Monday, September 30, 2013

Tuesday's Prospects

On Monday, Sept. 30:

Of 2,393 stocks and exchange-traded funds in this week's analytical universe, 38 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 16 to the upside and 22 to the downside.

Two symbols traded over the counter broke out, both to the downside.

Within my analytical universe, 1.7% of symbols gave bull or bear signals, compared to 0.8% the prior trading day.

The ratio of bull to bear signals was 1:1.5, up from 1:1 the prior trading day, as the markets remained neutral.

One symbol traded on the major exchanges, CHK, survived my initial screening, having broken out to the downside.

No symbols traded over the counter survived my initial screening.

The next round of earnings begins on Oct. 8, coming within the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement. This means that increasing numbers of symbols will be removed from my prospective trades list during initial screening.

I shall do further analysis on Tuesday, Oct. 1.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...
  • even or greater odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
  • a yield adjusted by those odds of 5% or greater,
  • and absence of an earnings announcement within the next 30 days. 
For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Government Shutdown: Economics reports

I've updated "The Week Ahead" with information about the likely impact of a partial shutdown of the U.S. government should it occur at midnight tonight.

Monday's Outcomes

Having broken below the 20-day price channel, CSCO moved back above the boundary within the first half hour of trading and didn't look back. I won't be opening a new bear position today because of the upside momentum, but I'll add CSCO to my Watchlist. See my analysis, "CSCO: Bearish on the bones of the 'Net".

USO, which has been on my Watchlist since Sept. 24, gapped below its resistance level of $36.85 but moved back above it with two hours to go before the closing bell. I'll keep it on my Watchlist but won't open a bear position today. See "USO: Crude bear play".

CSCO: Bearish on the bones of the 'Net.

Update 11/5/2013: CSCO broke above its 10-day price channel on Tuesday, signalling a tactical close to the position. The reward/risk ratio now stands at 92:100, which means I should close rather than hold.

I'm not certain at this point what happened with the Elliott wave count. I'll revisit it and do an update once I've untangled it.

CSCO rose 0.52% over the position's 32-day lifespan, or 6% annualized. That's a move in opposition to my bear position. 

Even so, the options produced a 1.5% positive yield on risk, or 16.9% annualized. Can't complain about that.

Update 10/4/2013: CSCO went on the shelf Sept. 30 after failing confirmation. It broke below the 20-day price channel again today and spent much of today down from its initial price in trading before the opening bell. 

However, it rose above the confirmation level with about two hours to go before the closing bell. It stayed high until the last 10 minutes of trading and in the final five minutes flirted with the breakout level. 

It was a ha'penny below confirmation when my trade was filled with six minutes to go, and closed a penny above confirmation. I'll call it a marginal compliance with the rules. The clock was ticking, the price was moving, and I had to choose.

I've structured the trade as a bear call spread expiring in November. Leverage is 5.3:1. The maximum yield at expiration is 48.2%. The position provides a 2.8% hedge of profitability at expiration above the entry price.

Cisco Systems Inc. (CSCO) broke below its 20-day price channel on Friday and traded still lower today. However, it has since risen back to within the channel and is flirting with the lower boundary. It may end up confirming the breakout; it may not.

The bear signal came at the end of a seven-day decline from $24.80, the culmination of the bull signal that preceded the present very near term downtrend. That peak coincided with the day the bull signal was given and so counts as a whip-saw.

Whether CSCO confirms its present breakout or not, its chart is one of the more interesting that I've worked with of late. To understand it, I had to go back to 2000, the year the Dot-com Bubble burst.

The markets as a whole followed the dot-coms into a decline, although not as severe, but afterwards rose in another major uptrend into 2007, only to collapse again with the advent of the Great Recession, and then to once again recovering to new highs.

CSCO's drummer was tapping out a different beat. The company survived the Dot-com Crash, but rather than moving to a new bull market, it began tracing a complex extended sideways correction.

CSCO 15 years monthly bars (left), 1 year daily bars (right)
In Elliott wave analysis, the correction has taken the form of a zig-zag (A-B-C on the left chart) with an intervening wave down (W) followed by what appears to be a triangle of some sort, although its nature won't be apparent until the conclusion of the present wave D.

The right chart zooms in to show the peak of wave C at $26.49 on Aug. 7 followed by the beginnings of wave D to the downside. As I count the near-term movement, the chart is showing a wave c decline that will be followed by an upside correction, and then further decline toward the lower boundary of the triangle.

The best bearish outcome for this structure would be a descending triangle with a flat base, which would give CSCO downside potential to $13.30, the end of wave B. A symmetrical triangle would have a higher downside target and so less potential.

After wave D in a triangle comes wave E to the upside, concluding below $26.49, and then either a continuation of the wave II correction, or the beginning of a massive wave III to the downside.

It seems likely that the lower-case waves (a-b-c) that I've labeled on the right-hand chart are several time-spans down from the upper-case waves (C), so I would not necessarily expect the present smaller wave c to be the conclusion of large wave D. There's room for waves within waves between the two.

It is in the nature of sideways corrections, such as triangles, that they produce substandard odds because the uptrends and downtrends offset each other. So it is with CSCO.

It failed my one-size-fits-all initial screening over the weekend. (See "Monday's Prospects".) And a closer look tailored to the chart shows that my intial screeing was correct in rejecting it.

CSCO has completed 17 bear signals since the triangle formation began in 2009; eight succeeded for an average gain of 4.3% over 34 days, but nine failed, for an average loss of 7% over 19 days. That's a negative 2.7% yield spread.

The present wave D has produced only one other bear signal so far. It yielded a 1.1% profit over 17 days.

For all of that I consider CSCO to be worth playing because of the structure imposed on the chart by the triangle pattern. It's too large a pattern to play as with an iron condor, which profits from sideways movements. However, the clear targets provided by the triangle increases the chances of success in a directional trade. At the least, my sense of where the price stands is clearer than would be the case in other structures.

Cisco Systems makes networking products that provide the bones of the Internet, which, far from being a damp, amorphous cloud, is a collection of wires and fiber-optic cables running through tubes on poles and underground and under the sea that are hooked up to a menagerie of routers and other devices, many of which are made by Cisco.

The Internet is made of hard stuff that like a skeleton holds our tweets and Facebook likes and birthday wishes and anti-government blog rants into a functioning whole that both binds and frees our thoughts.

