Wednesday, September 26, 2012

ORCL: Bear signal amid a tech decline

Oracle Corp. (ORCL) gapped below its 20-day low at the open this morning, continuing a steep four-day downtrend and triggering a Turtle Trading bear signal. (I describe the Turtle Trading rules here.)

The decline began on Sept. 21 from $33.29, the peak of a rise from $25.33 that began in mid-May.

Today's 0.9% opening gap was part of a broader tech decline. Even AAPL was hit enough to take out my stop/loss and close my bull position.

For Turtle Trader's, the signal makes it mandatory to open a bear position in ORCL, as long as it fits into the trader's diversification and funding rules.

For traditional support and resistance chartists, the gap marks a lower low, falling below the $31.16 base that marked the start of the final upward push. The pattern is a high followed by a lower low, and a new lower high -- below $33.29 -- will provide the three points needed to declare a downtrend correcting the rise from mid-May.

That has been a series of stair steps, and these provide support levels. The next support level down is $29.74, which was only tested once, and below that, $29.07, which was tested three times.

Oracle, based in Redwood City, California, builds and supports enterprise-level database systems, both software and hardware, for customers globally. It is the third-largest software maker, after Microsoft and IBM.

ORCL gets a 26% enthusiasm index from analysts, up from 24% three months ago.

Return on equity is 28% with a moderately low level of long-term debt amounting to 31% of equity.

Annual earnings have been on a steady rise in recent years, though the company's 2012 fiscal year, which ended in May.

The peak quarter, the 2nd calendar quarter covering the spring, has risen the past two years compared to the year-ago quarter. Ten of the last 12 quarterly earnings have seen upside earnings surprises, and two have surprised to the downside.

Institutions own 61% of shares, and the price is high: It takes $4.08 in shares to control a dollar in sales.

So the chart is contradicting the financials. On the books, for the fundamentalist, Oracle is a company to be bullish about. It is not, however, a value play. The price is just way too expensive for that.

ORCL on average trades 30.2 million shares of stock each day. It has a moderate selection of opton strike prices with open-interst running from three- to five-figures near the money. The front-month, at-the-money puts have a miniscule 1.3% bid/ask spread.

Implied volatility is running at 24%, halfway between the mid-point and the six-month low. It has been rising since Sept. 19.

Options are pricing in confidence that 68.2% of trades will fall between $28.71 and $32.89, for a gain or loss of 7%.

Options volume is running 13% above the five-day average, with puts leading at 50% above, compared to calls trading at 19% below the average.

With 100 minutes left in the trading day, the fair-price zone runs from $30.58 to $30.92, encompassing 68.2% of transactions surrounding the most-traded price, $30.80. That price is within penny's of ORCL's current mark.

ORCL next publishes earnings on Dec. 18. The stock goes ex-dividend on Oct. 10 for a quarterly payout yielding 0.78% annualized.

Decision for my account: I've opened a bear position under Turtle Trading rules, structuring it as January puts with a $33 strike price. This gives 7x leverage. The initial stop/loss for my $30.87 entry is above $31.98, or double the 55-cent average true range of the past 20 days.

I would also open a bear position based on traditional trend analysis, on the bases of the break below the prior near-term correction low.

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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