Thursday, August 30, 2012

UPS: Framing the chart

The ecology of sending stuff from here to there is really very simple.

If it's sort of flat, go with FedEx. If it's square or oblongish, go with UPS. If it's junk mail or a birthday card, let the Post Office do it.

 So I found it to be a bit shocking this morning to be awakened by an alert screaming "bear signal" on the stock of United Parcel Service Inc. (UPS).

Their signature-brown trucks pass by my house every day. The economy is recovering, although slower than everyone wants. If ever there were a company that should fall into the slow and steady growth model, it's UPS.

That, at least, is what the story-telling part of my brain says.

The question of UPS, as it turns out, has more to do with how a stock chart is framed than with the merits or demerits of corporate performance.

The signal was a drop below the 20-day low for the stock, a bear signal in the Turtle Trading system. You can read my discussion of Turtle Trading here.

Turtle signals operate at the extremes. And as any experienced trader know, the extremes are where a position either makes a bundle or loses a bunch. The extremes are where trading gets fun, or maybe heartbreaking.

The extreme at this case is the lower boundarya sideways movement that began in late July after a downside earnings surprise, running from about $73.50 to $76.80.

It is a move within a downward correction from a peak of $81.79 set in mid-March.

A Turtle signal has no built-in time frame. The idea is the position lives until it hits a stop/loss or exit level. And under Turtle rules, the trade must be taken. In the case of UPS, I have a stop/loss of  $75.80. As long as that level isn't hit, then I'll continue to hold the position.

Yet I find that most Turtle signals set up a short-term quandary. They happen at the extremes, and can be interpreted either as a breakout or as a set up for a move in the opposite direction.

In the case of UPS, my normal way of framing a chart's narrative would say that the price faced near-term resistance to further decline at $73.51, the low set July 24, and at $72.15, set June 5. A drop below $72.15 would be a powerful argument for the bear case.

A bounce from either of those levels would suggest a swing trade with at least $2 upside potential for a gain of about 2.7%.

Further upside resistance is at the Aug. 15 high of  $76.81 and further at the July 18 high of $80.53.

Note, please, that the Turtle breakout isn't a resistance level according to the normal methods of framing charts. It's just place, of no intrinsic significance. Like a ghost town whose post office was long ago shuttered.

UPS, headquartered in Atlanta, Georgia, ships package for 1.1 million customers each day to 7.7 million recipients in more than 220 countries. It is huge. But, arguably, it has pretty much grown to its limits, at least until Mars or the moons of Jupiter are opened up for settlement.

Analysts treat UPS positively but not as a huge opportunity for explosive growth. It has an enthusiasm rating of 15%, the same as a month ago. In scoring enthusiasm, I add points for strong buy recommendations, subtract points for hod recommendations and worse, and ignore simple buys.

And what a cash cow! United Parcel Service reports return on equity 58%. Yes, that comes at the cost of a heavy load of debt, amounting to 144% of equity. But, I mean, 58%! Any passing fundamentalists are embarrassed on my behalf as I talk  bear signals about a company with that sort of record of management efficiency.

UPS, like everyone else, in 2009 hit a recession low in annual earnings. Earnings tend to peak in the 4th quarter Christmas season, and earnings have risen in that quarter over a year earlier for at least the past two years. Ten of the past 12 quarters have showed upside earnings surprises, and two -- the most recent -- surprised to the downside.

Institutions own 66% of shares -- not oustandingly high -- and the price is a bit above parity. It takes $1.32 in shares to control a dollar in sales.

UPS on average trades 2.3 million shares a day, sufficient to produce a moderate selection of options strike prices with four-figure open interest and narrow bid/ask spreads. The front-month at-the-money calls have a spread of just 2%.

Implied volatility stands at 17%, in the lower half of the six-month range. It has risen to that level from a lower of 14% set Aug. 10.

Options are pricing in confidence that 68.2% of trades will fall between $70.42 and $77.72 in the next month, for a gain or loss of 5%. That's a bit below the volatility of the S&P 500 index, which itself is not especially volatile most of the time.

Options activity is running at 96% of their five-day average volume, with calls having the edge at 1.15% and puts less active at 70%. This suggests that the Turtle bear signal is contrary to the trading consensus at this moment.

The fair-price zone presently ranges from $73.86 to $74.05 and encompasses 68.2% of trades surrounding the most-traded price, $73.97. The current price is a bit above the zone.

UPS next publishes earnings on Oct. 23. the stock goes ex-dividend in November for a quarterly payout yielding 3.08% annualized.

Decision for my account: UPS is part of my Turtle Trading equities pool, so I opened a bear position. I structured it as the purchase of put options expiring next January with a strike price of $77.50. These give me 9x leverage at this point.

If I were trading based on the chart narrative, I would wait for a break below $73.51 to open a bear position, or a bounce from that level to open a bull position.

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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