SNDK: Oscillator or trend?

The Sandisk Corp. (SNDK) chart is one of those oddities of the market: An oscillator masquerading as a breakout. Or, perhaps, an oscillator that's having a change of heart and moving on to a new phase in life. There's no way to tell except after the fact, and that's what makes trading interesting.

SNDK broke below its 20-day low of $41.79, but didn't continue far beyond it. It's the third time that level has been touched since Sept. 26, as the price executed a sideways maneuver ranging from  that low up to around $45, which one major breakout to the upside that immediately retraced.

That breakout to the upside on Oct. 19 moved all the way to the upper 20-day high and pierced it, giving a bull signal that proved to be massively false.

By the classic Turtle Trading rules, SNDK has given a bear signal and that trade must be taken. My own trading rules, as regular readers will know, are less dogmatic. I'm comfortable with the fact that trading signals exist within a high degree of ambiguity. The classic Turtle rules don't allow for that.

The challenge with SDNK is to figure out where the momentum lies. We know from the chart that the trend is sideways short-term, and down in the immediate term.

SNDK met my time delay criteria. It broke out and remained below the 20-day low a half hour after the breakout.

The relative strength index, which I use to filter trades, is declining today, providing confirmation for the bear signal. It also provided confirmation for the Oct. 19 bull signal.

Two other indicators proved to be better filters on Oct. 19.

The MACD, which compares two moving averages, was below the zero-line, in bear territory, both for today's downside breakout and the earlier upside breakout.

John Carter's TTL Squeeze indicator, which compares Bollinger Bands to Keltner Channels, also confirms today's downside breakout while waving traders off from the earlier upside move.

The decision about trading SNDK to the downside is complicated by the company fundamentals. Sandisk, headquartered in Milpitas, California, makes flash media storage devices that are used in smartphones, laptops, game machines, and other products.

With flash memory rapidly replacing the hard drive as the primary storage method on consumer devices, Sandisk seems well positioned to make some money. On the story level of analysis, at least. (Every stock has a story, which doesn't necessarily govern what happens to the price.)

Analysts certainly are up on SNDK's prospects, showing a 26% enthusiasm index for the stock. Enthusiasm stood at zero a month ago, in a perfect balance between analytical optimists and pessimists.

Add to that return on equity of 8% for the 3rd quarter in earnings reported in October anda low level of long-term debt amounting to 11% of equity, and you have a company that's at the least stable, although not a flashy (no pun) growth stock.

SNDK has been profitable from 2009 onward, after slipping into heavy losses in 2008 during the height of the recession. Annual earnings were off in 2011 compared to the year before. Estimates suggest 2012 earnings will also show a further decline but to then show growth in ensuing years.

All of the last 12 quarters have been profitable, with the three quarters reported so far this year well below the 2011 and 2010 peaks. All but one of the 12 quarters showed upside surprises. The 1st quarter of this year surprised to the downside.

Institutions owns 86% of SNDK's shares, and the price is running above par; it takes $2 in shares to control a dollar in sales.

What all of this tells me is that SNDK is having a slightly troubled year but ought to do better next year. That certainly matches the sideways pattern, as a balance between the glass-half-full and glass-half-empty crowds.

So it's a bear signal requiring caution. One way to provide that caution while still taking the signal is to sructure the position as a short vertical options spread -- a bear call spread, in this case.

If I enter at $41.96 (the current price as I write), my initial stop/loss will be $44.75, equal to double the stock's average trading range.

If I structured the spread as short the $44 December call and long the $45 call, then my break-even point is $44.33, at about the stop/loss level. And my maximum loss is at $45.01, just 68 cents above the breakeven point for the spread.

My maximum profit is the $33 premium I get for each contract, a yield of about 49% over the risk. Of course, if SNDK continues its downward course, confirming the trend, then I would do straight directional plays -- buying long puts -- at my designated prices for adding to the position.

I discussed the question of spreads as trading vehicles to manage risk over the weekend. You can read the post here.

SNDK's implied volatility stands at 36%, in the lower half of the six-month range, and has been mainly declining since mid-October.

At that level of volatility, options are pricing in confidence that 68.2% of trades will fall between $37.66 and $46.44 over the next month, for a potential gain or loss of 10%, and between $39.94 and $44.16 over the next week, for a gain or loss of 5%.

Options trading is in the doldrums, running at only 46% of five-day average volume. Calls are slower, at 37% of the avreage, compared to 56% for puts.

