Sunday, December 30, 2012

The Week Ahead: Jobs, Leading Indicators

The first week of 2013 will be dominated by the last release 2012 jobs data, on Friday at 8:30 a.m. Eastern.

The employment/unemployment report is, overall, a trailing indicator, although it includes one important leading indicator. Also, look for two more leading indicators, from the Institute of Supply Management manufacturing survey, out at 10 a.m. Wednesday, the factory orders report, released Friday at 10 a.m.

My theory is that it is the leading indicators that count -- the rest of the economic indicator zoo is just for entertainment -- so this is a big week for traders trying to peer into the misty future.

The U.S. central bank will kick off the year in monetary policy by release Federal Open Market Committee minutes from the Dec. 12 meeting at 2 p.m. Wednesday.

The week will see the customary prelude to the jobs report, with the payroll company ADP's employment report released on Thursday at 8:15 a.m.

The markets will be closed Tuesday for New Year's Day, the one totally global financial holiday of the year.

If Congress fails to act, Wednesday will be the first workday after across-the-board U.S. government budget cuts kick in -- the Fiscal Cliff -- and also after the U.S. hits its debt ceiling, although the latter will be mitigated by some fancy footwork at the Treasury Department to buy a few months extra time.

Also this week, we at Private Trader will bring some new analytical tools online. My goal is to roll them out on Wednesday Monday, Jan. 7.

Leading indicators out this week (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

The average hourly workweek in manufacturing  from the employment report, at 8:30 a.m. Friday.

Manufacturers' new orders for consumer goods and materials from the factory orders report, at 10 a.m. Friday.

The S&P 500 index, reported continually during market hours.

Vendor performance -- the delivery time index -- from the ISM manufacturing survey, at 10 a.m. Wednesday.

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

Manufacturers' new orders for non-defense capital goods from the factory orders report, at 10 a.m. Friday.

Other reports of interest:

Monday: Dallas Fed manufacturing survey in Texas, 10:30 a.m.

Wednesday: Motor vehicle sales throughout the day, purchasing managers index just before 9 a.m. and construction spending at 10 a.m.

Thursday: Challenger job-cut report at 7:30 a.m. and  petroleum inventories at 11 a.m.

Friday: Monster (.com) employment index of online job demand, time unspecified.

Trading calendar

By my rules, as of Monday I can trade February short vertical spreads as well as April single options and straddles. Of course, shares are good at any time.

Happy New Year, and good trading this week and throughout 2013!

Friday, December 21, 2012

The Week Ahead: Christmas Week

Christmas Week will have only four trading days, and one of those will see an early close. Even so, the  Merry Old Elf who sits in a drab basement room within a non-descript, vaguely offical-looking building grinding out economic data will keep up the good work, sliding three housing reports plus a few other goodies down the market's chimney, although after the Christmas feast.

The U.S. markets will be closed on Tuesday for Christmas Day, and will close at 2 p.m. Eastern on Monday, the day before Christmas.

Of the major forex money centers -- London, New York, Tokyo and Sydney -- only Tokyo will be operating all five days of the week, and even Tokyo will be slowing down with the approach of New Year's, Japan's biggest holiday.

Congress may return on Thursday for more work on a budget settlement. Or not. It's all up in the air at this point as the national stagecoach careens out of control toward the Fiscal Cliff.

New home sales will be released by the Realtors on Thursday at 10 a.m. Eastern. This is the smaller part of the housing market -- most sales are to someone other than the original owners -- but it's an important indicator of how much (or whether) the housing market is recovering.

On Tuesday, the S&P Case-Shiller home price index will provide a detailed look at housing prices in 20 metro areas across the U.S. Housing is the most local of commodities, and this report has the ability to reveal trends masked by the national numbers. Out at 9 a.m.

The third housing report is the pending home sales index, to be released by the Realtors on Friday at 10 a.m. It tracks transactions where contract has been signed but deal hasn't closed yet.

Leading indicators out this week (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

Other reports of interest:

Thursday: Consumer confidence from the Conference Board, at 10 a.m., and petroleum inventories at 11 a.m.

Friday: Chicago purchasing managers' index, at 9:45 a.m.

Trading calendar

By my rules, as of Monday I can trade January short vertical spreads, butterfly spreads, iron condors, and the short legs of calendar and diagonal spreads, as well as April single options and straddles. Of course, shares are good at any time.

Merry Christmas, and good trading!

Thursday, December 20, 2012

Silver: Where's the glitter?

The iShares Silver Trust exchange-traded fund (SLV) fell below its low price of the past 20 days, on the fifth day of sharp slide.

The decline produced a trend score of 175% of the average daily trading range, which is far from a rout but is still a serious decline.

I construct the score for a bear signal based on the percentage of lower highs recorded on the daily chart during the five days prior to the breakout, combined with the distance traveled, close to close, on those five days.

The huge Vancouver, B.C., silver mining company Silver Wheat Corp. (SLW) closely tracked the metal itself in the decline. It showed a trend score of 144% of the average daily trading range.

In the case SLW, 80%  of the days saw a lower high, and the distance traveled was down $1.42.

One difference between the two is that SLV fell on higher volume, and SLW's volume has declined throughout the fall. Generally, I consider a fall on high volume to be more of a rout -- people fleeing -- and a fall on declining value to show a lack of interest, which is a milder condition.

SLW is an alternate way to play the metal. A mininng company can have earnings surprises that impact give higher volatility to the chart. It also pays a small dividend.

A mining company also has far better better analyst coverage than does a metals ETF, so I can learn that SLW's analysts are quite bullish on the company, with a 70% enthusiasm index. The metal? Who knows. It isn't tracked in the same detail as a corporation is.

On the other hand, SLV -- the metals ETF -- can be considered an index option, with favorable tax implications for profits.

For the rest of this discussion, I'll focus mainly on the metal, since it has the stronger trend score, but will toss in a few comparisons with the mining company. Frankly, my personal preference for the simpler play. A company is subject to all sorts of vagaries, such as mismanagement. A metal? Not so much.

News reports suggest the main reason for precious metals' fall was a robust GDP report. The Bloomberg News story can be read here, but the gist of the argument is: Economic growth means less stimulus means higher value for the dollar against other things, such as a precious metals.

Silver's fall is more about the dollar's rise, since the dollar is where the Fed's policy impact will fall.

SLV on average trades 10.6 million shares a day, making it far more liquid than SLW, which trades 3.1 million shares.

The iShares Silver Trust has a huge selection of option strike prides with near-the-money open interesting runing to four and five figures. The front-month at-the-money bid/ask spread on puts is 3%. Actually, Silver Wheaton's spread runs 2.4%, a marginally better deal.

SLV's implied volatility stands at 28%,  below the mid-point of its six-month range. It began to rise on Dec. 18. SLW's implied volality is higher, at 40%, which makes it the better choice for selling options, such as in short vertical spreads.

Options on the metal play, SLV, are pricing in confidence that 68.2% of trades over the next month will fall between $26.45 and $31.17, for a potential gain or loss of 8%, and between $27.68 and $29.94 over the the next week.

Volume on SLV put options is running 66% above the five day average, and for calls, 4% above the average.

Today's half hour chart on SLV, with three hours of trading remaining, shows a fair-price zone of $28.68 to $29.06, encompassing 68.2% of transactions surrounding the most-traded price, $28.84. SLV fell into that zone in the second half hour of trading and has stayed there ever since.

SLV, of course, has no dividends or earnings announcements. Silver Wheaton next publishes earnings on March 13. It goes ex-dividend in February for a quarterly payout yielding 0.82% annualized at today's prices.

