this approach is rather limited from a timing perspective.

The technical approach is certainly better suited to timing the completion of a move, but it too has limitations. It largely ignores fundamentals and other forms of analysis that could deter from the effectiveness of the price analysis.

I just want to lay that out there so it is clear where I am coming from. Combining the two approaches, when possible, offers the more robust outcome in my opinion.

My recent trade in GLD (forecasting higher levels) is well suited to showing you a very basic technique for determining price targets.

Note in the chart below that I had identified a triangle pattern. Break from triangles are typically sharp moves and often termination moves.

Step 1: measure the length of Waves 1-3. If you are not an Elliott Wave trader, no problem, just measure the length from where the trend started and terminated prior to the corrective pattern (triangle). In this case it was 4.77 points.

Step 2: Project that ‘length’ of 4.77 from the completion of the triangle. In this case the Wave iv low (E)

Moves from triangles will typically travel .618 the length of the area measure in Step 1. So, in this case we could easily know in advance that $122.25 (4.77 * .618 = 2.94 then 2.94 + $119.48 = $122.25) was the likely termination area. In this case prices extended a bit beyond there to $123’ish before selling off to where we are currently at $120’ish

This pattern and price target were instrumental in why I issued a Bull Call Spread in GLD (May 25th) and why we closed it when it was trading north of $122 on June 6th

Have a question for me? Just ask.

Comments
  • Matt
    Reply

    Nice!

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