The fair-price zone on today's half-hour chart runs from $41.85 to $42.17, encompassing 68.2% of transactions surrounding the most-traded pricde, $42.01. With two hours of trading left, the price has moved above the zone.

SNDK on average trades 8 million shares a day. The company next publishes earnings on Jan. 28.

Decision for my account: I took the trade, structuring it as the vertical spread described above. For a spread like this, there's no stop/loss. The definition of the risk inherent in a vertical spread fulfills that function. The next step to add to the position is below $41.28, and should that point be hit, then I'll add by buying (most likely) $46 January puts.

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.

Trading resumes Wednesday

Stock and options trading resumes on Wednesday at the usual time, 9:30 a.m. Eastern. The New York Stock Exchange statement is here.

So, let's see, we've had two days of earnings announcements, plus one major federal economic report, plus a major reshuffling of Apple's executive line up, and no chance to price any of those events into the markets through stock trading.

Not to mention pricing in the damage done by post-tropical-cyclone Sandy in its progress across the  mid-Atlantic and northeast seaboard.

Wednesday morning may have more drama than usual.

Trading vehicles

A downside of trend-following systems, such as the one I use, is that there are so many head fakes and damp firecrackers.

I have tools in place that help weed out the head fakes -- a trading signal that is quickly negated by the price action. 

Damp firecrackers, however, are a tougher nut to crack. A damp firecracker is where the stock breaks beyond its 20-day price extreme, only to meander sideways thereafter, usually a bit below my entry level, or so its seems.

Those patterns don't make for large losses, but they do produce small losses and otherwise tie up funds, producing lost-opportunity costs.

Vertical option spreads are a way around the damp firecracker problem. They make money even in a sideways market, and they also allow the trader some cushion between the entry point and the break-even price. They also limit losses to a defined level.

The cost of that added control and limit on losses is that gains are also limited.

So I've added a discretionary paragraph to my trading rules that gives the trader the choice of using vertical spreads for the initial position, upon breakout. However, if the price then becomes to trend, triggering additions to the position, the additions must be in the form of long calls or puts, or shares, both long or short, depending upon the direction of the trade.

The rule addition reads:

For positions based on the equity and exchange-traded fund pools, the initial position can be either long calls or puts, or short vertical spreads (bull put spreads, bear call spreads) with the break-even point set near or at the initial stop/loss point (2N from the entry price), at the trader’s discretion. Additions to the position must be long calls or puts.

In testing, I've founds that selecting the short leg of the spread from among strikes having deltas from 30 to 40 works well, with the long leg as close to the short as I can manage. Generally, the short strike will be close to the stop/loss level.

When I trade, I'll note in my write-up which vehicle I used and how I constructed it.

Some reading:

• A vertical spread tutorial from TD Ameritrade's ThinkOrSwim unit. (Note that it is the short verticals that are used in my rules.)
• A tutorial on short verticals from Investopedia.
• My trading rules, with an explanation of the choices I made.
• The original Turtle Trading rules, upon which my rules are based.

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.

The Week Ahead: Prepare for the surge

Update: This entire schedule has been thrown into doubt as a result of Hurricane Sandy pushing through the Washington, D.C. region. 

The week's big report, employment, will go ahead as planned on Friday, according to a Department of Labor statement here.

No info from the issuing agencies yet  regarding the other big reports, the ISM manufacturing index scheduled for Thursday and factory orders on Friday. Since Sandy is due onshore on Tuesday, my best guess is that those two reports will proceed as scheduled.

Be prepared for a surge. Not from Hurricane Sandy pushing her way up the mid-Atlantic and northeastern seaboard, but of political headlines following the absolutely final federal jobs report before the Nov. 6 election.

For my trading, I don't put a lot of faith in the Labor Department's employment situation report, out on Friday at 8:30 a.m. Eastern. It's a trailing indicator, since hiring is the last step in a decision process that proceeds from market estimates and many other things. And there are better tools for judging the economy's prospects, including -- and perhaps especially -- the trend of the S&P 500.

But the release will generate a flood of commentary on how the unemployment rate (the least reliable part of the jobs report) will impact President Obama's chances for re-election and Gov. Romney's struggle against the Electoral College odds. That's despite the fact that early voting began last week, so a lot of votes will be cast before the report comes out.

"Nowhere am I so desperately needed as among a shipload of illogical humans." -- Spock in the Star Trek episode "I, Mudd".