Decision for my account: I've placed a hold on trading until Washington works out its budget and debt-limit deal. I'm just reluctant to place my future fortune in the hands of House Speaker Boehner and President Obama. Nice guys, I'm sure -- Barrack and Michelle sent me a Christmas card -- but still...

If I were trading, I probably would wait before taking the SLV or the SLW trade. Both showed a serious downside gap this morning, suggesting much of the price move might already have happened. I would want to see what happened on Friday.

Another consideration would be that the year-end holidays are close, with the consequent lowering of liquidity as traders stay home for Christmas and New Year's. It's just not a good time to be trading because there are fewer counter-parties around to take the other side of my positions.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday, December 18, 2012

DHI: Congestion worthy of the flu

The Fort Worth, Texas homebuilder D.R. Horton Inc. (DHI) broke above its 20-day high of, coincidentally, $20 today, swinging into bull phase under my trading rules for the first time since early September.

Horton operates in 25 states and 73 metro markets, so its fortunes rise and fall with the national housing market. No coincidence, the real-estate exchange-traded fund XRT also entered bull phase today.

Of the 10 stocks and ETFs that I analyzed today, only DHI had an acceptably strong trend, scoring 132% of its average daily trading range.

The stock has been in a sideways trend since mid-November, with a floor of about $18.27 and a ceiling of $20. This level marked a decline from a prior sideways trend running from mid-September, with a floor of $19.73 and a ceiling of $22.79.

This means congestion worthy of the flu season, as DHI tries to push higher.

All of the autumnal Sturm und Drang comes as a correction to a stunning run up from $8.03 in October 2011 to $22.79 last September. I say stunning because, remember the recession? Remember all of the angst about the housing market not leading the recovery as it has in the past? Somehow, DHI didn't get the memo.

And if DHI didn't get the memo, analysts haven't read the chart. Their aggregate enthusiasm index stands at a negtative 33%, a level that is known in the business by the technical term "Ew! That sinks!"

Admittedly, Horton's return on equity isn't a real standout. It stands at 8%, not awful but not often the mark of a company that is going places. On the plus side, debt is quite low, amounting to only 5% of equity.

Quarterly earnings have been meandering and small, with two losing quarters out of the last 12. The 3rd quarter of 2012 had a huge one-time "non-cash benefit" that bumped earnings up to the stratosphere, but that's not significant in judging the business for my purposes.

Nine of the quarters surprised to the upside, and three to the downside.

Institutions own 88% of shares and have bid up the price a bit. It takes $1.48 in shares to control a dollar in sales.

DHI on average trades 5.7 million shares a day, sufficient to support an excellent selection of stock option prices with open interest near the money in the four figures. The front-month at-the-money bid/ask spread for calls stands at 2.4%.

Implied volatility stands at 40%, near the middle of the six-month range, and has been mendering sideways since mid-September, initially with wide swings, but those have narrowed considerably since mid-November.

Options are pricing in confidence that about two thirds of trades will fall between $17.77 and $22.37 over the next month, for a potential gain or loss of 11%, and between $18.96 and $21.18 over the next week.

Call options are trading slowly, at only 14% of their five-day average volume. All of the action is on the put side, where volume is 23% above the five-day average. This looks to me as though traders are betting on the downside.

The entirety of the breakout happened in the first hour of trading today. Since then until this writing two hours before the close, the price on today's half-hour chart has been seesawing in a narrow range near the top of the fair-price zone, with runs from $19.87 and $20.11, encompassing about two-thirds of transactions at the most traded price, $20.05.

Horton next publishes earnings on Jan. 23. The stock goes ex-dividend next March with a quarterly payout at today's prices yielding 0.75% annualized.

Decision for my account: I've put a hold on my trading and reduced exposure sharply until the budget and debt-ceiling negotiations are worked out in Washington. 

Even if I were trading, and even though DHI has met my rules for a bull trade, I wouldn't take the trade today. The high put volume compared to calls and the fact that the price hasn't budged since the first hour of today's session gives me pause, big time.

A mentor once told me that success in trading is defined by whether the trader followed the rules (whatever rules he or she might have devised). My decision violates my rules. So, in penance, I shall hang my head in contrition as I sip my second pot of green tea, muttering to myself, "I am a bad, bad trader."

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Sunday, December 16, 2012

The Week Ahead: Housing, Witches and the End of the World

Housing dominates the economic reporting this week before Christmas, with a scattering of reports tracking other areas to add sauce to the mix.

Housing starts, out Wednesday at 8;30 a.m. Eastern, is a leading indicator for the real-estate sector. A housing start is when the shovel first bites dirt. Other housing reports are existing home sales on Thursday at 10 a.m.

There are also a pair of lower impact housing reports. Earlier in the week, look for the Homebuilders housing market index at 10 a.m. Tuesday, and later in the week, the FHFA house price index on Thursday at 10 a.m.

Other major reports: A final revision of the 3rd quarter gross domestic product on Thursday at 8:30 a.m., followed by the Philadelphia Federal Reserve Bank's survey of the business outlook in the mid-Atlantic region at 10 a.m.

On Friday, durable goods orders and personal income and outlays will both be released at 8:30 a.m.

Of high importance to many traders: Friday is the last day to trade the December options, which expire on Saturday. Friday, in fact, is a quadruple witching day, the last trading day before stock index futures and options, stock options and single-stock futures expire.

Shakespeare got by with only three witches. The markets need four, which no doubt says something profound about the way our world works.

Oh, and I almost forgot. Friday is also the end of the world, as the Mayan calendar ends the Long Count that began 5,125 years ago. I suppose that would mean the expiration of all options, even the Januaries and Februaries. Even the LEAPS.

Leading indicators out this week (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

Building permits for new private homes, from the housing starts report at 8:30 a.m. Wednesday.

University of Michigan/Reuters index of consumer expectations on Friday at 9:55 a.m.

The Conference Board index of leading indicators, which aggregates all of individual leading indicators into a single index, will be released Thursday at 10 a.m. It is not itself considered to be a leading indicator, and has a low potential for moving markets, but there are those of us who love it.

Other reports of interest:

Monday: Empire State manufacturing survey of business conditions in New York, 8:30 a.m., and the Treasury Department international capital report, tracking foreign capital movements into and out of the U.S. economy, at 9 a.m.

Wednesday: Petroleum inventories at 10:30 a.m.

I also like to keep an eye on the Baltic dry index of world shipping, updated daily.

Fedsters

Richmond Fed Pres. Jeffrey Lacker, a member of the Federal Open Market Committee, speaks Monday at 12:30 p.m.

Trading calendar

By my rules, as of Monday I can trade January short vertical spreads, butterfly spreads, iron condors, and the short legs of calendar and diagonal spreads, as well as March single options and straddles. Of course, shares are good at any time.

Good trading!

Friday, December 14, 2012

JCP: Suspect breakout

The retailer J.C. Penney Co. Inc. (JCP) has broken above its 20-day high, $19.79, and continues to push higher on a leg that began Dec. 5 at $17.10. that leg is part of a slightly broader uptrend that began Nov. 16 from $15.69, reversing a downtrend lasting since mid-September.

The breakout happened on Thursday, followed by a pullback, and then another break above the 20-day high that has been continued today up to $21.50 (so far).

The chart raises a perennial question for traders who make their living off of price reversals: When is a breakout not a breakout.

The stock has been on the decline since Sept. 20, with a few relatively shallow retracements to the upside. The slide has lasted long enough that the 20-day high is also declining, day-by-day, in an echo of the month-old price decline.

So, looking purely a price reversal levels, the current breakout means precisely nothing. There is no near-term resistance that it has punched through. The breakout level is just an arbitrary pebble in a featureless fall.

The nearest  break above resistance is at $27, quite a distance away.

