The peak gave way to a correction that carried the price down to $41.11 on Aug. 22. The stock meandered sideways for two weeks, and then on Sept. 9 took off and in a week pierced its 20-day price channel, producing a bull signal, and hitting a high today in confirming the signal of $45.47.
In a broader context, the rise from November 2012 is part of an uptrend that began in March 2011 from $24.97.
Using Elliott wave methods, I count a wave 1 that ended in December 2011, a wave 2 correction that ended in November 2012, a wave 3 up that culminated last May, and the current wave 4 correction.
Corrective waves tend to alternate in form; if one is strongly vertical, then the other tends to trend sideways.
The wave 2 correction was more of the sideways variety, suggesting that wave 4, which BMY may presently be in, would be a sharp three-wave lightning bolt to the downside.
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| BMY 3 years 2-day bars |
I would have a hard time at this point in pronouncing wave 4 to be complete. I see a first wave down, wave A, followed by an up wave. For the wave 4 correction to be anywhere near the time magnitude of wave 2, it really does need to do some more work, suggesting that the upward move of the past week is wave B, and a downward wave C will follow.
But it is certainly possible that wave 4 will be very short, having ended in August, and that we are now in the early stages of wave 5. I've labelled that scenario as an alternate possibility in my chart.
The alternate count will become my preference if BMY moves above its wave 3 high, $49.57. That is 9.5% above where it is trading today.
If my present, bearish preferred count actually reflects the mind of the market, then a 61.8% Fibonacci retracement would mark the more likely turning point. That's at about $46, or 1.7% away.
BMY created a good record of success during its wave 3 rise. It completed three bull signals. Two were successful, on average yielding 10% over 49 days. One lost 2.8% over 11 days.
Of course, if the wave 4 correction still holds sway, then those odds don't apply to present conditions. Since wave 4 began in June, BMY has completed one bear signal. It made a 3% profit.
BMY was one of four stocks that gave bull signals on Monday. I uncovered them using a manual screen, since my data provider is in the midst of a huge technology crisis and couldn't provide quotes for my analytical software to crunch. (See "Tuesday's Prospects: Quill pen edition".)
One stock, ABT, failed confirmation by moving back into its price channel.
CVS and WMT have charts that are clearly in the midst of a correction, contrary to the direction of their bullish price-channel breakouts. They lack the ambiguity that BMY exhibits.
I probably would have rejected BMY, as well, had my range of choices been broader. BMY has a bearish rating from Zacks, which is contrary to the bull signal. I very much prefer to have Zacks aligned with the direction of my trades.
Bristol-Myers Squibb, headquartered in New York City, is a global pharmaceutical house. Its stock is part of the S&P 500.
Their drug portfolio covers the leading ills of our age. Cancer drugs account for 28% of the stock price, diabetes treatments for 22% and cardiovasculars for 21%.
Analysts collectively come down as not very excited about the company's prospects, giving it a negative 37% enthusiasm rating.
The company reports a respectable 20% return on equity with debt amounting to 45% of equity, more than I like to see in a growth stock but certainly a manageable level for most companies.
The record of the last 11 quarters shows profits in each, but with lower levels from mid-2012 onward compared to the period before. Earnings have surprised to the upside five times, and to the downside six times, including the most recent two quarters.
Institutions own 65% of shares, and the price has been bid up to a high level. It takes $4.70 in shares to control a dollar in sales.
BMY on average trades 6.7 million shares a day and supports a moderate selection of option strike prices spaced $1 apart, with open interest of three and four figures. The front-month at-the-money bid/ask spread on calls is 2.1%.
Implied volatility stands at 20%, in the lower half of the six-month range. It has been falling since late August.
Options are pricing in confidence that 68.2% of trades will fall between $42.64 and $47.88 over the next month, for a potential gain or loss of 5.8%, and between $44 and $46.52 over the next week.
Trading in options is running above the five-day average volume. Calls are 67% above average, and puts, 40%.
Bristol-Myers Squibb next publishes earnings on Oct. 21. The stock goes ex-dividend in October for a quarterly payout yielding 3.09% annualized at today's prices.
Decision for my account: The misalignment with the Zacks rating isn't a big problem, but the chart does give me pause. The worst case scenario provides less than 2% of upside potential followed by a great deal of potential to the downside. That's more risk than I want to take on.
References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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