The technicals faltered on Friday, before the long holiday weekend, when the polarized fractal efficiency (pfe) line dipped below the +50 mark. However, the move was never confirmed and CTSH remain in bull phase, and the pfe line is now again rising toward +50. Small falls from bullish perfect are opportunities for the nimble trader.
CTSH has excellent financials, with a 23% return on equity and no debt to speak of. The return on equity has risen in each of the past five years, which spanned the financial meltdown.
Revenues and earnings per share also grew in each of the five years. Both are expected to rise this year.
The stock is overpriced with a price/earnings growth ratio of 1.57, but I would expect the market to price in quite a bit of future growth, given past performance.
CTSH rose to an all-time high today before retrenching a bit in the second rise from a recent swing low set last Thursday. Overall, the stock has held to a range of $76.25 down to $74 or slow so far this month.
- $76.45, +1.1% (all-time high)
- $76.61 --- You are here.
- $74.30, -1.7% (20-day moving average)
- $73.54, -2.7% (recent swing low)
From a longer term perspective, the stock has been in an aggressive bull phase since September 2009.
Cognizant has produced an earnings surprise in each of the last five quarters, two of them 10% higher than the consensus forecast, one 8% higher, and two of them 2% higher.
This says to me that CTSH management embraces earnings surprises as a policy.
Price follow-up has been a mixed bag, with some surprises resultings in a sharp rise, and some producing a fall. Wall Street has no gratitude.
Given that, the cautious trader will play the stock up to earnings but close beforehand, harvesting profit from the pre-earnings expectations and analyst chatter while avoiding any post-earnings downward gap (but also losing out on any upward gap -- caution always has trade-offs).
As always with earnings plays, I structured my position as an options vertical spread, which limits my losses (but also my profits). It is a conservative strategy.
In this case, I chose a bull put spread expiring in February, short the $75 strike and long the $72.5 strike, for a credit of $88 per contract.
The position will be profitable at expiration if the stock is at $74.12 or above. Maximum profit is the $88 credit. Maximum loss is the $250/contract spread less the credit received, or $162.
The reward/risk ratio, therefore, is 1:1.8.
- pfe - Location of the polarized fractal efficiency line.
- pps - Person's Proprietary Signal mode.
- trend - Trend of the polarized fractal efficiency line.
Key to the PPS/PFE tables
|+100 and above
|+50 to below 100
|0 to below +50
|below 0 to above -50
|-50 to above -100
PFE/PPS Analytical Tools
The analysis uses an indicator called the polarized fractal efficiency (pfe) technical tool. It employs the fractal math of Benoit Mandelbrot to measure how efficiently move between levels. The higher the efficiency, the more directional the price trend.
The math for the pfe is public knowledge, but it is well above my math knowledge, and so to me is also a black-box signal.
This is a relatively new technical tool, based on fractal math. Investopedia has only a cursory explanation. Wikipedia is silent on the subject. ThinkOrSwim has a fuller explanation.
For confirmation, the analysis uses the daily Person's Proprietary Signal (pps), developed by John Person.
This is a black box signals -- the "proprietary" means that Mr. Person knows how it works under the hood, and I don't. But it has shown a fair degree of success in identifying good entry and exit points, and I find it useful.
PFE/PPS Trading Rules
The polarized fractal efficiency line (pfe) provides the phase change signals (bull or bear), and the Person’s Proprietary Signal (pps) either confirms the change or not.
The pfe trend shows which direction the pfe line is moving and so suggests the likelihood of phase change in the near term.
For this analysis the pfe chart is divided into three sections: Above +50 is bull territory, below -50 is bear territory, and anything in between is neutrality.
Confirmed bull phase means the pfe has risen beyond the +50 line and the pps is in bull mode. The phase ends when the pfe crosses the +50 line into neutrality and the pps moves to bear mode.
Confirmed bear phase means the pfe has fallen beyond the -50 line and the pps is in bear mode. The phase ends when the pfe rises crosses the -50 line into neutrality.
On occasion the pfe will move to 100 or slightly above and flatline for extended periods. Although I code the 100+ extremes in my presentation charts, they have no significance for determining the phase or entering/exiting positions.
The trading rules are to open a long position on confirmed bull phase and close when the phase ends, open a short position on confirmed bear have and close when the phase ends, and have no position when the phase is neutral.
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.