This stock is one of my zombies, a trade gone bad that has been lurching through my portfolio for several years, and the move gives me an opportunity to make some money.
| pps | pfe trend | pfe loc | |
|---|---|---|---|
| MCO |
Moody's failure to see the dangers in mortgage-based debt made it one of the bad guys of the real-estate collapse of 2007-08. It has had negative equity for four years straight, so from the standpoint of a trader looking for growth stocks, it counts aamong the worst of the bad.
However, there were signs early on that things were turning around. The monthly chart moved to bull phase last October, around the time that the 50-day moving average crossed above the 200-day day moving average.
So as the broad economy continues to mend, MCO in theory should mend with it.
Today's high, $29.47, is around a level that has been significant for MCO. It has traded at this level twice as a swing high, only to drop again. The last time was at $31.04 in March of last year, and prior to that, $31.79 in May 2009.
So for the trader, the question is whether this level is a springboard to something big, or a wall against which prices will crash and collapse into bitter disappointment. Twice, the latter has proven true.
Reversal Levels
- $31.79, +8.7% (May 2009 high)
- $31.04, +6.1% (March 2010 high)
- $28,46, +0.8% (Today's high)
- $29.25 --- You are here.
- $27.06, -7.5% (50-day moving average)
- $26.10, -10.8% (recent swing low)
For me, this level presents an opportunity. I bought MCO shares in May 2009 at $29.85 as a base for covered calls. The price dropped, and so the stock wasn't called away, and it was soon well below the level where covered calls are feasible.
Today's jump puts the stock back in covered call territory. My choice is to either sell a covered call, earn some money, and risk continuing to hold the shares, or sell the shares for a small loss.
If I do the covered call, I would sell the February $30 strike call for $73 per contract. If the stock price remains below $30, the option expires unexercised and I keep both the stock and the $73 premium. If the stock is at $30 or more, then it will be bought from me for $30 per share. I keep the $73 premium from the option, plus $15 for the 100 shares underlying each contract, for a total $88 profit.
Win-win? You betcha. Unless, of course, MCO declines deep down, again, keep $2,985 tied up in a zombie position.
MCO does pay a 1.59% dividend and goes ex-div on Feb. 16. The call option expires Feb. 18.
Abbreviations:
- 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
| column | color | meaning |
|---|---|---|
| pps | bull phase | |
| bear phase | ||
| pfe trend | uptrend | |
| no trend | ||
| downtrend | ||
| 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.
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.
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