An amazing book on the subject is Tubes: A Journey to the Center of the Internet by Andrew Blum, which takes the reader to many of the more interesting places in the infrastructure of the 'Net. Cisco is one of the major global players that has created the stuff of that infrastructure.

Analysts love Cisco. I can't say it any simpler than that. The stock has a wide professional following and most give its prospects top marks, for a collective enthusiasm index of 47%.

The financials, looking backward, support that opinion, with return on equity of 18% and debt amounting to only 22% of equity.

Each of the last dozen quarters has shown a profit, only three of which have shown a decline from the quarter before. The most recent of those, all of which are quite small, was reported in August 2012, and the other two were way back in 2011. Profits have been in a shallow uptrend the last four quarters.

All 12 quarters showed upside earnings surprises.

Institutions own 72% of shares. The price stands at a premium; it takes $2.57 in shares to control a dollar in sales.

CSCO on average trades 38.6 million shares a day and supports a moderate selection of option strike prices spaced a dollar apart. The front-month at-the-money bid/ask spread on puts is 1.3%, which is quite narrow.

Implied volatility stands at 27%, about the middle of the six-month range. It has been on the rise since hitting a six-month low on Sept. 13.

Options are pricing in confidence that 68.2% of trades will fall between $21.58 and $25.28 over the next month, for a potential gain or loss of 7.9%, and between $22.54 and $24.32 over the next week.

Trading in option contracts is heavy today, with calls approaching triple their five-day average volume and puts at double the average.

Cisco Systems next publishes earnings on Nov. 13. The stock goes ex-dividend on Oct. 1 for quarterly payout yielding 2.9% annualized at today's prices.

Decision for my account: CSCO has a good bearish chart. I can live with the odds, which are almost even over the long haul, because of the triangle structure.

As I write this, 4-1/2 hours before the closing bell, CSCO is showing upside momentum that has carried it back within its 20-day price channel. I'll check the charts in the last half hour of trading. If that momentum has reversed to the downside, then I'll open a bear position and update this analysis with my action. If momentum remains to the upside, then I'll add CSCO to my Watchlist and look for a potential reversal.

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.

Sunday, September 29, 2013

The Week Ahead: Jobs and factories

Update 9/30/2013: The Bureau of Labor Statistics said today that should a continuing budget resolution not be signed into law, causing portions of the government to shutdown beginning Tuesday, then some economic reports won't be released as scheduled.

For guidance here are the reports listed in "The Week Ahead" that are issued by government agencies that appear likely to be impacted by the shutdown, with the date and time they were originally scheduled for release:

Tuesday: Construction spending at 10 a.m.

Wednesday: The Energy Information Administration, which publishes the weekly petroleum inventories report at 10:30 a.m., will be able to operate through Oct. 11 under a shutdown.

Thursday: Initial jobless claims at 8:30 a.m. and factory orders at 10 a.m.

Friday: Employment and unemployment at 8:30 a.m.

The Federal Reserve has independent funding and so won't be impacted. I've not listed their reports. Private sector reports, it seems likely, will go ahead as scheduled.

And the inevitable caveat: All is in flux and nothing is certain. What will actually happen to econ reporting this week is anybody's guess.


This is jobs week in the endless feast of economic reports that nourish our lives as traders. An influential manufacturing index released by a private-sector organization and a Commerce Dept. report on factories will add touches of spice to the often drab fare.

The Labor Dept. will release its figures on employment and unemployment on Friday at 8:30 a.m. New York time. As always, there will be the run-up events to fuel speculation: The ADP employment report, put together by the largest American payroll company, will be out at 8:15 a.m. Wednesday, and on Thursday, the Challenger job-cut report tracking layoffs at 7:30 a.m. and weekly jobless claims at 8:30 a.m.

The Institute of Supply Management will publish its ISM manufacturing  index at 10 a.m. Tuesday. It has influence as a leading indicator; so many of the economic reports look backward, but the forward-looking ISM survey, along with the Commerce Department's factory orders report out Thursday at 10 a.m., is an exception.

Also, Fed Chairman Ben Bernanke gives opening remarks to a banking conference in St. Louis at 3:30 p.m. on Wednesday. It's not the sort of venue that normally produces major announcements, but when Chairman Ben speaks, wise traders listen.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The average hourly workweek in manufacturing from the employment report, at 8:30 a.m. Friday.

Manufacturers' new orders for consumer goods and materials from the factory orders report, at 10 a.m. Thursday.

Vendor orders, also called the deliveries times index, from the ISM manufacturing survey, at 10 a.m. Tuesday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

Manufacturers' new orders for nondefense capital goods from the factory orders report, at 10 a.m. Thursday.

Other reports of interest:

Monday: Chicago purchasing managers index at 9:45 a.m., and the Dallas Federal Reserve Bank manufacturing survey at 10:30 a.m.

Tuesday: Motor vehicle sales throughout the day, the Purchasing Managers index of manufacturing just before 9 a.m. and construction spending at 10 a.m.

Wednesday: Petroleum inventories at 10:30 a.m.

Thursday: Institute of Supply Management non-manufacturing index at 10 a.m.

Fedsters

Three Federal Open Market Committee members haves scheduled public appearances during the week: Fed Chairman Ben Bernanke and New York Fed Pres. William Dudley on Wednesday and Fed Gov. Jeroome Powell on Thursday.

Two FOMC alternates will also take the podium: Dallas Fed Pres. Richard Fisher on Thursday and Minneapolis Fed Pres. Narayana Kocherlakota on Friday

Analytical universe

This week I shall be analyzing new bull and bear signals among 2,393 stocks and exchange-traded funds that have some analyst interest. They are traded both on the major U.S. exchanges and over-the-counter. My universe is selected from mid-cap stocks and larger, defined as market capitalization of $1 billion and greater.

Trading calendar

By my rules, I'm trading November options for the short legs of vertical, diagonal and calendar spreads and covered calls, and for all legs of butterfly spreads and iron condors. I'm trading January options for single calls and puts as well as straddles. Shares, of course, are good at any time.

Good trading!

Saturday, September 28, 2013

Monday's Prospects

On Friday, Sept. 27:

Of 2,393 stocks and exchange-traded funds in this week's analytical universe, 16 that are traded on the major American stock exchanges broke beyond their 20-day price channels, seven to the upside and nine to the downside.

Two symbols traded over the counter broke out, both to the upside.

