TIVO: Angry kid with crayons

TiVo Inc. (TIVO) sent a bull signal when it broke above its 20-day price channel on Monday, but its chart looks like something drawn by an angry 3-year-old with crayons.

Over the long haul, from 2010, the scribbles have tended somewhat to the upside but with swings of such magnitude and frequency that I would find it difficult to begin to find a pattern that I could play.

Forget about Elliott waves. I would be happy to find a simple trend.

TIVO 4 years 2-day bars (left), 180 days 4-hour bars (right)

So my instincts after a glance at the chart are to shy away frm TIVO. I'm a trend trader. TIVO has no trend. End of story.
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But of course it's not quite that simple. Markets are like onions, with layers bonded to layers. Although TIVO is without a trend over the longer terms, it has been in an uptrend since Aug. 19, 2013, when it began a rise from $10.47 that carried it on Monday to a high of $13.39, a 28% gain in two months.

That uptrend shows a clear five-wave Elliott wave pattern, and one that I would argue appears to be complete, given the magnitude of the decline that followed in trading today.

A fall below $12.85 -- the price-channel breakout level -- would bring the price below the peak of the previous wave 4, buttressing my conclusion that the uptrend is over and a correction is underway.

A rise above Monday's high would mean wave 5 is still in progress to the upside, with the correction not yet begun.

TIVO 90 days 1-hour bars (left), 5 days 5-minute bars (right)

Even at this micro level, the chart argues against opening a bull position in TIVO.

TIVO was one of two symbols that survived my overnight screening. The other, WPPGY, a U.K. ADP, shows a clear uptrend but trades only 57,000 shares a day, and so was not my first choice for analysis.

TiVo Inc. is of course the household name that dominates set-top boxes for on-demand video. It is available in the United States, Canada, Mexico, the U.K., Australia and New Zealand .

Analysts love TiVo, collectively coming down with a 50% enthusiasm rating.

The financials do nothing to support the love affair. TiVo reports a negative 15% return on equity (a loss on equity) with long-term debt amounting to 32% of equity.

The company has earned a profit in only four of the last 12 quarters. The most recent quarter was among the profitable and showed earnings nearly double the previous highest earning quarter out of the 12.

TiVo has produced upside earnings surprises in eight of the past 12 quarters, and surprised to the downside in four.

Institutions own 84% of shares and the price has been bid up to speculative levels. It takes $4.54 in shares to control a dollar in sales.

TIVO on average trades 2 million shares a day,  sufficient to support a broad selection of option strike prices spaced a dollar apart with open interest running mainly to the four figures at strikes used to construct options spreads.

The bid/ask spread on front-month at-the-money calls is 6.4%.

Implied volatility stands at 40%, in the lower third of the six-month range. A sideways fluctuation since mid-September was broken today by a sharp rise.

Options are pricing in confidence that 68.2% of trades will fall between $11.47 and $14.47 over the next month, for a potential gain or loss of 11.6%, and between $12.25 and $13.69 over the next week.

Options are trading below the five-day average volume, with both calls and puts running at about three-quarters average.

TiVo next publishes earnings on Nov. 26.

Decision for my account: I'm not opening a bull position in TIVO for the reasons stated in my discussion of the charts. Although not an absolute deal killer, the negative return on equity is also something that discourages me from opening a bull position.

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.