Unlike the classic Turtle Trading rules that my trading rules are based on, I treat all breakouts as suspect. Any breakout must prove to me that it is in fact based on price and not just an arbitrary span of time. Twenty trading days is four calendar weeks. What makes that special?

On the other hand, the breakout has a good tail-wind behind it, with a trend score of 107% of the average daily trading range. Anything above 100% deserves to be considered seriously, in my book.

J.C. Penney is a household name and so its business model needs ot explanation. It's not among the glitterati of retailers, but it sells good, solid products, and what's not to like about a store where my grand-daughter's  great-great-great-grandmother might have bought her dresses.

Analysts, however, are less impressed with the history. In aggregate they give JCP a negative 63% enthusiasm rating.

And the long-term chart supports that assessment. The stock has been executing a large sideways move since the beginning of 2009, ranging from below $20 to above $40. Obviously, there's money to be made from such wide swing, but the chart really isn't going anywhere.

Nor are the finances. J.C. Penney has a negative return on equity of -8%. The debt isn't awful, standing at 84% of equity.

The company has reported accelerating losses the last three quarters. Like all retailers, JCP makes its money mainly in the the 4th quarter. The 2011 4th quarter was profitable but still down from the year-ago quarter.

Of the past 12 quarters, eight have shown upside surprises, and three -- the unprofitable ones -- have surprised to the downside, meaning the losses were worse than analysts expected.

Institutions own nearly all of the shares, and price -- no surprise -- is cheap. It takes 31 cents in shares to control a dollar in sales.

JCP on average trades 9.8 million shares a day and supports a wide selection of option strike prices, with open interest mainly in the four figures, sometimes in five, and extremely narrow front-month at-the-money bid/ask spread on calls of only 1%.

Implied volatility, at 77%, is high, in the upper half of the six-month range, and has been in an uptrend since Nov. 30.

Options are pricing in confidence that about two-thirds of prices will fall between $16.65 to $26.17 over the next month, for a potential 22% gain or loss, and between $19.13 and $23.69 in the next week.

Options are trading very actively today, with calls running 60% above their five-day average volume, and puts at 180% above the average. Note the preponderance of bearish put trades compared to bullish call trades in the direction of the breakout. Yet another cause for caution.

The fair-price zone on today's half-hour chart fruns from $21.13 to $21.49, encompassing about two-thirds of transactions surrounding the most-traded price, $21.36. The price moved up to that level after 90 minutes of trading, and remains there with three hours of trading left in the day.

J.C. Penney next publishes earnings on Feb. 27.

Decision for my account: I'm not trading this week as I await a resolution of the budget talks in Washington, and more important, negotiations over the debt ceiling.

Even if I were trading, I would not take this trade based on the fact that the breakout signal doesn't map on the chart to any true move beyond resistance. The abysmal financials and vicious opinion of analysts simply reinforces that decision.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Wednesday, December 12, 2012

GME: Game on

GameStop Corp. (GME), the video game retailer  headquartered in the Dallas suburb Grapevine, Texas, broke above its 20-high of $28 today, moving into bull phase under by trading rules.

There was no shortage of breakouts today, but only two were trending with enough strength to draw my interest. GME had a five-day trend score of 180% of its average daily trading range. The other was the chemical giant E I Du Pont De Nemours and Co. (DD), a bullish breakout with a trend score of 139% of range.

The breakout came during the last leg of an uptrend that began in August at $15.32. The six-day rise from $25.40 to $28.19 (so far today) followed an eight-day fall that, under my rules, put the stock back in neutral phase.

So the breakout means that its game on in an ongoing game. Forget the analytical niceties -- GME is in an uptrend, and under Newton's 4th Law of Motion, a stock in motion remains in motion until traders and analysts get bored.

(Newton on a stock bubble of his day: "I can calculate the movement of the stars, but not hte madness of men.")

Despite the rise, analysts aren't showing the stock a lot of love, collectively giving it an enthusiasm index of precisely zero. One way to interpret that is "Don't love it, don't hate it, don't care".

The financials, however, are quite good. GameStop, with more than 6,600 stores in the U.S., Australia, Canada and Europe,  shows a return on equity of 14%, with no long-term debt.

As is always the case with retailers, the 4th quarter, which includes Christmas, is where the money is made. The last two 4th quarters for GameStop have shown higher earnings per share compared to the year-ago quarter. Of the past 12 quarters, ten have shown upside earnings surprises and two surprised to the downside. All were profitable.

The stock is a darling of institutional investors, yet the stock price is dirt cheap -- it takes but 38 cents in shares to control a dollar in sales.

GME on average trades 2.7 million shares a day and supports an excellent selection of option strike prices, most in the front month with four-figure open interest. The front-month at-the-money bid/ask spread is 3.4%.

Implied volatility stands at 41%, near the floor of the six-month range. Options are pricing in confidence that about a third of trades will fall between $24.63 and $31.21 over the next month, for a potential gain or loss of 12%, and between $26.34 and $29.50 in the next week.

The fair-price zone runs from $27.78 to $28.05 on today's 30-minute chart, encompassing about two-thirds of transactions surrounding the most-traded price, $27.91. The price was trading above the zone but has dropped back to the most-traded price with 45 minutes left in the trading day.

GameStop next publishes earnings on March 18. The stock goes ex-dividend on Nov. 26 for a quarterly  payout yielding 3.58% annualized at today's price.

Decision for my account: I'm not entering into new positions at this point as we wait for the politics of budgeting and debt to percolate in Washington, D.C.

If I were trading, I would note that the price has dropped below the $28 breakout level. I would open a position if the price moved above $28 again, initially selling a bull put spread, short the January $26 put and long the January $25 put. 

That structure puts the breakeven point at $25.72, below my standard stop/loss, $26.46 in this case, calculated as the entry price less twice the average daily trading range. The maximum yield is 22%

If the price continued to rise, I would add to the position using long April calls with a delta of about 70.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday, December 11, 2012

UAL takes off for no discernable reason

I woke up this morning to flurry of alerts as the market, setting aside it's Monday sleepiness, began to move. Among the breakouts, all to the upside, were exchange-traded funds covering the broad averages, such as SPY, which tracks the S&P 500.

Bloomberg News, with the usual insight shown by market writing, had the headline, "U.S. Stocks Rise on German Confidence Amid Budget Talks", which must count as the most incomprehensible market headline I've for awhile.

SPY, however, slipped past its 20-day high with a low trend score, just 49% of the average daily range for the past 20 days.

It was individual stocks, as usual, that showed the strongest trends, with four at or beating the trend score I consider to be a minimum for a tradable breakout: IBM at 100%, POT at 101%, STI at 121%, and the winner and grand champion, UAL, with a trend score of 130%.

To put it in context, some days I've seen trend scores of 200% and better, so while an improvement over recent results, it's not a hallelujah market yet.

United Continental Holdings Inc. (UAL), headquartered in Chicago, Illinois, flies the friendly skies (as an old ad slogan put it) under the brand United Airlines. It is the world's second largest airline by passenger count, trailing Delta.

The chart got a high trend score because of four straight days of higher lows that culminated on the fifth day with a break above the 20-day high of $21.65. It's a true breakout, busting past a level that has been tested twice before since early October.

The move carried the price from $19.54 on Dec. 4 to today's high (so far) of $22.14. The rise brings the price into an area of little resistance. The next swing high is at $24.95, attained on July 11.

The price has been in a large sideways pattern since April 2010, ranging from a floor of roughtly $16 to a ceiling of about $30.

There was no positive news to account for today's 6.5% intra-day rise. The company reported a decrease in revenue per passenger mile, in part due to Hurricane Sandy's battering of the American East Coast.

Analysts opinions in aggregate give the company a 33% enthusiasm score.