Within my analytical universe, 0.8% of symbols gave bull or bear signals, compared to 1.4% the prior trading day.

The ratio of bull to bear signals was 1:1, down from 1.3:1 the prior trading day, as the markets remained neutral.

No symbols traded on the major exchanges or over the counter survived my initial screening.

The next round of earnings begins on Oct. 8, coming within the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement. This means that increasing numbers of symbols will be removed from my prospective trades list during initial screening.

I shall do further analysis on Monday, Sept. 30.

In the absence of symbols that survived my initial screening, I shall take a look on Monday at the most liquid also-rans. I'm searching for bear plays only at this point. (See my post "Rolling away from risk".) The  most liquid bear symbols that failed screening are CSCO, NKTR and MRVL.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...
  • even or greater odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
  • a yield adjusted by those odds of 5% or greater,
  • and absence of an earnings announcement within the next 30 days. 
For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Friday, September 27, 2013

Rolling away from risk

When I was a young trader, one Friday morning I looked at the markets and was troubled by what I saw. The Dow had been sluggish for a few months, had staged an anemic recovery and then started to slide a bit.

Back in those days I traded only a few stocks, in the form of shares, and on occasion traded my 401(k) out of and back into a mutual fund that tracked the S&P 500.

I had no trading plan, no system. I looked at the market action once or twice a week and if my holdings were going down, I considered getting out, and if not, then I stayed put.

It wasn't very active management. If I traded twice in a month, that was an occasion for celebration, because my strategy back then was pretty much buy and hold.

And even when ready to trade, I tended to go slow. A doubt might require a week before it became a decision. It took time to convince myself that the decision was really right.

And so it was on that Friday. I had my doubts, and made a note to keep a closer eye on things the next week with the thought of maybe getting out of the market for awhile.

I had a good weekend -- October in Washington, D.C. is a beautiful time of year.

The year in this case was 1987, and when I checked the market news on Monday, I found that the Dow Jones Industrial Average was falling at a rate faster than I had ever seen before. It closed the day -- Oct. 19, 1987 -- down 22.6%.

I learned several lessons from that day. One was the importance of acting on decisions without dawdling. Another was the importance of actively managing my positions.

A third lesson, perhaps the most important, was the need to get out of the way of major risk, even if doing so might mean lost opportunities for profit.

Good lessons all, although the tuition was a bit expensive.

Fast forward to October 2013, which begins next Tuesday. The markets started turning soft in mid-September. The Dow is down 3% from its most recent peak, not awful but not confidence inspiring.

Bigger picture: After rising steadily from November 2012, the market from last May began a series of swings. The highs were higher and the lows were higher, and the swings from high to low were enough to bounce a trader's heart up into his or her throat.

S&P 500 ETF (SPY) 2 years 2-day bars

More troubling, the Republican Right in the U.S. House has been threatening to allow the government to run out of borrowing authority on Oct. 17 unless the Obama administration makes major concessions on policy, concessions that the executive surely won't be willing to make. I mean, the GOP's ask would leave President Obama's record from 2009 onward essentially meaningless.

If the debt ceiling isn't raised and if as a consequence the U.S. is seen as potentially defaulting on its debts, I certainly believe that those events have the likelihood of causing a panic in the markets, as people and institutions and nations sell their T-bonds, T-notes and T-bills and go straight to cash. That in turn would cause a crash in the capital value of U.S. government bonds and a dramatic rise in interest rates that would endanger our still shaky economic recovery.

Reading that graf, it sounds a lot like the zombie apocalypse. But many times in the past decades we have seen countries go from prosperity one week to beggardom at the doors of the International Monetary Fund the next.

Scarier still, the more moderate Republican leadership of the House seems to have little control over their right flank, and the Democratic Left is also muttering about getting budget concessions to their own liking before supporting a bill to raise the debt ceiling.

All in all, it has the potential for major disorder in the markets, and I would prefer not to ride out that sort of storm a second time.

I have closed all of my bull positions and some of my sideways plays where the price is close to the lower boundary of the zone of profitability.

It's not a permanent closure. I'm treating it as a maneuver called a roll that I execute each month in order to keep option positions alive after they expire. For example, I rolled my September positions over to October options a week before the September options expired.

In the normal course of things I would be doing the roll on Oct. 11, the Friday before the last week the October options can be traded. So my early roll is less dramatic than it might sound; I'm only coming forward by two weeks.

The difference between this roll and my normal practice is in the way I handle my shares of stock. They don't expire and so aren't normally rolled. In this case, however, I've closed the share positions and will re-open them once the debt-ceiling question has been resolved.

Under my roll procedure, I'll re-enter, post crisis, when the stock has again pierced its 20-day price channel. And since I don't consider a roll to be the end of a position, I don't calculate profit or loss at the time of the roll, reserving that exercise for when I decide to roll no further. Generally, I close a rolling position for good when it gives a close signal by crossing beyond its 10-day price channel in a direction opposite that of the trade.

In an earlier post today, I quoted the words Shakespeare put on the lips of Julius Caesar, "Cowards die many times before their deaths; The valiant never taste of death but once," and then followed with the observation, "What's good for Caesar, however, is not necessarily good for traders. The trader, like the cat and the coward, wants to have many lives so that he or she can come back to trade again."

I'll end with another quote from Shakespeare, this time speaking through the persona of Falstaff in Henry The Fourth"The better part of valor is discretion". 

And it is the virtue of Falstaff's discretion rather than Caesar's valor that I choose to exercise today.

Or, in the words of the poet, "Go to cash and run away, live to trade another day".

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Friday: No trade (with comment from Dune and Caesar)

Nine symbols survived my initial screening last night: GNW, DISCA, EGOV, BWP, PSB, IRC, NJ and ROVI with bull signals, and RVBD with a bear signal. (See "Friday's Prospects".)

Having looked at them further this morning, I can't find a one that merits further analysis.

My bias at this point is toward bear trades. My holdings are over-balanced to the bull side, and in looking at charts I'm finding many bull signals that are coming as upside corrections within larger-scale downside movements.

The markets movements are fractal, with smaller trends tracing their courses within larger trends. Or as the great Frank Herbert put it in his Dune series:
"Wait a bit, Tyek," Farad'n said. "There are wheels within wheels here." --Children of Dune
The wheels within wheels of the markets these days to my eye are pointing to the downside, even when they signal to the upside.

