Tuesday, January 17, 2012

DELL: Game of Triangles

Dell Inc. (DELL) -- a major computer maker, headquartered outside of Austin, Texas  -- is showing some serious triangulation on its weekly chart that might suggest interesting times ahead for traders.

There are two overlapping triangles, both having a floor stretching from the low the week of Aug. 23, 2010 through a higher low recorded the week of Aug. 15, 2011.

Triangle #1 is a larger-scale ascending triangle with a base ceiling at $17.52 (the week of April 12).

Triangle #2 is a symmetrical triangle with a base ceiling from the high set the week of July 18.

The symmetrical triangle can be seen as having broken out last week, and the breakout has continued this week. The triangle two base is $4.31 wide. The breakout point was about $15.68. So, triangle lore would have it that the upside target is $19.99 -- round it up to $20.

Triangle #1 won't reach braekout until it tops $17.52.

Dell reached the Triangle #2 ceiling through a 10-day rise that interrupted by only two stumbles, both followed by rapid recoveries. Analysts are also looking more kindly on DELL, amid chit-chat about how the company is reinventing itself.

The price has been in a sideways pattern since August 2009, with big swings that alone can produce plenty of profit.

If size counts, DELL counts. It serves a huge range of the computer market, from enterprise-level servers down to laptops, from giant corporations down to schoolkids.

With average volume of 15.2 million shares, it is a supremely liquid trade. Institutional ownership stands at 69%, a bit low for a behemoth. Perhaps money managers are still a bit skeptical of the reinvention talk.

DELL's return on equity is 47% -- growth stock territory. It's financing its reinvention through borrowing, with a debt/equity ratio of 0.95, which is far higher than I like.

The stock is cheap, like something you would pick up at the local thrift store, with a price to sales ratio of 0.46. That means less than half a dollar in stock gives ownership of a dollar in sales. I like that a lot, but with the caveat that cheap stocks are usually cheap for a reason.

DELL's liquidity comes with a full suite of options, with strike prices $1 apart, narrow bid/ask spreads, and lots of open interest.

Earnings are scheduled for Feb. 21.

Decision for my account: The triangle breakout combined with the high liquidity and analyst happy-talk makes DELL very attractive. The high debt and the fact that the price has been swinging sideways since the summer of 2009 are troubling. I considered opening a stock position, suitable as a basis for for selling covered calls. But present call premiums make the return too low. 

As an alternative, I've sold February bull put spreads, short the $16 strike and long the $15 strike, which is profitable down to around $15.73. The spread limits upside gains but also downside losses.

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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