Return on equity is a super high 52%, but debt is also super-high, at nearly six times equity. 

Quarterly earnings have been all over the map. Four of the last 12 have shwon losses, including this year's 1st quarter. The two ensuing profitable quarters this year were below the profitable quarters of 2011 and 2010.

Three quarters showed negative earnings surprises. The rest surprised to the upside, incluing all four losing quarters.

Institutions own enarly all of the shares, and the stock price is so low that the term "bargain  basement" fails to do it just. It takes just 19 cents in shares to control a dollar in sales.

UAL on average trades 2.6 million shares a day yet has a wide selection of options strike prices with open interest running to the four and five figures in the front month. The bid/ask spread for front month at-the-money calls is 3%, which is fairly low.

Implied volatility is 47%, a high level compared to the S&P 500 and most other big companies I look at. However, it's on the low side for UAL, standing in the lower half of the six-month range.

Options are pricing in confidence that about two thirds of trades ove rthe next month will fall between $18.91 and $24.83 for a potential gain or loss of 14%, or over the next week between $20.45 and $23.29, for a 7% gain/loss.

Trading in options is extremely heavy today, with calls running at more than six times their five-day average volume, and puts at nearly five times the average.

The fair-price zone on today's 30-minute chart stretches from $21.34 to $22.02, encompassing about two-thirds of transactions surrounding the most-traded price, $21.68. 

The stock is trading in the upper half of the zone with about three hours left before the close. Today's next most-traded price is $21.83 to $21.87, suggesting a trader preference for the upside.

United Continental Holdings next publishes earnings on Jan. 21.

Decision for my account: I'm not trading for reasons extraneous to the analysis. If I were trading, I would open a bull position in UAL, structuring the initial holding as a bull put spread, shot the $21 January put and long the $20 January, for a credit of $28 per contract. 

That sets the break-even point at $20.72, a bit above my standard stop/loss of double the average daily range, which is $20.52 in this case.

Subsequent additions to the position would be long call options expiring in March with a delta of around 70.

I'm not trading -- actually, I'm reducing exposure -- because I want to see what happens with the Fiscal Cliff budget negotiations and, perhaps more important, the debt ceiling. The last round in this battle, in 2011, caused a sizable decline in the market. I'd just as soon avoid that.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Monday, December 10, 2012

Waiting for Godot, I mean, a trend

I have five breakouts, all to the upside, among the 300 or so stocks and exchange-traded funds that I follow, but not one has a trend score worth playing.

The stocks are Teradyne Inc. (TER) and 3M Co. (MMM). The ETFs are the SPDR S&P Mid-cap 400 (MDY), the Amex SPDR Health Care Select Index (XLV), and the Amex SPDR Industrial Select Index (XLI).

Some of these, TER and XLI, for example, are showing fairly strong breakouts,  but the trend scores for the five days prior to breakout are just awful.

TER managed to score 50% of a day's average true range. XLI came in at a mere 11% of its ATR. Before I take a position, I like to see a trend score of 100% or greater.

Those three-figure scores used to be fairly common, but not the last few weeks. The market is in the doldrums.

Watching breakouts has been much like sitting through a performance of Samuel Beckett's "En attendant Godot", although these days the play is being written by Boehner and Obama, not Beckett, and we are en attendant -- not Godot, but the Cliff and the Ceiling. (Not to mention the Mayan Calendar End of the World on Dec. 21, the day December options expire!)

None of these are worth extensive analysis, so I shall return to drinking my English breakfast tea while reading a fascinating book about Bayes Theorem. In any case, I'm in the midst of a self-imposed moratorium on opening new positions until I see which way the political wind is blowing on the budget talks and potential default over the debt ceiling, which some Republicans are using as a threat to reprise the 2011 credit crisis.

References

My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Sunday, December 9, 2012

The Week Ahead: eXtreme Fedstering

This week sees the last meeting in 2012 of the Federal Open Market Committee. This is one of the high profile meetings, with an announcement at 12:30 p.m. Eastern on Wednesday, followed by FOMC member forecasts at 2 p.m. and Chairman Bernanke's news conference at 2:15 p.m.

If you love extreme monetary policy, this is your week.

The Fed under Bernanke has become so open, the meetings often seem anti-climactic. Still, they're sort of like a corporate earnings announcement -- there's always room for a surprise, so they bear watching.

The econ week (the part that counts) begins Tuesday with international trade at 8:30 a.m., continues through producer prices and retail sales, both on Thursday at 8:30 a.m., and culminates on Friday with the consumer price index at 8:30 a.m. and industrial production at 9:15 a.m.

This is also the penultimate week in the life of the December options. My practice is to close positions on Friday of the week preceding expiration week. The last day to trade the options is Dec. 20.

Leading indicators out this week (in order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday.

Other reports of interest:

Wednesday: Import and export prices at 8:30 a.m., petroleum inventories at 10:30 a.m., and the Treasury budget at 2 p.m.

Thursday: Business inventories at 10 a.m.

I also like to keep an eye on the Baltic dry index of world shipping, updated daily.

Trading calendar

By my rules, as of Monday I can trade January short vertical spreads, butterfly spreads, iron condors, and the short legs of calendar and diagonal spreads, as well as March single options and straddles. Of course, shares are good at any time.

Good trading!

Friday, December 7, 2012

Failed Breakouts: AET and AMTD

I see two persistent breakouts today: Aetna Inc. (AET) and TD Ameritrade Holding Corp. (AMTD). Both broke to the upside.

"Persistent" means they've stayed above the 20-day price channel since breaking out.

A third issue, the SPDR S&P MidCap 400 exhcange-traded fund (MDY), failed to stay above the breakout level.

The two persistent breakouts, AET and AMTD, have extremely low five-day trend scores, both ranking at 0.11. I generally want to see 1.0 or better before I like a trade.

Both had lows higher than the prior day's low on only two of the five trading days prior to breakout. That's not much of a trend.

And the closing price on the day prior to breakout, in both cases, amounted to only 28% of the average daily trading range.

I want to wait before opening a position on either one of these guys. One reasonable way to do that is to raise the breakout level to the 55-day channel (a standard breakout point in the Turtle Trading method that my rules are based on), and then score the trends again.

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Thursday, December 6, 2012

Cliff Notes (Fiscal Edition)

Update 10/15/2014: I see this is the only place in the entirety of the Private Trader corpus where I've mentioned a really bad trade that I placed in June 2012, so I'll report the outcome here. It is in an object lesson in how not to trade and the perils of the buy-and-hold approach.

We all remember how unsettled things were in 2012. Yes, the Great Recession was but a memory, and a vivid one whose impacts were still ruining lives. The Republicans in Congress were Hell-bent on shutting down the Federal Government or defaulting on the nation's debt, or both.

My thinking was that I should do a hedge against a catastrophic failure of the markets. So I bought puts in the S&P 500 index options, SPX, that expired more than two years in the future, plenty of time for the markets to correct amidst an apocalyptic failures of our political structures and markets. I never quite imagined zombies lurching through the streets look for brains to eat, but I suspect that particular nightmare was lurking somewhere in my sub-conscious.

We now all know the rest of the story. I bought the puts when the S&P 500 stood at $1,333.98. The index peaked on Sept. 22 at $2,019.26. At that point the puts were worthless -- there was no market for them to be had. 

So they haunted my account, like Banquo's ghost, soaking up buying power and sticking out as a constant reminder of how things were when I was young and foolish.

As recently as yesterday the puts were valueless. But today's rapid and massive decline finally brought them back to having some value, and I sold them for 5 cents a contract, and fell well pleased to be rid of the albatross.

At the time of the sale, the index stood at $1,833.13, or 37.4% over their level at time of purchase 845 days ago. That change, when of course is a loss for a bear position like mine, works out to 16.2% annualized.