All the symbols confirmed their signals by continuing to trade beyond their 20-day price channels.

I rejected DISCA, BWP, PSB and ROVI because their bull signals were at odds with bearish ratings from Zacks. My best-case scenario is for Zacks and my trade direction to be aligned.

The bear signal, from RVBD, came in a chart that is clearly in an upward correction. Bull signals from GNW, EGOV and NJ are within downward corrections.

The IRC chart -- well, I couldn't make sense of it, so I tossed it off the island, sans pitiĆ© . I really do loathe a chart I can't understand.

I also took a look at HTZ, a very liquid stock that gave a bear signal but failed initial screening because its odds of success were below my threshold. But I read the chart as being a bear signal within an uptrend, and one that broke a rule of Elliott wave analysis. So I'm uncertain how to interpret it and so shall give it wide berth.

In truth, with the possibility, however remote, that the House Republicans will force the United States into defaulting on its debt, it's not really a great time to be opening new positions. My greater concern is to get the timing right as I flee my existing option spreads that expire Oct. 19 early enough to avoid damage from a political train wreck. The government runs out of borrowing capacity on Oct. 17 unless Congress acts.

Shakespeare, in praise of courage, has Julius Caesar say, 
Cowards die many times before their deaths; The valiant never taste of death but once.
What's good for Caesar, however, is not necessarily good for traders. The trader, like the cat and the coward, wants to have many lives so that he or she can come back to trade again. The valiant trade but once, then irrevocably die, never to trade again. Where's the profit in that?


References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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

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.

JCP update

JCP has made an announcement that moves its chart out of the realm of trader speculation into the realm of news. I'm removing the symbol from my Watchlist and have updated my analysis with details of the decision.

Thursday, September 26, 2013

Friday's Prospects

On Thursday, Sept. 26:

Of 2,382 stocks and exchange-traded funds in this week's analytical universe, 29 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 16 to the upside and 13 to the downside.

Five symbols traded over the counter broke out, three to the upside and two to the downside.

Within my analytical universe, 1.4% of symbols gave bull or bear signals, compared to 0.9% the prior trading day.

The ratio of bull to bear signals was 1.3:1, down from 2.5:1 the prior trading day, as the markets returned to neutrality.

Nine symbols traded on the major exchanges survived my initial screening. Eight broke out to the upside: BWP, DISCA, EGOV, GNW, IRC, NJ, PSB and ROVI. One broke out to the downside: RVBD.

No symbols traded over the counter survived initial screening.

The next round of earnings begins on Oct. 8, coming within the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement. This means that increasing numbers of symbols will be removed from my prospective trades list during initial screening.

I shall do further analysis on Friday, Sept. 27.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...
  • even or greater odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
  • a yield adjusted by those odds of 5% or greater,
  • and absence of an earnings announcement within the next 30 days. 
For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Thursday's Outcomes

PNK fell below its 10-day price channel and I closed the bull position for a profit. I've updated my analysis with details.

I analyzed one symbol today but decided against trading. See "CSE: Banking bull signal".

CSE: Banking bull signal

Not all breakouts are created equal.

CapitalSource Inc. (CSE) broke above its 20-day price channel on Wednesday, sending a bull signal according to the Turtle Trading method that forms the basis of my rules.

Turtles who follow the pure doctrine would jump in upon the signal, a price broke above $11.88.

That break, however, leaves the price below the near-term swing high of $12.36 on Aug. 1. Arguably, the true breakout on the chart, rather than according to doctrine, lay 48 cents away when the Turtle breakout occurred.

The discussion pits Turtles against a legendary trader called Joe Ross, who put great store on breakouts based on chart pricing rather than arbitrary rules. Joe would ask, What's special about the 20-day high? Why not 19? Or 23?

Joe's method lets the price peaks define the breakout level. While the Turtles survey the field broadly from the air, Joe is always always down in the brush, boots on the ground, seeing what the field looks like up close.

I did a little study in 2011 that pitted Turtle Trading against Ross' method. You can read it at "Smackdown: Joe Ross vs. the Turtles". In it, I summarize the Ross method as "Turtle trading plus wait-a-sec", and any who read my trading rules, with their deliberate slowing of the process, will see his influence.
CSE 3 years 2-day bars


The $12.36 peak on the CSE chart takes on great significance in my analysis because I see it as the end of an uptrend that began from $5.96 on June 5, 2012. That's a major move, and if my analysis is accepted as correct, it would be unusual to say the least for the price to again top the $12.36 level.

The uptrend, according to the Elliott wave count, has completed five waves, three up separated by two down. 

The correction that has just begun is of the same magnitude as the rise of the past 15 months. Typically, it would correct down by one of these distances:
  • 38.2%, to $9.92
  • 50%, to $9.16
  • 61.8%, to $8.40
Those aren't guaranteed levels, only of higher probability. A correction would stop short of $5.96, but it could end up anywhere above that but below the $12.36 peak.

There is no also no guarantee that the time span of a correction will be similar to that of the trend being corrected. A correction can happen quickly, or it can dawdle. 

CSE was one of four symbols that survived my initial screening last night, all having broken out to the upside. All confirmed their breakouts by continuing to trade beyond their 20-day price channels.

One, ZONMY, is too illiquid for my preferences.

CSE has the highest average volume of the three remaining picks, and it is also the only one to score a bullish ranking from Zacks.

RGA received a bearish ranking from Zacks, and I prefer that my trades and Zacks, where possible, be aligned.

The remaining symbol, PKY, looks fine at first glance, but based on the higher liquidity, I decided to give a more detailed look at CSE.

CapitalSource, headquartered in Los Angeles, California, provides commercial loans to small and medium-sized businesses in the United States, focusing on the healthcare sector.

It also provides financial services to consumers in California through its CapitalSource Bank subsidiary. It's a small bank, with only 21 branches.

CapitalSource is followed by only a handful of analysts, who collectively come down with a negative 43% enthusiasm index. 

The company reports 8% return on equity with debt amounting to 70% of equity. 

The record of the last 11 quarters shows that the company was profitable in 10. The loser was the 3rd quarter of 2011. Earnings have held steady quarter by quarter with the exception of the 2nd quarter of 2012 when they soared to many multiples of the earnings average. I assume a one-time event was the cause.

CapitalSource has surprised to the upside six times and to the downside five, most recently in the 1st quarter of 2013.