The usual collection of employment sneak previews will be out: On Thursday, the ADP employment report at 8:15 a.m., the Challenger job-cut report at 7 a.m., and jobless claims at 8:30 a.m. And sometime Friday, look for the Monster employment index (so appropriate for Halloween week).

Personal income and outlays kicks off the week on Monday at 8:30 a.m. The personal savings rate is calculated from this data set, and savings, they say, is a key to financial recovery. Since we were spooked by the collapse of capitalist finance, we've been saving hard for a rainy day. When we're confident enough to spend instead of save, the recovery will take hold, the theory goes, and happy days will indeed be here again.

The Institute of Supply Management's manufacturing index, out Thursday at 10 a.m., is a source of data for the leading indicators (see below), as is factory orders, released Friday at 10 a.m.

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, out Thursday at 4:30 p.m. from the Federal Reserve.

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

Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.

Manufacturers' new orders for consumer goods and materials will be reported in factory orders on Friday at 10 a.m.

Vendor performance, also called the deliveries times index, is a part of the ISM manufacturing index released Thursday at 10 a.m. The idea is that if delivery times slow, it is because they are flooding in, straining the system's ability to cope. That, in turn, is a positive sign for econ activity.

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

Manufacturers' new orders for nondefense capital goods, also part of the factory orders report.

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

Other reports of interest:

Monday: The Dallas Federal Reserve Bank's manufacturing survey of its region, at 10:30 a.m.

Tuesday: S&P Case-Shiller home price index (tracking prices by metro area), at 9 a.m., and the government's consumer confidence report, at 10 a.m.

Wednesday: Employment cost index at 8:30 a.m., the Chicago purchasing managers' index at 9:45 a.m. and petroleum inventories at 10:30 a.m.

Thursday: Motor vehicle sales throughout the day, productivity and costs at 8:30 a.m. and construction spending at 10 a.m..

Fedsters

Two Federal Open Market Committee members are scheduled to make public appearances: New York Fed Vice Chairman William Dudley on Tuesday and San Francisco Fed Pres. John Williams on Wednesday and Friday.

An alternate FOMC member, Boston Fed Pres. Eric Rosengren, speaks on Thursday.

Trading calendar

We're in the in-between period for complex option structure. By my rules, as of Monday I can trade February single options and straddles. Of course, shares are good at any time.

Happy Halloween and good trading!

AAPL: After the earnings miss

Apple Inc. (AAPL) on Thursday broke below its 55-day low during trading just before releasing earnings after the close, and pushed further down today (Friday) before retracing significantly from the lows. The company fell 2% short of analysts' expectations.

It previously cut below its 20-day low on Oct. 8, confirmed by the relative strength index, and has in the main moved lower ever since.

So the chart shows a deluxe bear signal on Apple according to the Turtle trading rules. Otherwise, not so much.

AAPL bounced off of a swing low of $522.18 on May 18, beginning an upswing that carried it to an all-time high of $705.07 on Sept. 21. It subsequently swung into the present near-term downtrend.

However, the rise from May hasn't been negated. The most recent leg up began July 23 at $570, and it would take a drop below that level for me to count count a lower low on the chart.

And the $522.18 swing low from May indeed ended a minor correction in an uptrend that began in 2009 from $78.20.

So for my account, it's not yet panic time.

But of course, as private traders we never panic out of a position in any case, but instead base our exits on a cold and fearless analysis of our charts.

I find the price profile today to be fascinating. The most-traded price is $597.59, which is above the day's low of $591 set around noon Eastern. It has since risen to just shy of $607, and just now (2 p.m. Eastern) established a new most-traded level at $603.61.

This tells me that traders are treating this setback as a temporary occurrence, not an OMG We're Doomed! black-swan-of-death event.

The fair-price zone on today's 30-minute chart runs from $596.49 to $609.91, encompassing 68.2% of transactions surrounding the most-traded price, and with AAPL trading at 11 a.m. just above the new most-traded level.

Options are trading only about 1% above their five-day average volume, with calls ahead at 1% above compared to 11% below for puts. These are basically ho-hum it's Friday figures.

Volume on the daily chart has set a new peak for the week, at 28 million shares so far, but for than a fifth of that volume came in the first half hour of trading, as the price fell.

Volume then declined and has continued to do so throughout the day, as the price fell and as it recovered.

That's a bearish pattern -- a panic out at the open as the overnight traders' orders were executed, and then declining interest the rest of the day.

