Tim Bovee, Private Trader: MTRX: Room to rise

Update 6/30/2014: MTRX has continued to decline, closing below the 10-day price channel on June 27, a Friday, and confirming the exit signal the next trading day. I've removed MTRX from the Roll Shelf and calculated the results.

The position was structured as long shares. The stock's price fell 1.6% over the eight days I held a position, or 73.9% annualized.

Update 6/19/2014: The momentum that led me to open a bull position on June 11 quickly faltered. MTRX closed below its stop/loss point on June 18, with confirmation, and I've closed my position for a small loss.

The price remains within the 10-day price channel, so MTRX goes on the Roll List for re-entry if and when the price moves above the 20-day price channel. As always, I'll defer calculating profit or loss until the roll series is complete.

By the chart, I cannot say that MTRX has completed its uptrend. The $38.71 high of June 17 appears to me to be the end of wave 3 {-1} within 5 of the base degree, suggesting that there's is further room to the upside.

If that's the case, then my rules will get me back in. If not, then I've been protected from a decline.

Click on chart to enlarge.

MTRX 6 months daily bars

Update 6/11/2014: ~~MTRX failed to show upward momentum in the half hour before the closing bell and I've moved it to the Watchlist.~~

I posted too soon. MTRX showed late momentum and I've bought long shares.

Matrix Service Co. (MTRX), in giving a bull signal on Tuesday, demonstrated that there is still life in the uptrend that has multiplied its price several times over in the last few years.

Naysayers, when confronted by such a chart, tend to shake their heads slowly and mutter darkly, "Too far, too fast". However, a deeper analysis shows that MTRX has room to rise.

The Chart

MTRX is tracing out the middle wave -- the 3rd -- across three degrees of magnitude, with the smallest degree in the final leg of its uptrend.

Elliott wave analysis shows that MTRX has quite of bit of upside left in its rise from $10.05 that began in November 2012. That trend has multiplied the price more than 2-1/2 times over several years.

Click on chart to enlarge.

MTRX 20 years monthly bars (left), 3 years 4 months 3-day bars (right)

I've labeled the wave up that began in 2009 as wave 3 {+1}. It is embedded within two more third waves of higher degree, 3 {+2} and 3 {+3}, the latter having be in September 2010.

All are part up wave 5 {+4}, the final leg in an uptrend that began in 2009, at the point of the Great Recession low.

For a shorter-term trade, the key is the present wave 5 in the base degree, which began May 8 from $28.11. There's no way to estimate how far up it will carry. MTRX shows a tendency toward extended waves, and while not a guarantee of a long life for wave 5, it may indicate a likelihood.

Options are pricing in confidence that 68.2% of trades will fall between $31.65 and $39.41 over the next month, for a potential gain or loss of 10.9%, and between $33.67 and $37.39 over the next week. I've marked the monthly range on the right-hand chart in blue.

Odds and Yields

MTRX has completed six bull signals since wave 3 {+1} began in 2012. Four were successful, on average yielding 16.8% over 50 days. Two were unsuccessful, losing on average 3.5% over 17 days. The resulting win/lose yield spread is quite high, at 13.3%.

The numbers tell me that MTRX doesn't tend toward whipsaws and makes enough from its successful trades to more than overcome losses from unsuccessful ones.

The Company

Matrix, headquartered in Tulsa, Oklahoma, provides engineering, construction and maintenance services to the oil producers, refiners and distributors in North America, as well has providing infrastructure for electrical utilities and industrial customers and also storage tank.

The company is followed by a handful of analysts who come down with a positive 20% enthusiasm rating regarding the company's prospects.

Matrix reports return on equity of 14% -- not growth-stock territory but still quite good -- and a low level of debt, amounting to only 17% of equity.

The earnings yield is 3.74%, compared to a 2.63% yield on 10-year U.S. Treasury bonds. The company pays no dividend.

Matrix' earnings have shown a steep increase the past two quarters after nearly three years of dramatic moves but no trend. Earnings have surprised to downside four times in the last three years, most recently in the 2nd quarter of 2013.

Growth estimates imply a price of $14.17 a share. Market value is 2-1/2 times that price, meaning that traders are pricing in a lot of hope over those estimates. I've marked the growth-implied price on the left-hand chart in purple.

The stock is selling for 27 times earnings but at a discount to sales. It takes only 82 cents in shares to control a dollar in sales.

Institutions own 90% of shares.

Matrix next publishes earnings on Sept. 1.

Liquidity and Volatility

MTRX on average trades 235,000 shares a day and supports a narrow range of option strike prices spaced $5 apart, with open interesting running from double digits down to zero.

The front-month at-the-money bid/ask spread on calls is 22.6%, compared to 0.8% on the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility is running at 38% and has fallen from 62% beginning April 28. Volatility on the S&P 500 index, by contrast, is 12%.

The MTRX volatility is at the 28th percentile of the one-year range, meaning that options positions structured as long spreads bought with a debit are likely to have the best chance of success. However, the options are too illiquid for me to use in trading; any bull position I open in MTRX will be structured as long shares.

Contracts today are skewing heavily toward calls, which are running at more than double their five-day average volume. Puts are nearly 20% below their average volume.

Decision for My Account

I intend to open a bull position in MTRX if it continues to show upward momentum in the half hour before the closing bell, structuring it as long shares. If momentum falters, then I'll put MTRX on the Watchlist for later consideration.

The stock's price dropped sharply in 10 minutes after the opening bell, and so if there is no late rise, then I won't be making the trade today.

-- Tim Bovee, Portland, Oregon, June 11, 2014

References

My shorter-term trading rules can be read here. My longer-term 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. The principal practitioner 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.

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my shorter-term 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 decisions for his or her own account, and take responsibility for the consequences.