Institutions own 84% of shares and the price has been bid up to speculative levels; it takes $5.47 in shares to control a dollar in sales.

CSE on average trades 2.8 million shares a day and supports a moderate selection of option strike prices spaced a dollar apart with open interest in the two- and three-figure range. Front-month at-the-money calls have a bid/ask spread of 2.3%.

The options are just a bit too illiquid for me to trade; I would be hard pressed to construct a workable vertical spread. So if I open a position in CSE it will be structured as shares.

Implied volatility stands at 16%, near the floor of the six-month range. It has been fluctuating wildly since mid-August, with its most recent big move to the downside.

Options are pricing in confidence that 68.2% of trades will fall between $11.40 and $12.50 over the next month, for a potential gain or loss of 4.6%, and between $11.69 and $12.21 over the next week.

Call options today are trading at only 11% of their five-day average volume; puts are more active at 93% of average.

CapitalSource next publishes earnings on Oct. 28. The stock goes ex-dividend in December for a quarterly payout yielding 0.33% annualized at today's prices.

Decision for my account: Given the bearish nature of the chart, I don't see CSE as a decent bull play. I don't expect it to rise above the wave 5 peak of $12.36, which limits my reward to 3.4%. And in the best case among the most probable outcomes, the downside risk is down to $9.92, a decline of 38.2%.

A 1:11 reward risk ratio is just not something I'm willing to take on.

So I won't be trading CSE. If it breaks to the downside -- the lower boundary of the 20-day price channel is at $11.37 today -- then I would consider a bear play.

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.

Wednesday, September 25, 2013

Thursday's Prospects

On Wednesday, Sept. 25:

Of 2,382 stocks and exchange-traded funds in this week's analytical universe, 16 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 11 to the upside and five to the downside.

Five symbols traded over the counter broke out, four to the upside and one to the downside.

Within my analytical universe, 0.9% of symbols gave bull or bear signals, compared to 1.3% the prior trading day.

The ratio of bull to bear signals was 2.5:1, up from 1.5:1 the prior trading day, as the markets returned to a bullish bias.

Three symbols traded on the major exchanges survived my initial screening, all having broken out to the upside. They are CSE, PKY and RGA.

One symbol traded over the counter survived initial screening, ZONMY, having broken out to the upside.

The next round of earnings begins on Oct. 8, coming within the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement. This means that increasing numbers of symbols will be removed from my prospective trades list during initial screening.

I shall do further analysis on Thursday, Sept. 26.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...
  • even or greater odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
  • a yield adjusted by those odds of 5% or greater,
  • and absence of an earnings announcement within the next 30 days. 
For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Wednesday's Outcomes

My analysis of JCP was skeptical over chances the downside momentum would continue and my doubts proved to have been justified. See my update to this morning's analysis, "JCP: Retail bear play". Plus, I've added a third chart to illustrate the resistance (or lack of) with half an hour to go before the closing bell.


JCP: Retail bear play

Update 9/27/2013: Penney announced it is pricing its public offering of 84 million shares at $9.65 per share. This moves JCP's chart out of the realm of speculation to reaction to news. The News Exclusions provision of my trading rules says,
Symbols that break out the day of or immediately following a major news announcement may optionally be excluded from trading on those grounds. The decision to trade or not will be based on a judgement of the degree to which continued price movement is likely, a highly subjective call.
In this case, my "highly subjective call" is to remove JCP from my Watchlist. I won't be making a trade based on the bear signal of Sept. 24.


Update 9/25/2013: To the right is a chart of JCP as it stood 30 minutes before the open bell. The price is in deep pit territory; it's the lowest it has been for the past 20 years.
JCP 9/25/2013 5-minute bars

I find no way to define a resistance point, a price that, if pierced, marks the end of resistance, beyond today's low of $9.93. JCP is on the way down, and at the micro level -- a chart with 5-minute bars, it is in a third wave down, which tends to be the most powerful portion of a decline.

So, as the best port in this particular storm, I'll revisit the trade if JCP falls below $9.93.


J.C. Penney Co. Inc. (JCP) is a case too far too fast. After breaking below its 20-day price channel on Tuesday, it fell 14.8% today in the first 65 minutes of trading. Atypically for liquid stocks, the rapid decline happened entirely after the opening bell rather than in the pre-market trading.

JCP has been in a downtrend since from its $43.18 peak on Feb. 9, 2012. The trend is taking the Elliott wave form of a five-wave decline, the first, third and fifth waves propelling the price downward, interspersed by second- and fourth-wave corrections to the upside.
JCP 3 years 2-day bars

That's a long fall over the longer term, and a sharp fall over the very near term.

Happily for rational traders, there is a way to estimate how much more downside potential JCP has. Unhappily, the answer is so shocking as to be useless.

Elliott wave doctrine says that the third wave in a five-wave decline can never be the shortest.

In the downtrend from February 2012, wave 1 ws $24.12 long and wave 3 was $19 long. The imposes on wave 5 the duty of being less than $19 in length. Otherwise, the count is wrong and must be reconsidered.

The problem is, the JCP wave count is quite clear and I don't see a viable alternate count. Could be wrong, but I don't see it.

So far wave 5 has covered $9.70. It will reach $19 in length if it falls an additional $9.30.

The shocking part is that a fall of that magnitude would bring JCP down into penny stock range, at 62 cents per share.

It seems unlikely that the company will reach such dire straights, despite its present problems, so arguably wave 5 is within $9 of its end. That's still a huge percentage drop, but there are no guarantees that it will fall that far. It is equally likely to have come to an end today.

The end of wave 5 will bring an upside correction of the fall from $43.18 to $9.93. Typical corrections are:
  • 38.2%, to $22.63
  • 50%, to $26.56
  • 61.8%, to $30.48
No guarantees, obviously, in the world of the markets. But retracements to those levels are a common occurrence. 

The internal count of wave 5, however, gives no such assurance. Wave i is shorter than wave 3, so wave v can be of any length without breaking the count.

This is JCP's ninth bear signal since the downtrend began in February 2012. Five of the completed signals were profitable, on average yielding 11% over 35 days. The unsuccessful trades lost 10% on average over 13 days. The win/lose yield spread is quite narrow, at 1%.

There have been two completed bull signals since wave 5 began on May 24, 2013. One was successful, for a 2.6% profit over 25 days, and one was unsuccessful, losing 8.6% over 14 days. This makes for a negative 6% win/lose yield spread, which is quite awful.