The original Turtle Trading rules would require an immediate exit, without hesitation, with the 10-day low was pierced. My directional rules provide a bit more leeway, but I would have been out weeks ago.

However, my AAPL holdings are in the form a diagonal spread, which operates on slightly different rules than my directional trades based on Turtle signals. I'm short the $650 November calls and long the $630 Decembers.

With a bullish directional trade I exit when the price drops below the 10-day low, which in the case of AAPL would have gotten me out on Oct. 2 at around $656.50

But I'm not eager to trade in and out of diagonal spreads, which depend in part of the decay of an option's price over time. My incentive is to continue holding the position.

So my rule is to exit on a drop below the 55-day low. That has happened, but it came about based on earnings.

Today is the first trading day since earnings were published, the Earnings Day in the terminology of my trading rules. I'm not allowed according to those rules to trade in or out of a stock on that day. The next trading day, Monday, I call Reset Day, because that's when traders sit back and reset their expectations.

If AAPL remains below the 55-day low of on Reset Day, I'll close the position.

A final thought: Time spreads tend to be more slow-moving than directional trades. That's how time works. It ticks along at the rate of one minute per minute. And that characteristic can be loss-making in the case of a rapid move such as AAPL showed today.

That raises the question of whether time spreads, like diagonals, are really a good vehicle for trading, except for people with a long-term horizon, six months or a year away. I

Decision for my account: No trade today, for the reasons outlined above, but maybe on Monday.

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.

USD/JPY: A trading-rules ambiguity

The currency exchange between the U.S. dollar and Japanese yen (USD/JPY) has uncovered an ambiguity in my trading rules.

You can read the rules here, accompanied by a discussion of why I set things up as I did.

The problem is with the exit test using the relative strength index (RSI), a popular momentum measure.

The RSI divides its field into overbought when the indicator is above 70 and oversold when it is below 30. The rule is that when the indicator drops out of the overbought or oversold region back into the neutral ground between 30 and 70, that's a signal to sell.

I've adopted that for my own trading as an over-ride for the other exit rules, with my usual half-hour delay before acting on the signal, just in case it's a momentary head-fakie.

The indicator on the USD/JPY chart moved into over bought territory on Oct. 22, the third trading day after it had moved above its 20-day high, producing a bull signal.

Two days later, on Oct. 24, it dipped below the 70 mark, producing an exit signal. So far so good. The indicator was below 70 for more than half an hour, so it was considered valid under my rules.

Today, however, the RSI reversed course, rising to 74 (so far).

Remember, under the rules, I closed the position yesterday. So what do I do today?

I see two reasonable possibilities:

I could re-enter the trade -- the Turtle bull signal remains in place.

But that would set up the possibility of a series of trades in and out as the indicator bounces along the 70 level. That could get expensive quickly, since each transaction costs me the difference between the ask price and the bid.

Or I could stay out, and not re-enter USD/JPY on the bullside until it produces a classic Turtle sell signal by falling below the 10-day low price. Basically, this adds a rule forbidding new positions when the RSI is in overbought or oversold territory.

But sometimes the RSI jitterbug along with a series sell signals as the price continues to move a considerable distance. That rule could impose a huge lost-opportunity cost.

And the third possibility is to allow entry, but with a barrier. And there are several possible barriers.

Time: For example, I could use time, requiring that the RSI remain overbought or oversold for two days before I re-enter.

Level: Or I could set up a indicator level barrier, raising the over bought level to 75 or lowering the oversold the 25, making it more difficult for the indicator to break through again.

Trend: Or I could set a trend barrier -- no re-entry unless the RSI sets a higher high compared to its previous peak.

On the USD/JPY chart, it will have met the Time barrier of two days above 70 at 5 p.m. Eastern today, assuming it doesn't drop in the next few hours.

It is still at this writing about half a point shy of meeting the Level test, standing at 74.51.

And it has met the trend test. The high point on Oct. 22 was 73.48, and today's high point is 74.51.

I dislike the Level barrier because it is arbitrary -- what makes 5 points a magic number?

The Time barrier suffers from the same flaw.

The Trend barrier, however, is intrinsic to the chart action, and I think that's where I'll go for now, with the added provision that the price must be beyond the 20-day extreme. USD/JPY meets the latter test, as well.

And to be clear, I'll treat this as a new breakout beyond the current 20-day extreme, with an initial one-unit position added to incrementally according to my rules. It is in no way a reconstitution of the old position.

