Friday, January 14, 2011

LRCX Watch

Lam Research Corp. (LRCX), which makes wafer fabrication equipment for semiconductor manufacturers, showed confirmation this morning of a bull phase signaled last Tuesday. The price has been trending strongly upward for six trading days, and earnings are to be released on Jan. 26 after the close.

ppspfe trendpfe loc

LRCX has decent financials: Return on equity of 30.9%, with increases for four of the last five years, and no debt to to speak of. Sales and earnings took a hit in two of the last five years -- not unexpected for the semiconductor sector. Although sales are expected to be down a bit this year, earnings, in analysts' eyes, are on track to grow.

The price/earnings growth ratio, at 0.85, means the stock is selling for a bit below "fair" price (whatever that means). The beta is 1.5, meaning that the price is prone to swings more than 50% greater than those of the S&P 500. Volatility is the mother profit, so I like higher betas.

Institutions own 93% of shares, a point in the company's favor in my book.

The company has shown large positive earnings surprises in each of the last five quarters.

The price response has been more of a mixed bag: Sometimes a postive earnings surprise has been met by a price decline.

The price set an eight-trading day resistance level in December, then fell into early January to a swing low on Jan. 7 before climbing out of the hole.

Reversal Levels
  • $52.77, +0.4% (December resistance)
  • $51.26 --- You are here.
  • $50.70, -3.5% (20-day moving average)
  • $48.68, -7.4% (50-day moving average)
  • $46.27, -12.0% (January swing low)

On the slow-trading chart, the current bull phase has weak confirmation, with the line tracking up, but at a shallow angle, just below the +50 line.

Monthly chart
ppspfe trendpfe loc

The consistency of earnings surprises for LRCX is encouraging; the inconsistent price response is troubling.

However, given the strong upward bias to the price this week and the unflagging tendency to surprise on earnings days, I'm willing to set aside my reservations, but with a cautious vow to exit quickly if the price response doesn't materialize, or to exit before the announcement.

I would structure the trade as a bull put spread that expires in February, selling the $50 strike and buying the $49 strike for a credit of $40 per contract. This gives me a 2:3 reward/risk ratio, which is good for a vertical.

The support under this stock's price is far, far to the downside. A $50 strike puts me right below the 20-day moving average, which is support of sorts.

That's what I tried to do this morning, but the price ran away from me, and I can't get a fill even at $32 per contract. I don't want to go any lower.

The strike intervals move to $5 above $50, so there's no real way to do that.

I could structure the trade by moving down a notch on the strikes, selling the $48 and buying the $45, for a $60 credit per contract and a reward/risk ratio of 1:40. (There are no $46 or $47 strikes in the options inventory.) That structure would put me below the 50-day moving average, giving me two resistance levels.

But in the latter case, the reward/risk ratio is greater than I'm willing to accept.

I'll keep today's offer open until the close. If I can't get filled, I'll revisit LRCX on Tuesday, the next trading day.

When (if) I open a position, I shall exit according to the usual short-term rules when I'm skittish: Exit upon a switch to bear phase, or a sharp downward slope in the confirmation line, or just prior to the earnings release if I haven't developed some theoretical profit to the position to give me cushion.

  • pps - Person's Proprietary Signal.
  • pfe trend - Trend of the polarized fractal efficiency line.
  • pfe loc - Location of the polarized fractal efficiency line.

Key to the PPS/PFE tables
pps bull phase
bear phase
pfe trend uptrend
no trend
pfe loc +100 and above
+50 to below 100
0 to below +50
below 0 to above -50
-50 to above -100
below -100

PPS/PFE Analytical Tools

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.

For confirmation, the analysis uses an indicator called the polarized fractal efficiency (pfe) technical tool. It uses 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.

PPS/PFE Trading Rules

These rules are very preliminary. I’m still trying to figure out how the polarized fractal efficiency signal works.

When Person’s Proprietary Signal (pps) is in bull phase, enter when the polarized fractal efficiency (pfe) line crosses the zero line in an uptrend trend) A pps signal and pfe uptrend have less strength but greater upside potential when the pfe location (pfe loc) is below +50, and greater strength but less upside potential when the pfe location is at or above +50.

When the pps in in bear phase, enter when the pfe trend crosses the zero line in a downtrend. The set up has less strength but greater downside potential when the pfe loc is above -50, and greater strength but less downside potential when the pfe loc is at or below -50.

How should the pfe line be treated when it has flatlined at either end of its range, around +100 or -100. My preliminary observations are that the price by then has had a large run and tends to present a picture of exhaustion. However, by the description of the pfe, a high level should indicate a continued strong trend.

This is something that I’ll figure out as I go along.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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