JCP was the sole survivor of last night's initial screening. (See "Wednesday's Prospects".)

The retailer, headquartered in Plano, Texas, needs no introduction. It was founded in 1902 and has been a household name for a long time as a place for goods priced for regular folk. (Its name back in the day was sometimes pronounced with a faux French accent to give it some class: J.C. Pen-NAY.)

The forces that have put many sectors of the economy under pressure have not spared retail. The Internet has made a far greater selection of goods available to people for prices that match or improve on Penney's. Globalization in manufacturing has helped spur the rise of mega-competitors such as Wal-Mart. Infighting in the Penney executive suite this year has made the markets uneasy.

So it is no wonder that analysts are somewhat less than enthusiastic about Penney, giving it collectively a negative 44% enthusiasm rating. Remember that I'm considering a bear play, so negative is good.

And a good thing that is. Return on equity is a negative 47%, and debt is quite high at more than double equity.

Penney last earned a profit in the 4th quarter of 2011. In the six quarters that followed, it has seen, with one exception, increasingly greater losses. The exception was the 1st quarter of this year, when the company managed to trim losses while still losing money, but the decline resumed in the 2nd quarter, with a fall below the level reported in the 4th quarter of 2012.

Earnings have seen downside surprises in each of the six unprofitable quarters.

Institutions own 86% of shares. If I were an institutional manager facing the need to justify my stewardship, I would be fairly eager to get JCP off of my holdings list. If that is indeed the way institutional managers feel, they will maintain downward pressure on prices.

The price is cheap. It takes only 22 cents in shares to control a dollar in sales.

JCP on average trades 19 million shares a day and supports a moderate selection of options strike prices spaced a dollar apart, with open interest in the four- and five-figure range at strikes that I would use to construct a position. The grid also has weekly options.

Implied volatility stands at 109%, near the top of the six-month range. It shot up from the bottom of the range, around 48%, beginning Sept. 13.

Options are pricing in confidence that 68.25 of trades will fall between $7.09 and $13.57 over the next month, for a potential gain or loss of 31.4%, and from $8.77 to $11.89 over the next week.

Trading volume is running at 39% above the five-day average for calls, and 15% below average for puts.

J.C. Penney next publishes earnings on Nov. 19.

Decision for my account: Reason tells me that a decline of such magnitude over the span of an hour must be followed by profit taking and a retracement to the upside. And that is in fact what has happened, to a small extent, with 3-1/2 hours to go before the closing bell.
JCP 30 days 1-hour bars

The chart for the short term shows that in the internal count of wave v, the huge decline is a wave (3). If today's low so far, $9.93, is in fact the end of wave (3), then the next move up would be a wave (4) correction to the upside, that in turn would be followed by a slide to below $9.93.

The common retracement levels under such a scenario would be:
  • 38.2%, to $11.32
  • 50%, to $11.75
  • 61.8%, to 12.17
The least of these retracements amounts to a 14% upside move.

(I'm using three levels of waves here: the top level is wave 5, with wave 5 as the next smallest and wave (3) as the smallest in this discussion.)

I'll track JCP during the last hour of trading to see what happens to momentum, and update this posting with my observations, but given the very near term state of the chart, I'm not willing to commit to a trade at this point, even if downside momentum resumes.

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.

USO update

I've added an update to USO with some thoughts on how to define a resumption of downside momentum. It can be read here.

Tuesday, September 24, 2013

Wednesday's Prospects

On Tuesday, Sept. 24:

Of 2,382 stocks and exchange-traded funds in this week's analytical universe, 30 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 18 to the upside and 12 to the downside.

Two symbols traded over the counter broke out, one in either direction.

Within my analytical universe, 1.3% of symbols gave bull or bear signals, compared to 1.4% the prior trading day.

The ratio of bull to bear signals was 1.5:1, down from 2:1 the prior trading day, as the markets returned to neutrality.

One symbol traded on the major exchanges survived my initial screening, JCP, which broke out to the downside.

No symbols traded over the counter survived initial screening.

The next round of earnings begins on Oct. 8, coming within the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement. This means that increasing numbers of symbols will be removed from my prospective trades list during initial screening.

I shall do further analysis on Wednesday, Sept. 25.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...
  • even or greater odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
  • a yield adjusted by those odds of 5% or greater,
  • and absence of an earnings announcement within the next 30 days. 
For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday's Outcomes

USO failed to maintain momentum and I've decided against opening a bear position today. I've added USO to my Watchlist. See my analysis from earlier today: "USO: Crude bear play".

DIS fell below its stop/loss level and I've closed the position for a loss. See "DIS: Magic Kingdom bull play" for details.

I've removed XLF from my Watchlist after it fell below its 10-day price channel. After analyzing the fund on Sept. 17, I decided it needed to break above $20.93 before I opened a bull position. Instead, it headed south. See "XLF: A tale of the three charts".

USO: Crude bear play

Update 10/11/2013: USO for a second time bounced off the lower boundary of its 20-day price channel amid a sideways run fluctuating between $36.41 and $37.54 during regular trading hours. It dipped as low as $36.30 in pre-market trading but quickly retreated to the upside.

For the reasons outlined in my post "Time-limited trades", I'm declaring USO to be a slacker lacking momentum and have closed my position.

The net movement in USO's share price over the 10 days I held the position was half a percent, or 2% annualized. My bear call options spread produced a 1.5% yield on risk, or 52.9% annualized.

Basically, it was a wash.

Update 10/1/2013: USO dipped below its resistance, $36.85, in pre-opening trading and remained there throughout the day.

In the last half hour of trading, USO's price ranged from $36.65 to $37.73. Although that range is above the initial price at the opening bell, $36.61, it is below the pre-market open of $36.80 at 8:15 a.m. New York time, and I am treating today's close as sufficient momentum to support a trade.

I opened a bear position in USO at $36.72, structuring it as a bear call options spread expiring in November, short the $37.50 calls and long the $38.50 calls. 

The position has a maximum potential yield of 44.9%. Leverage is 7:1. The position has a 3.2% hedge of profitability above the entry price on the underlying stock.

Update 9/30/2013: USO gapped below the $36.85 downside resistance level before the opening bell but then rose steadily to peak in the third half hour before the close. From that point in declined, but in the last 20 minutes of trading touched the resistance level and treated it as support. That resets the question to where it was on Sept. 25: A break below $36.85 with downside momentum intra-day is a chart I can trade; otherwise, no.