My options -- simple sold puts, with the insurance that spreads can provide, lost 99.8% in value over the lifetime of the position, or 43.1% annualized.

Actually, annualized, the figures aren't too awful. But a single contract on SPX is so expensive that it is a quite a significant loss in absolute terms.

Since those carefree days I have put in place my trading systems

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. My very short term volatility trading rules can be read here.


Notice that under my rules, every position is either permanently hedged or must be hedged under strictly followed rules. And notice that there is a rule for everything -- getting in, getting out, whatever the contingency may be.

As much as I hated taking the hit -- losing money in a trade is genuinely painful for any private trader -- I've learned from the experience, and the gain in knowledge and wisdom is always of far greater value than the monetary losses.

Click on chart to enlarge.


I've been scratching my head for weeks trying to figure out how to deal with December's fiscal cliff negotiations and January's debt ceiling deadline.

Last year's debt ceiling stand-off caused an 18% tumble in the S&P 500. While a move of that magnitude is far from being the end of the world, I'd sooner avoid it if I can.

Regular readers will know how averse I am to trading based on news or the expectation of events. I trade charts and probabilities, not guesses or forecasts about the future.

The one exception, in my rules, is earnings announcements. I have a moratorium on opening a new position within 30 days of a stock's earnings announcement. And I have no hesitation about selling a stock right in advance of earnings if the chart seems to indicate a preponderance of negative opinion about the upcoming announcement.

Absent a deal, the federal government falls over the fiscal cliff at the end of December, and the debt ceiling most likely must be resolved early in 2013, possibly in February.

Basically, the fiscal cliff/debt ceiling complex that we're rushing toward is like a huge earnings announcement, and should be treated as such. It has the capability of suddenly overturning all prior assumptions that have motivated traders, or of confirming those assumptions, or of leaving the situation mired in ambiguity.

The point is, as with earnings, I don't know which outcome to expect or how the markets will react. My crystal ball is cracked, my tarot cards were turned to pulp in a gully-washer, and when I break out my astrology books and look up to the stars, here in Portland, Oregon, deep in the American Fog Belt, I see nothing but clouds.

Now, I have every confidence that House Republicans and President Obama will reach a deal, both on the fiscal cliff and the debt ceiling. The 2011 debacle was far too damaging to the Republicans, and the most radical anti-government faction in the House was weakened by the November elections.

I'm also confident that the market has priced in a certain amount of Sturm und Drang in the run-up to the deadlines. It's the outliers that have the capacity to move markets significantly.

So here's my plan:

I'm not opening new positions until the fiscal cliff and debt limit issues have been resolved. I expect that a resolution to the December fiscal cliff will also make clear whether the debt limit remains a problem.

My present collection of December options expire Dec. 20, and I won't be rolling them over.

Positions that expire later on, I'll close them before Christmas.

I'll retain one position -- an insurance hedge of out-of-the-money puts on SPX -- the S&P 500 index options -- that expire in January 2014. If the worst happens, they'll come closer to being in the the money and give me a nice profit. If the market doesn't collapse, then no loss.

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Wednesday, December 5, 2012

PFE: Storytime

It is characteristic of pharmaceutical stocks that they tend to move on stories. Stocks in other sectors may creep up on speculation; pharmaceuticals make quantum leaps based on research announcements or the decisions of the FDA.

Pfizer Inc. (PFE) took such a leap today, breaking past its high of the past 20 days, $25.30, in a move that carried it as much as 2.9% above the prior day's close.

Today's stretch up to $25.79 was part of an uptrend that began in mid-November from $23.55, which is turn is a leg in a sideways movement that has been in place since early August, stretching from a floor of around $23.60 up to a ceiling of about $26.10.

Frankly, as a trader, I dislike opening positions after out-of-left-field moves. I'm prefer charts where the price sneaks up on a breakout level and then tip-toes across. Big moves on high volume tell me that a lot of the money has already gotten in, leaving me as a come-lately.

If we follow the old saw about buying on the cannons and selling on the trumpets, then today's move is all trumpets. However, the price was on the rise even when the cannons were firing.

The uptrend had legs, with a trend score of 1.11, one of the stronger scores I've seen in this lackadaisical week.

Today's high stands 1.2% below the top of the sideways move, so the significant potential profits will come either from a rise strong enough to break through the sidewinder's ceiling or a short-term retreat that allows entry nearer the breakout level before the rise resumes.

The news that made traders happy about Pfizer was positive results of studies into an experimental breast-cancer drug.

Pfizer, with a research headquarters in Groton, Connecticut, has higher revenues than any other pharmaceutical company in the world. Pfizer is synonymous with Big Pharma, with the market clout that implies.

The chart reflects a high level of analyst bullishness; I give PFE an enthusiasm rating of 63%, which is quite high. A return on equity of 21% with fairly low debt amounting to 38% of equity can't hurt.

Earnings over the last dozen quarters aren't trending at all, but rather fluctuating in place. All but one have shown upside earnings surprises, and that one miss was long ago in 2010.

Institutions own 71% of shares, and the price is expensive; it takes $3.05 in shares to control a dollar in sales.

PFE on average trades 31.1 million shares a day. It has an excellent selection of optoins strike prices with open interest near the money running to five digits. The front month at-the-money calls have a bid/ask spread of 3%.

Implied volatility stands at 18%, about a third of the way up the six-month range. It has been on the rise since mid-November, although today it is showing a dip.

Options are pricing in confidence that 68.2% of trades in the next month will fall between $24.31 and $27.02, for a potential gain or loss of 5%, and between $25.01 and $26.32 in the next week, for a 2.5% gain/loss.

Options trading isn't spiking today. Overall, trading is at 79% of volume for the past five days, with calls leading by 9% above average volume and puts at half the average.

The fair-trade zone on today's 30-minute chart runs from $25.34 to $25.76, encompassing 68.2% of trades surrounding the most-traded price, $25.67.

The most-traded price is near the top of the zone, today's trading has shown four prior significant price areas as the stock moved up, and trading the last two hours has stayed fairly close to the most-traded area. 

These suggest to me that the market has found its level, and so I'm not expecting any dramatic upside moves the rest of the day or at the open tomorrow.

Decision for my account: I'm fully committed under my rules so I don't the have cash to spare for this trade. So, I won't be opening a position.

If I did have the resources, I might take the trade, but with reservations. The low volatility suggests that the upside may be near exhaustion, as does the slow options trading and the most-traded price situation on the half-hour chart.

Also, the low volatility limits premiums on my initial position, which I would structure as a bull put spread, short the $25 January puts and long the $24 January puts, for a yield of 14%. This puts the break-even point at $24.84, close to a stop/loss that is double the average daily trading range below the entry point.

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday, December 4, 2012

Where's the analysis?

A reader wrote to ask why I wasn't posting analysis every day like I used to?

Truth is, the signals that meet my rules just haven't been there. Perhaps the market is marking time while the Obama administration and the House Republicans work out a deal spending and taxes. Perhaps everyone has gone Christmas shopping.

Whatever the cause, I haven't been doing analysis because there is none worth doing under my rules.

On Monday, for example, I had half a dozen breakouts. Within an hour or two they had all melted away, as the price retreated to within the price channel. By my rules, the price must be beyond the price channel for me to open a position.

Today there were four breakouts, all bearish.

Yamana Gold Inc. (AUY) retreated back to within the channel. So I've reset the alert and will deal with it fresh on the next breakout.

The Gap Inc. (GPS) and two Chinese companies, SINA Corp. (SINA) and Baidu.com Inc. (BIDU), also broke out. So I checked the analyst ratings and calculated a trend score for each.

