Tuesday, September 4, 2012

HON: Downside breakout

Honeywell International Inc. (HON) took a dive this morning on no discernible news, falling 1.3% from its open to a low (so far) of $57.16, exceeding its 20-day average price movement by 39%.

It quickly retraced about half the decline. However, in falling it crossed the stocks lowest price for the past 20 trading days, triggering a Turtle Trading bear signal.

This is one of those charts where the Turtle signal flies in the face of trend analysis. HON has in the main been in the midst of a sideways move throughout 2012. It could be called an ascending triangle if the base is carried back into 2011, although that's a bit far-fetched. But in any case, it's a stock stuck between about $52 and $62 with no intention of moving beyond those boundaries.

The Turtle signal, breaking below $57.66, has a good 10% or so of downside before hitting resistance on the downside, so it's not an uncomfortable divergence of signals. The last month has seen downside resistance at around $58.20, so the decline counts as a break below resistance by both methods of chart analysis.

An explanation of my Turtle Trading rules can be found here.

Honeywell designs and builds big technology products serving four business segments: Aerospace, Automation and Control Solutions, Performance Materials and Technologies, and Transportation Systems.

The Morristown, New Jersey company ranks 77th on the Fortune 500. So it's big and it's global and exercises great control over its markets by virtue of that size and reach. Analyst opinion in aggregate scores 29% for enthusiasm, higher than many and unchanged from three months ago.

But, it is said, the bigger they are the hard they fall. Honeywell's annual earnings fell  by 24% over two years during the recession, and have not even attempted a recovery to pre-recession levels.

Quarterly earnings in 2012 are slightly above 2011 levels but are steady rather than accellerating. The last 12 quarters have been profitable, and all have shown upside earnings surprises.

Honeywell reports return on equity of 29%. That would be growth-stock territory if its long-term debt were lower than 52% of equity. For growth, I like to see debt below 10% of equity.

Institutions own 78% of shares. The price is slightly above sales parity. It takes $1.22 in shares to control a dollar in sales.

HON on average trades 2.3 million shares a day, supporting a good selection of strike prices with four- and five-figure open interest. The bid/ask spread is narrow, amounting to 3.3% for at-the-money front-month calls.

Implied volatility stands at 28%, about the midway point in the six-month range. It has been on the rise since mid-August. Options are pricing in confidence that 68.2% of trades will fall between $53.04 and $62.34 over the next month, for a potential gain or loss of 8%.

The fair-price zone today run from $57.16 to $57.85, encompassing 68.2% of transactions surrounding the most-traded price, $57.38. An hour befor ethe market close, HON is trading within the zone.

Honeywell next publishes earnings on Oct. 15. The stock goes ex-dividend in November for a quarterly payout yielding 2.58% annualized.

Decision for my account: HON is part of my Turtle Trading equity pool, so under the rules I have no choice but to take the trade. I structured it as calls expiring in December with a strike price of $62.50, for 7x leverage.

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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