Update 9/25/2013: I've taken a closer look this morning at USO's downside resistance. Tuesday's low, set in the second half hour of trading, was $36.85. 

The peak of trading on Aug. 8 following an downside opening gap was $36.86, and that day's trading was followed immediately by an upside opening gap. The peak of trading on July 9 was $36.80, and it was followed the next day by an opening gap to the upside.

So $36.85 to $36.86 is a very significant level, and a break below would signify that downside momentum had indeed resumed.

USO opened today at $37.29. I'm setting an alert at $36.86. Any move below that level will tell me to resume close monitoring of USO with an eye to opening a bear position in the last half hour of Wednesday's trading.

Update 9/24/2013: USO in the last two hours of trading rose significantly, from $37.05 to a peak of $37.30, and it  stayed trading sideways just below that peak as the closing bell approached. 

Of greatest importance for the application of my trading rules, the rise pushed USO back to the lower boundary of the 20-day price channel, $37.27, and also produced an intraday rise of 1.2%, low to high. That's insufficient downside momentum to support opening a bear position.

I'll add USO to my Watchlist and if downside momentum recovers and produces a fresh break below the 20-day price channel, I'll reconsider the trade. USO is a fund and so there are no complications from earnings announcements to worry about.



Despite the perpetually entertaining headlines about crude oil's rise and fall, the fact is that the price of oil has pretty much gone nowhere since the summer of 2009. The entirety of the commodity's movements since then can be contained within a box from $29 to $44 plus change.

For a trader, oil is a play for the short term. Given some leverage, there is money to be made from its fluctuations, and many major moves, of the sort that make or break fortunes, have happened within the span of a month or a week.

Sideways markets are a profit killer for the unwary trader who attempts to play their fluctuations as directional trends. As soon as the signal is given and the trader hops aboard, like as not the price will reverse, leaving the position with a loss.

Crude oil is tracked by the exchanged-traded USO, the United States Oil Fund LP, whose portfolio consists almost entirely of crude oil futures contracts.

The fund's price dropped below its 20-day price channel on Monday and continued lower today, confirming the bear signal under the Turtle Trading system.

A trader who follows the strict Turtle rules will open a position on the basis of that signal alone. For me, the chart is where the final trading decision must be made, and an interesting chart it is.
USO 5 years 4-day bar

USO, tracking the price of crude, has been executing a descending triangle since May 2011. On June 10 this year the price broke above the upper boundary of the triangle, where it remains today.

Monday's bear signal is a move back toward the upper boundary, which today stands just below $36.50, about 60 cents or so below the present price.

One other fact about the pattern is its size. It is a very big triangle whose apex lies somewhere in the misty distance of March 2016.

What to make of this?

A descending triangle is a bearish continuation pattern, meaning that when the apex is reached, then USO will resume its downward trend that began in 2008 as the Great Recession kicked in.

However, the distance from now to the apex is so great that it is essentially meaningless. The triangle's only value, for my trading, is to provide a framework to constrain the price and guide analysis of its likely future reversals.

When the price breaks beyond a triangle boundary at a time when the apex is still distant, it tends to return to the triangle, and that is what appears to be happening now.

USO's chart shows a tendency for declines from the upper chart boundary to go all the way to the lower boundary, as has happened twice since the triangle began.

If that is indeed what is occurring, then USO has the potential of declining to $29 in the present move, a bearish move of 22% from the current price on the shares, without leverage.

And leverage there is.

USO on average trades 2.1 million shares a day and supports an extremely wide selection of option strike prices at 50 cent intervals and with open interest in the four and five figures. The front-month at-the-money bid/ask spread on puts is 1.9%, which is quite narrow.

Implied volatility stands at 23%, slightly below the midpoint of the six-month range. It has been falling since late August, although it has recovered slightly in an upward move beginning a few days ago.

Options are pricing in confidence that 68.2% of trades will fall between $34.63 and $39.49 over the next month, for a potential gain or loss of 6.5%, and between $35.89 and $38.23 over the next week.

Two symbols survived my initial screening last night. USO was not among them.

Although both survivors, MCP and BELLY, confirmed their bull signals, further analysis today kicked them both off the prospects list. MCP's future is rated bearish by Zacks, and I generally prefer for Zacks and the direction of my trades to be aligned. BELLY has very low volume and is too illiquid for my purposes.

Besides, my holdings are overloaded on bull positions. I need some bear plays for balance. So I looked at high volume bear signals that had not survived last night's screening, and USO was near the top of the list.

It failed to pass initial screening because of low historical odds of a profitable bear trade since the markets began their present trend in 2011. It worked out to one chance of a profit for every four bear signals.

My initial screening, of course, is one size fits all, as it must be in dealing with more than 2,000 symbols. It is in the second and third phases, today, that I took a closer look.

The low odds are exactly what I would expect from a sideways pattern, such as USO's triangle. Trends in triangles are stillborn, as are their profits.

Having broken my rules to take a deeper look at USO, I now as a trader must face the decision: Is this a trade I should take?

Best case, USO descends back into the triangle and continues its merry way down to $29. Big profits and champagne.

Worst case, it stays above the boundary and again challenges its breakout high of $39.54. A loss, followed by soul searching.

Catastrophic case, of course, something really bad happens in the Middle East and the price of crude triples or quintuples, in which case I'm very, very happy that I structured the trade as a hedged options spread, limiting my potential loss.

Putting it another way, and ignoring the catastrophic, it is a choice between a potential reward on the stock movement of 22% vs. the risk of a 7% loss.

Decision for my account: The reward/risk ratio works out to be around 7:1. Those are great odds. The chart provides a reasonable expectation for further movement to the downside.

If USO continues to show downside momentum in the very short term within the last half hour of trading, I intend to open a bear position, structured as a bear call options spread expiring in October. 

I'll update this posting near the close with my final decision.

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.

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.

Monday, September 23, 2013

Tuesday's Prospects

On Monday, Sept. 23:

Of 2,382 stocks and exchange-traded funds in this week's analytical universe, 31 that are traded on the major American stock exchanges broke beyond their 20-day price channels, 21 to the upside and 10 to the downside.

Two symbols traded over the counter broke out, one in either direction.

Within my analytical universe, 1.4% of symbols gave bull or bear signals, compared to 1.5% the prior trading day.