Analysts are slightly bullish on GPS, so the breakout runs counter to the consensus opinion. Analysts are neutral regarding the two Chinese companies.

The trend score looks at how many highs (in the case of a bear breakout) in the five days prior to breakout were lower than the high the day before. I combine that with the difference in the close the day before the breakout and the close on the fifth day prior to the breakout.

It's a way of figuring out how convincing a breakout is. Put another way, it tells me how likely I would expect a breakout to be before it actually happens. A good trend score is greater than one. Excellent scores ran run to three and more.


The scores are abysmal for the three. SINA was best with a miserable 0.49. GPS followed at 0.28, and  BIDU actually managed a score of negative 0.08 -- less than zero.

So these are not trades I would take.

Also, the stocks aren't just breakouts, but mega-breakouts, with declines of 6% to 8% from the prior day's close. Something like that, I usually want to wait for a reaction.

I'll look at all three tomorrow morning and see what they're doing. And when I start getting interesting signals, I'll do the analysis.

Readers interested in receiving alerts when something new is posted can follow Private Trader on Twitter at https://twitter.com/TimBovee or by liking Private Trader's Facebook page, https://www.facebook.com/PrivateTrader.

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Sunday, December 2, 2012

The Week Ahead: Jobs

It's jobs week as the Labor Department on Friday releases its comprehensive employment and unemployment statistics, at 8:30 a.m. Eastern.

These numbers, the most politically charged of the economics reporting cycle, to me always seem to be like a clothes washer, because their reporting is always followed by a Washington spin cycle.

During the elections those who wanted to paint the Obama administration as a disaster always drew the most negative conclusions, while administration supporters always found signs of hope. Now that the election is over, it will be politically fascinating (although a market yawner) to see how the various factions in Washington respond.

The other bookend for the week is the Institute of Supply Management's manufacturing index, out Monday at 10 a.m. The index tipped back toward toward expansion the last two months, and a continuation and strengthening of that trend would suggest the recovery truly is taking hold.

Leading indicators out this week (in order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

The average hourly workweek in manufacturing, taken from Labor's employment report at 8:30 a.m. Friday.

Manufacturers' new orders for consumer goods and materials, from the factory orders report out Wednesday at 10 a.m.

Vendor performance (delivery times index), a part of the Institute of Supply Management's manufacturing index, released Monday at 10 a.m.

The S&P 500 index, reported continually during market hours.

Index of consumer expectations from the Reuters/University of Michigan consumer sentiment report, Friday at 9:55 a.m.

Manufacturers' new orders for nondefense capital goods, from the factory orders report Wednesday at 10 a.m.

Average weekly initial jobless claims, at 8:30 a.m. Wednesday, a day earlier than usual because of the holiday.

Other reports of interest:

Monday: Construction spending at 10 a.m.

Tuesday: Motor vehicle sales throughout the day.

Wednesday: The ADP employment report, based on payrolls, at 8:15 a.m.; productivity and costs at 8:30 a.m.; factory orders and the ISM non-manufacturing index, both at 10 a.m.; and petroleum inventories at 10:30 a.m.

Friday: Consumer sentiment at 9:55 a.m.

I also like to keep an eye on the Baltic dry index of world shipping, updated daily.

Fedsters

St. Louis Fed Pres. James Bullard, an alternate on the Federal Open Market Committee, gives a speech on Monday.

Trading calendar

By my rules, as of Monday I can trade January short vertical spreads and March single options and straddles. Of course, shares are good at any time.

Good trading!

Wednesday, November 28, 2012

Art of the Tentative

This has been a day of tentative breakouts within a week, so far, of nothing much.

I'm following three breakouts today. I say "following" because they keep retreating or pausing just above the breakout level, as confused by the broad new vistas opening up on the far side of the price channel boundary.

My trading rules, based on the well-known Turtle Trading method, handle drama quite well -- breakouts, breakdowns, sturm und drang -- not a problem. But the tentative? That is a different matter indeed.

The three breakouts, all to the bullside, are two stocks, Coach Inc (COH) and Phillips 66 (PSX), and one exchanged-traded fund, EWG, which tracks German stocks.

Up front: I'm not going to trade any of these stocks. In this brief discussion, I'll focus on why none is making the cut.

I ran all three through my triage routine, which attempts to assess the strength of the upward move. It has two parts.

The first: Out of the five trading days preceding the breakout, what percentage had a higher low than the day before (for bull breakouts, or lower high for bear breakouts).

The second: Subtract the closing price the trading day before the breakout with the close on the fifth day prior to the breakout.

Five is a week in market time, so I chose that as the smallest unit above a day that encapsulates a meaningful period in trading.

Then I convert the second number to a multiple of the stock's average daily trading range, and multiply that number by the percentage I got in step one.

The result is the trend score.

COH and PSX has small trend scores, 0.36 for COH and 0.43 for PSX. Part of that was because each had higher lows on only three of the five days preceding the breakout. Also, their price rise (step two) over the five days was less than a singe day's average range.

EWG had quite a respectable score of 2.56, based on each of the five preceding days showing higher lows, and a total rise, close to close for that period of more than two and a half times the average trading range.

However, EWG has an average volume of 2.9 million shares, and while it has four-digit open interest for the front-month at-the-money calls, the open interest shrinks to two-digits $1 out, and one digit $2 out from at-the-money.

That is far to illiquid for my purposes.

So, for those reasons, no trade today.

My point in all of this is that although the Turtle Trading rules, upon which my rule set is based, famously demand that any breakout within the trader's universe of prospects be traded immediately, the reality on the chart and the options grid sometimes dictates prudence and a decision based on factors other than the breakout.

Turtle purists will turn up their Turtle-ish noses in disgust, but as a trader I feel I must above all THINK and not follow the cautionary slogan that used to be posted in IBM offices back when it was the leading computer company in the world: THIMK.

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday, November 27, 2012

FSLR: Sunny side up

First Solar Inc. (FSLR) broke up its high of the last 55 days, creating a bull signal under my trading rules. The price has been trading an ascending triangle since late August.

Volume today was about triple the recent average, a sign of heavy momentum behind the move.

First Solar has been a huge disappointment the past two years for those who trade on stories rather than charts. From a high of $175.45 in February 2011, the price plummeted to a low of $11.43 last June.

It's an oft-told tale: Hop on the Next Big Thing too early, and it breaks your heart.

So I'm not an ethusiast about FSLR because it's clean energy and sunshiny and new tech and all of that. It's a breakout on the chart that met my rules.

The momentum leading up to the breakout was somewhat on the low side, with a trend score of 0.74. I'm more confident with a score of 2.0 or better, but a low score isn't a deal killer.

Very briefly, since we're near today's close:

Analysts hate this stock; the enthusiasm rating is a negative 75%.

Return on equity is 10%, which is respectable, and long-term debt is low, at 14% of equity.

Institutions own 72%, and the price is way cheap. It takes just 75 cents in stock to control a dollar in sales.

I'll skip the options analysis except to say that the selection was sufficiently liquid to meet my needs. Implied volatility is very high at 72%.

First Solar next publishes earnings on Feb. 25.

Decision for my account: I took the trade, structuring the initial position as a bull put options spread, short the $24 put expiring in December and long the $23 put. This puts my break-even point at $22.99, which, thanks to the high volatility, is below my standard stop/loss at $23.58. The potential yield on the position is 31%.

If the price continues to rise, triggering additions, I'll buy long calls expiring in March, with a delta of around 70.


References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Monday, November 26, 2012

FB: Into the gap

Facebook Inc. (FB) gapped past its high for the past 55 days: $24.68. More important, the rise carried the price into the gap left by the stock's fall on July 27, as it tumbled down to the channel where it has meandered ever since.