I've bold-faced the new language; it's near the bottom of the rules.

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.

FB: A gap, but not a quantum leap

Ah, Facebook. First you break our hearts, and then you give a cute little smile, as if to say, "Everything will OK now."

Facebook Inc. (FB) delivered its second earnings release on Tuesday, with earnings per share spot on what the analysts expected. Whereas the first earnings last July produced a 14% downside gap, this week's release prompted a 24% gap to the upside.

I'm going to focus on the chart for this discussion, with no mention of the fundamentals. Everyone knows FB so there's no need to go into it.

The FB chart looks very much like an exercise in quantum physics. If FB were an electron, it would have an upper orbit in the $26 to $33 range (rounding the numbers shamelessly here) and a lower orbit from $18 to $24.

It last moved between the orbits discontinuously, in a quantum leap (or fell in a quantum tumble is perhaps a better description -- "quantumble"?).

(In this discussion I'm ignoring the IPO opening price of $45, which, in our physics metaphor, we can liken to a big bang that quickly turned into a damp firecracker.)

The boundary between the two orbits is the downside gap last July, which carried the price from the top orbit to the bottom..

Today's upside gap failed to carry the price out of the bottom orbit. It hasn't yet moved into the July gap. And after opening, the price quickly began to retrace.

So in terms of the support and resistance levels, the post-earnings performance so far falls short of inspiring a great deal of confidence.

What would make me happy as a trader to the bullside? A break above the floor of the July gap, at $24.54, would tell me something potentially bullish was going on. A move above $26.73 into the upper orbit would  tell me that a persistent upward move was likely in the works.

That's support and resistance. Let's look at trends.

FB has been in a persistent downtrend since it first hit the market on May 18 at $45 per share. It declined to $25.52, the middle of what would later become the July gap, and then began a sideways move that established the upper orbit.

Come July and the first earnings release (which, by the way, beat analysts' estimates by 33%), and the price did its quantum tumble and established a sideways trend that became the lower orbit.

For trend analysis, the question is what has happened since July. The stock's all-time low of $17.55 was hit on Sept. 4. The price rose to $23.37 on Sept. 19, and corrected down to $18.80 on Oct. 19.

So far, we have a starting low, a high, and a lower low. With yesterday's earnings announcement, the price gapped up and for a high of $24.25 -- that's a higher high, and therefore, FB must be counted as having established an uptrend -- a bullish sign.

Finally, Turtle Trading. (See the original Turtle Trading rules here, and my adaptation here.)

Today's gap carried FB not only above the 20-day high of $22.59 but above the 55-day high of $23.37. That would trigger a bull signal under the Turtle rules, with immediate and unconditional entry.

Under my rules, I would enter a half hour after the breakout, which occurred at 10:30 a.m. Eastern. My entry would have come at 11 a.m., at a price of about $22.90. The indicator I use as a confirming signal, the relative strength index, had moved into an uptrend on Oct. 22 and so confirmed the bull signal.

So on the chart, we have two bull signals and one bear phase.

Spoiler alert: I'll tell my decision on my own account here rather than waiting. I have no intention of buying FB.

I went into this earnings announcement with long calls on FB due to expire in November, the remnants of a diagonal spread that turned sour at the time of the July gap. Today's upside gap gave me an opportunity to mitigate the loss, although a loss it still remains.

So I'll be waiting for FB to move back into the upper orbit, above the July gap, before I'm interested in it again.

And this is perfectly fine under my rules. I use Zacks ratings as a gauge of the fundamentals, and choose my stock prospects from among those whose Zacks ratings are aligned with the direction of the signal. Zacks is neutral on FB, so it's not part of my equities pool at this point.

FB next publishes earnings in January.

Decision for my account: I'm not taking the trade.

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.

MON: Chart, fundamentals diverge

Monsanto Corp. (MON) broke below a sideways range that has set a floor of $87.57 since Sept. 6. That pattern is part of a longer sideways trend that followed a swing high of $87.77 set on July 20.

The price has made it to higher levels, reaching $92.20 on Oct. 10. But the broad movement for this period has been sideways. Even an earnings miss on Oct. 3 barely budged the price.

Before the present floor was established, there was a floor at $84.86, which marks the low since the sideways trend began last summer. I will consider the sidewinder to be in effect until MON breaks below that level.

The break below $87.57 today triggered a bear signal under the Turtle Trading rules and it made it past the chart filters I use under my trading rules.