The ratio of bull to bear signals was 2:1, on the bullish edge of neutrality, down from 2.9:1 the prior trading day.

One symbol traded on the major exchanges survived my initial screening, MCP, which broke out to the upside.

One symbol traded over the counter survived initial screening, BELLY, which also broke out to the upside.

The next round of earnings begins on Oct. 8, coming within the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement. This means that increasing numbers of symbols will be removed from my prospective trades list during initial screening.

I shall do further analysis on Tuesday, Sept. 24.

The symbols I'm analyzing are mid- and large-cap stocks having analyst coverage, as well as selected exchange-traded funds. I screened them for...
  • even or greater odds of a successful trades in the direction of the breakout since the present uptrend began on the S&P 500 weekly chart, on Oct. 4, 2011,
  • a yield adjusted by those odds of 5% or greater,
  • and absence of an earnings announcement within the next 30 days. 
For bear signals, I also screened to ensure the ability to do a trade, either because of the presence of options whatever their open interest or sufficient volume to allow for the short sale of shares.

My cut-off point for bullish bias is a ratio of bull to bear signals of 2:1 or greater, and for bearish bias, 1:2 or smaller, rounded to the nearest whole number.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Monday's Outcomes

LNKD fell below the lower boundary of its 10-day price channel, triggering the closure of my bull position for a loss. I've updated my initial analysis with details and results.

I analyzed ANGI, one of the two survivors from my analysis of Friday's breakouts, and found it to be wanting. Read the analysis here.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

ANGI: Social media bull signal

Angie's List Inc. (ANGI) has been flirting with non-confirmation repeatedly the first 90 minutes in trading. I'm doing the analysis with the understanding that the day may well end with ANGI back within its price channel and so ineligible for a trade.

ANGI opened at $18 upon its initial public offering on Nov. 17, 2011, and as so often happens with IPOs, immediately plummeted. It moved briefly above that level the following March and April, but then resumed its downward course to a low of $8.94 on September 6, 2012, 10 months after going public.

The rise from that point marked the beginning of a well formed Elliott wave uptrend that peaked last July 18 at $28.32. I count that as the end of wave 3, and see ANGI as either having just completed, or still being mired in, a wave 4 correction.

The argument for wave 4 having been completed can best be seen on the 90-day chart. The decline is a clear a-b-c zig-zag, followed by two completed lower level movements, wave i to the upside and wave ii as a sideways correction, and then wave iii up.

If that count is indeed valid, then wave iii will be followed by a wave iv correction down and then a final push with wave v above $28.22, the greater magnitude wave 3 peak. The greater magnitude waves encompass a time frame measured in months.

The alternative count sees the present rise as being merely a peak connecting two corrective patterns. It isn't unusual for zig-zag corrections to be twins, or even triplets. A reversal from around the wave b peak, $25.42, would make the alternate count my preferred.

A word on the alternation of corrective patterns. The greater magnitude wave 2 correction was a sideways triangle, suggesting that the wave 4 correction will be a simple zig-zag.

Likewise, if my preferred count of wave 5 being underway is indeed correct, then wave ii over the lower magnitude uptrend is a sideways correction, suggesting that wave iv will be a simple zig-zag that will carry the price significantly lower in a correction.
ANGI 2 years 2-day bars (left), 90 days 2-hour bars (right)
The bottom line conclusion that I reach from the Elliott wave analysis is that ANGI's upside breakout may be merely a fluctuation within a downside correction, or it could well be the start of a new uptrend that will conclude the rise from 2012. It's ambiguous, as charts often are.

This is ANGI's fourth bull signal since wave 3 began on Oct. 24, 2012. Two of the completed signals were profitable, for an average yield of 42% over 68 days. The unsuccessful trade lost 12.6% over 10 days.

The resulting win/lose ratio is 29.4%, which is not at all shabby.

The downside since wave 4 began, on July 18 of this year, has been a far weaker move. It has completed one bear signal, with resulted in a 2.9% loss over 21 days.

ANGI was one of two symbols that survived initial screening over the weekend. The other, FFIV, moved sharply back within its 20-day price channel and so failed confirmation.

Angie's List (not to be confused with the political action committee Emily's List) allows users to rate and review businesses in their area and to share those reviews with others.

The company, headquartered in Indianapolis, Indiana, describes its goal as providing a way to "capture word-of-mouth wisdom" from its 1.5 million subscribers, who pay a small monthly fee -- under $10 in the areas I checked -- for access to the information.

So Angie is sort of a pay-to-play LinkedIn for consumers of local goods and services.

Social media is cool, and hot in the public consciousness these days. Well all love social media, and analysts following Angie are no exception; they collectively give the company a 25% enthusiasm rating.

But then, there's the little matter of profits. Not be crass, but in Angie's case, there are none, except for a few cents per share the last quarter of 2012. Otherwise, it has been double-digit losses in the other six quarters on record.

Even with that record, Angie has managed four upside surprises, countered by two to the downside.

No profits of course means no return on equity. It actually works out to a negative return of more than 1,000%. The company is carrying $14.9 million in long-term debt.

At this point, I've lost interest in Angie. I don't do bull plays on unprofitable companies. But having come this far, let's push through to the end of the analysis.

ANGI on average trades 1.1 million shares a day and supports a moderate selection of option strike prices spaced $2.50 apart with open interest in the three-figure range where it counts for my purposes.

The front-month at-the-money bid/ask spread on calls is 9.5%, which is on the high side.

Implied volatility stands at 65%, quite a high level but it is at the midpoint of the six-month range. Volatility has been pushing higher since Sept. 16.

Options are pricing in confidence that 68.2% of trades will fall between $18.15 and $26.59 over the next month, for a potential gain or loss of 18.9%, and between $20.34 and $24.40 over the next week.

Trading in contracts is quite active with about 4-1/2 hours to go before the closing bell. Calls are running at 170% above their five-day average volume, and puts at 108% above average.

ANGI next publishes earnings on Oct. 28.

Decision for my account: The financials are a deal killer for me. I won't be opening a bull position in ANGI based on this breakout because it is unprofitable. A breakout to the downside might be an interesting play (although the odds of success so far are not good). 

Even if ANGI were profitable, the ambiguities in the chart would give me pause. Before trading, I would want to see what happens as the current very near term uptrend approaches $25.42, the peak of wave b.

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.