The price had in fact first broken past the 55-day high two trading days earlier, but without the strong momentum seen today. So I'm treating today as the breakout point, although that is a bending of the rules.

Facebook has proved to be the premier drama queen of the markets. As it charges into the July gap, the question to ask is whether we're seeing General Patton and his tanks driving into Germany, or Lord Cardigan leading his cavalry in the Charge of the Light Brigade.

When FB gapped last October, I wrote in "FB: A gap, but not quantum leap", about the two orbits that have marked the stock's behavior since the company went public in March. The price remains below the floor of the upper orbit -- $26.73 -- but it is for the first time approaching that level in a break above the lower orbit's ceiling -- $23.37, with a few head-fakes mixed in to keep things interesting.

For the near term, the chart shows a clear uptrend: A low of  $18.80 on Oct. 19, a high of $24.25 on Oct. 24, a higher low of $18.87 on Nov. 12, and now a higher high of $26.05 (so far) today.

The volume is higher than that of the last week, but since it was a holiday week, that fact adds nothing to the analysis.

Facebook -- the company -- needs no explanation. It's one of the great cultural names of our time.

Analysts have grown more positive about the company in the last three months; an index based on their recommendations shows enthusiasm more than tripling, from 7% to 24%.

To a remarkable extent for a company perceived as being an innovative growth prospect, return on equity is quite low, standing at 6%. On the other hand, long-term debt is also low, at a bare 4% of equity.

The company has released only two quarterly earnings since going public, each with identical earnings per share and with virtually no surprise compared to analyst expectations.

Institutional ownership is way low, at 35%. Yet the price is way high; it takes $11.22 in shares to control a dollar in sales.

From a fundamental standpoint, at this stage, FB would be a foolish purchase in my book. If I had a very long term trading horizon, I might stash some shares away in a corner of my portfolio, hoping to cash in big some years down the line.

But my horizon is much shorter, and therefore fundamentals don't count for much in my trading decisions.

FB's strong upside break into the July gap signals to me that there's something's happening here. (What it is ain't exactly clear. For what it's worth.) For my style of trading, the proper course is to jump aboard for awhile and see where the train goes.

For triage, when selecting among trade possibilities, I score the price movement for the past five days.

If it's an upside breakout, I see what percentage of the lows for those days represented a higher low from the prior day. By that measure, FB did outstanding, at 80%.

I also calculate the price difference between the close the day before the breakout, and the close five days earlier, convert it to a proportion of the average true range, and then combine that (by multiplying) with the percentage of higher lows, to produce a trend score that shows very near term momentum before the breakout.

FB's trend score is quite low, at 0.32. (By contrast, my other breakout trade today, MO, scored 3.42.) I will argue that the push into the July gap is of sufficient importance to overshadow the trend score. We shall see if my thinking is correct.

FB on average trades 92.3 million shares a day, making it one of the most liquid individual issues on the market.

It supports a very wide range of option strike prices with open interest near the money running to five figures. The front-month at-the-money bid/ask spread on calls is 3%.

Implied volatility is high compared to other stocks, at 49%, yet it stands near the bottom of the six-month range. Volatility has been rising since Nov. 21.

Options are pricing in confidence that about two thirds of trades will fall between $22.21 and $29.55 over the next month for a potential gain or loss of 14%, and between $24.12 and $27.64 over the next week, for a gain/loss of 7%. The one month gain or loss is seven times the average trading range, and the weekly, four times.

Two hours before the close, the fair-price zone on today's 30-minute chart runs from $25.47 to $26, encompassing about two-third of transactions surrounding the most-traded price, $25.84. The stock is priced at about the most-traded price.

FB next publishes earnings on Jan. 23.

Decision for my account: I opened a bull position, structuring it as a bull put vertical spread, short the $24 December put options and long the $23 December puts, for a $22 credit per contract. The break-even point is $23.80, slightly above a stop/loss at $23.62, which amounts to twice the average daily trading range. The potential yield of the position is 17%.

My rules tell me to hold this spread until it expires. If the price should rise enough to trigger additions to the position, I'll buy March call options with deltas near 70, and apply a trailing stop/loss amounting to twice the average daily trading range.

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Sunday, November 25, 2012

The Week Ahead: Durables, Income, Outlays, Savings

Durable goods orders on Tuesday and personal income and outlays on Friday, both at 8:30 a.m. Eastern, bracket the week's economic reports.

Durable goods, which tracks big-ticket items, is a measure of how confident businesses and people are that they can buy expensive stuff and put it to productive use. If durables are doing good, that bodes well for the broad economy.

From income and outlays is derived the personal savings rate, a key measure of our willingness to shop till we drop.

In between, and of lesser significance, look for new home sales on Wednesday at 10 a.m. and the second try, the preliminary, at the 3rd quarter gross domestic product, on Thursday at 8:30 a.m. The GDP is a revision of last month's release and will be low impact unless the first version got the numbers horribly wrong.

Leading indicators out this week (in order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, moved to Friday 4:30 p.m. because of the holiday, from the Federal Reserve.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Wednesday, a day earlier than usual because of the holiday.

Other reports of interest:

Monday: The Dallas Federal Reserve manufacturing survey of Texas businesses, 10:30 a.m.

Tuesday: S&P Case-Shiller home price index, the lone housing report that recognizes that all real-estate markets are local, at 9 a.m., ahd the Conference Board's consumer confidence report at 10 .m.

Wednesday: Petroleum inventories at 10:30 a.m. and the Federal Reserve's Beige Book, a report on conditions in each Fed region, at 2 p.m.

Thursday: The Realtors' pending home sales index -- deals signed but not yet closed -- at 10 a.m.

Friday: The Chicago purchasing managers' index, tracking conditions in Chicagoland, at 9:45 a.m.

I also like to keep an eye on the Baltic dry index of world shipping, updated daily.

Fedsters

Federal Reserve Chairman Ben Bernanke gives opening remarks on Tuesday at 8:30 a.m. at the National Fed Challenge, an event for high-school students that teaches them to think like a Fedster. Can this truly be good for youthful minds?

Three members of the Federal Open Market Committee, responsible for setting monetary policy, also take to the podiums: Atlanta Fed Pres. Dennis Lockhart on Tuesday and Cleveland Fed Pres. Santra Pianalto and Fed Gov. Daniel Tarullo on Wednesday, 

Trading calendar

By my rules, as of Monday I can trade December short vertical spreads as well as the short legs of diagonal and calendar spreads, covered calls, iron condors, and butterfly spreads, and March single options and straddles. Of course, shares are good at any time.

Good trading!

Tuesday, November 20, 2012

DLTR: Price rise

Dollar Tree Inc. (DLTR) beat earnings estimates by a 39% last week, kicking off a price rise in the stock that on Tuesday broke past its high point of the past 20 days.

The purveyor of cheapness has been in a downtrend from $58.62 on June 20 and hit a swing low of $37.12 on Nov. 9.

Past that, until the earnings announcement, the price drifted sideways for three days.

The 20-day high breakout was $40.97, a resistance level that was the peak of a brief late-October correction to the upside.

DLTR showed an uptrend for four of the five days leading to the breakout, and the total price rise for those five days was $2.74. To set that number in perspective, it amounts to the distance DLTR's price typically travels in two days plus an additional two hours of trading.

My trend score for those five days is 1.9 -- the price rise adjusted for the persistence of the trend.

The next upside resistance is far away, at $49.57.

Dollar Tree, headquartered in Chesapeake, Virginia, operates 4,400 stores, operating also as Dollar Bills, in the United States and Canada. Everything sells for a dollar.

I find it fascinating to roam the aisles trying to figure out what characteristics allow items to go for so little, concluding in most cases that you get what you pay for. I once bought a watch there that died on my wrist after a day of floating in a sheen of Japanese summer sweat.

