The company announced an earnings surprise after the close on Dec. 21, but then gapped and fell 5% the next day. Call it an orphaned surprise.
| pps | pfe trend | pfe loc | |
|---|---|---|---|
| NKE |
After the fall, it dithered around sideways for seven trading days, and today fell 2.5%.
With a 21% return on equity and very little debt, the company has great fundamentals. But that's the past, and the markets are all about the now and the future.
The orphaned surprise raises an issues that traders, when they get together at their favored watering holes, spend hours discussing: Is it best to hold a position across the earnings announcement, or close beforehand, after capturing the pre-announcement run-up?
The answer, of course, is that it depends upon what happens next, and that is something no trader can no.
Today's decline puts the price at a week-long sideways level from mid-November of last year.
Reversal Levels
- $92.49, +10.2% (pre-earnings high)
- $88.25, +5.1% (post-earnings high)
- $83.95 --- You are here.
- $83.82, -0.2%
- $80.26, -4.4% (October swing low)
I had skin in the game on NKE's earnings announcement, skin that is now raw and sore from ill treatment suffered at the hands of this failed trade.
I structured my trade as a vertical, a bull put spread, with January expiration, short the $85 put and long the $80 put. The trade gave me a $109 credit per contract when I entered on Dec. 6, with the stock trading at $87.73.
After the post-earnings decline, I held on, because I had structured the spread in such a way that the position would remain profitable at the close down to $85.76, a mark that would move downward with the passage of time. The stock closed slightly below that level on Dec. 29. However, I decided to stay in the position until the market returned to full liquidity after the holiday.
As of today, the profit point at expiration is $83.90, about where the stock is trading today.
At the time of the orphaned surprise, I wrote that "a drop below the 50-day moving average ... would trigger an immediate exit". So even through the profit point wouldn't trigger an exit, the 50-day moving average piercing is decisive in my book.
So I'm out at a loss. It cost me $179 per contract to close out, for a net loss of $70 per contract.
The position at entry had $391 per contract at risk, so the trade comes out as a 17.9% loss.
Ouch!
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 | above +50 | |
| 0 to +50 | ||
| below 0 to -50 | ||
| below -50 |
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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