Analysts show little love for Dollar Tree -- maybe they bought watches there, too. The enthusiasm index stands at a negative 11% today, compared to a positive 21% two months ago.

Which seems contrarian. Dollar Tree's return on equity is 37%, and it has been at that super high range for at least three quarters. Long-term debt is fairly low, at 16% of equity, and has been typically low for at least three quarters.

So I can't argue that the analysts haven't caught up with the company's current situation. It has been making money for awhile.

Another story that might lend a negative twist to Dollar Tree's futures is the idea that as the economy's recovery strengthens, people will move upscale for Dollar Tree.

Like all retailers, DLTR's earnings peak in the 4th quarter, covering the Christmas shopping season. The 4th qarter of 2011, reported in February of this year, beat the prior 4th quarter significantly. The last 12 quarters have all been profitable and have produced earnings surprises to the upside.

Institutions own 82% of shares but the price is only slightly above par. It takes $1.30 in shares to control a dollar in sales.

DLTR trades 4.9 million shares a day on average. The inventory of option strike prices is fairly thin, with most set at $2.50 intervals. Open interest runs in three and four figures near the money, and the front-month at-the-money bid/ask spread is 5%.

Implied volatility stands at 28%, near the floor of the six-month range. Traders are pricing in confidence that nearly two-thirds of trades will fall between $37.97 and $44.53 over the next month, for a potential gain or loss of 8%, and between $39.68 and $42.82 over the next week, for a gain/loss of 4%.

Trade in call options is quite active today, with volume running 83% above its 5-day average. Puts are lagging at 19% below average.

The stock's fair-price zone runs from $40.69 to $41.36, encompassing nearly two-thirds of transactions surrounding the most-traded price, a range from $41.11 up to $41.18. On the way up the price started a trades spike from $40.76 to $40.81, but moved on upward from there.

Dollar Tree next publishes earnings on Feb. 27.

Decision for my account: I opened a position half an hour after the breakout, structuring it as a bull put spread, short the $40 puts expiring Dec. 21 and long the $37.50 puts, for a credit of $51 per contract.

That sets the break-even point at $39.49, a bit above a stop/loss set at double the average daily trading range.

If the rise continues, prompting to add to the position, I'll buy call options May call options with a delta of around 70.

(My trading calendar says I should buy long options expiring March, but DLTR has no March or April options, hence the unusually long lead time.) 

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Monday, November 19, 2012

NWL breaks out, bounces back

I love holiday weeks. The markets are open for some of the days, at least, but they generally proceed at a leisurely pace, leaving time for other projects.

My project this week will be to work up some routines to analyze my historical market data, with an eye to understanding better how to reduce false positives among price-channel breakouts.

Also, I get the impression that the 20-day and 55-day channel boundaries -- the standards for Turtle Trading -- serve more as reversal points than breakout levels for forex. I want to test that out, because currencies have the advantage of having higher leverage than options do, but it's an advantage only if the trade goes in my direction.

There were four breakouts -- all stocks -- in the early trading on Thanksgiving Week Monday. That called for triage.

The four breakouts were PGR to the downside and NWL, SWN and TSO to the upside.

All four passed my half-hour test. The price had not retraced to within the price channel a half hour after the signal was given. And all four had acceptable liquidity. So, no help there.

The fundamentals and brokerage sentiment (I use Zacks for this) were bullish on two of the stocks that broke out to the upside, and neutral on the remaining two. When the fundamentals match the direction of a breakout, I take that to be something that gives some slight bias toward a successful trade.

My final step was to judge the trend, in two ways, both looking at the five days of trading prior to the breakout.

First, I wanted to know what percent of those five days trended in the direction of the breakout. To  draw a trendline for a rising trend, my practice is to connect the daily lows. This marks price support for the trend direction. A falling trendline is the opposite -- I connect the highs, providing a line that marks resistance against a further rise.

NWL led the pack with for out of five days showing higher lows, which I scored as 80%. The others came in a 20% and 40%.

My second test is to test the close on the day before the breakout against the close five days earlier. This not only shows whether or not the price over that period is moving in the direction of the breakout, it also shows the magnitude of the move.

I express the move in terms of the 20-day average true trading range, which puts all the stocks in the triage on a level playing field. In Turtle Trading, and in my trading plan, the 200-day ATR is abbreviated as N.

So I code the result as Nx2.2, for example, meaning that the movement in those five days was a bit more than twice the average true range in the direction of the trade. Nx-2.2 would mean, opposite the direction of the trade.

NWL came in best, which a score of Nx1.2. SWN was second, with a miserable Nx0.01. PGR and TSO both moved contrary to the direction of the breakout.

So NWL it is. I've gone into such detail on the triage and the scoring because they'll be part of the  analysis I hope to develop as part of my programming project this week.  My hypothesis is that higher scores suggest stronger momentum at the time of the breakout.

We shall see.

Newell Rubbermaid Inc. (NWL) broke above high price of the past 55 days, $21.33, and pushed to a swing high of $21.52. It remained above the breakout point for the first 2-1/2 hours of trading, but it bounced back below breakout about the time I started to write this piece and after I had opened a position. Not a promising start.

But the Atlanta, Georgia company makes a lot of rubber products. So perhaps a bounce was inevitable. It's products are ubiquitous across a wide range of uses, such as the bookshelves in my basement.

The stock began a mid-term rise on Aug. 31 from $16.87  and has been in a weak correction since mid-October. I say weak because even though correcting, the price managed a slight upward tilt.

The breakout level was a true resistance point, which also adds weight toward taking a trade.

Analysts are optimistic about NWL's prospects, having given it a 55% enthusiasm index for at least the past three months.

And with good reason. Return on equity is 25%, and long-term debt, although higher than I like, amounts to two-third of equity, not a crippling level by any means.

Earnings tend to peak in spring and summer -- the 2nd and 3rds quarters -- and 2012s quarters are about the same as those a year earlier. That sort of pattern marks a mature market in my eyes. NWL is a money maker, but its earnings aren't accelerating.

Institutions own 87% of shares, and the price is about at part: It takes $1.02 in shares to control a dollar in sales.

NWL on average trades 3.9 million shares a day an supports a moderately good selectoin of optoins strike prices with open interest running in three and four figures.

The bid/ask spread on front-month at-the-money calls is quite wide, at 27%, and implied volatility isn't especially high, standing at 21% at the bottom of the six-month range.

Options traders are pricing in confidence that about two thirds of trades over the next month will fall between $19.94 and $22.53, for a potential gain or loss of 6%, and between $20.61 and $21.86 over the next week, for a gain or loss of 3%.

Options trading is slow today -- it is a holiday week -- with calls at 45% of their five-day average volume, and puts at 75%.

The fair-price zone on today's 30-minute chart ranges from $21.22 to $21.46, encompassing about two-thirds of transactions surrounding the most-traded price, $21.35.

One thing I look for in this analysis is whether other prices are gaining on the most-traded. NWL has a second peak in the making around $21.26 or so, the action where the trading is presently occurring. That suggests that the breakout momentum is dissipating and that the trade has a greater chance of failing.

Decision for my account: I took the trade earlier in the morning, back when it looked better. As is my common practice these days, I hedged it, structuring the position as a bull put spread, short the December $21 put and long the December $19 put.

The $37 net credit for each contract means that the position will be profitable at expiration on Dec. 21 if the stock is as low as $20.63, a bit above a $20.48 stop/loss set at double the average true range.

For bullish vertical spreads like this, my rules dictate that I hang on to the position until either the price breaks breaks beyond the 20-day low price, or the relative strength index rises above 70 and then falls back below that level.

References

My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

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.