Longer term, MON has been on the rise since July 2010, with the most recent leg up having begun last May at $70.15.

Monsanto is best known these days as a biotech company. Its main business used to be chemicals and plastics, but by 2002 it had divested itself of those activities to concentrate on agriculture, including genetically modified foods, which it pioneered in the 1980s.

So the Creve Coeur, Missouri company is in many ways a story play, like any company that stakes its future on new technology: Here's the shiny new stuff. It will change the world, and make money, as well.

Monsanto's story is muddied by the fact that genetically modified crops -- "frankenfood" to detractors -- are politically controversial, especially in Europe. It's a classic case where policy can quickly impact profits.

Analysts, in fact, are bullish on Monsanto. They're showing an enthusiasm index of 33%, up from 22% two months ago.

And the company does have a decent return on equity, at 17%, with low long-term debt, at 17% of equity. (Not a typo, the percentages are identical, although their meanings differ considerably.)

Annual earnings per share rose in 2010 and 2011, each over the prior year.

The quarterly earnings tend to peak in the 2nd quarter, which on the company's fiscal calendar covers winter, as I would expect from an ag company; farmers buy seeds and supplies in winter so they can be ready for spring planting.

The 2nd quarter this year advanced over the year-ago quarter, which was also higher than a year earlier. The last three 4th quarters, which cover summer, have all shown losses, with Q4 this year showing a bigger loss over its 2011 counterpart, which in turn was a greater loss than Q4 in 2010.

Of the last 12 quarters, four showed losses and the rest were profitable. Eight showed upside earnings surprises, while four surprised to the downside.

Institutions own 83% of shares and the price has been bid up to a high level. It takes $3.52 in shares to control a dollar in sales.

Although the breakout is to the downside, those financial stats bias my opinion of Monsanto to the upside. So there is a divergence between the trading signal and the fundamentals.

MON on average trades 2.9 million shares a day. This supports an adequate inventory of option strike prices with open interest running to the three and four figures near-the-money. The front-month at-the-money puts have a bid/ask spread of 2%.

Implied volatility stands at 24%, in the lower half of the six-month range, and has been on the rise since Oct. 17.  Options are pricing in confidence that 68.2% of trades will fall between $81.10 and $91.10 over the next month, for a potential gain or loss of 7%, or between $84.22 and $89.98 over the next week, for a 3% gain or loss.

Options are trading 34% above their five-day average volume, with puts leading at 48% above average, compared to 18% above for calls.

With 2 hours plus change to go before the close, the fair-price zone on today's 30-minute chart runs from $86.49 to $87.32, encompassing 68.2% of transactions surrounding the most-traded price, $87.08. The stock is trading near the most-traded point.

Monsanto next publishes earnings on Dec. 31. The stock goes ex-dividend in January for a quarterly payout yielding 1.72% annualized at the current price.

Decision for my account: I passed up the trade despite the Turtle signal because the direction of the signal, bearish, diverges from the bulllish bias of the financials and other fundamental analysis.

The support and resistance levels suggest waiting until a break below $84.86 before taking the trade, if in fact the price does indeed move below that level.

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.

VFC hits the iceberg

Earnings announcements make trading stocks like a cruise on the Titanic. Things are merrily sailing along in accordance with their trends when -- Boom! -- the quarterly iceberg looms ahead, striking the starboard side.

And down goes the stock -- I mean, ship -- with much loss and sorrow, with chunks of earnings -- I mean, ice -- floating in its wake.

The apparel-maker V.F. Corp. (VFC) is a case in point. It has been in an uptrend since July 3 from a low of $129.53, and the swing carried it to an all-time high on Oct. 17 of $169.82.

The stock broke above its 20-day high on July 19, entering bull phase under the Turtle Trading rules, and continued in-phase until Sept. 28, when it dipped below the 10-day low, forcing a sale of long positions.

That proved to be a head fake, and it again broke above the 20-day high back into bull phase on Oct. 15.

It faltered a bit in the two ensuing days after its all-time high, and then came this morning's earnings announcement before the open.

The company beat analysts' earnings estimates, but fell short in revenues. The price gapped down and pierced the 20-day low level for the stock, triggering a Turtle bear signal.

My interest in VFC is to study how my trading rules (you can read them here) would apply to this complex, earnings-driven chart.

Although my rules are based on those of the Turtle traders, I've added some exceptions to account for earnings. The original Turtle Trading rules were applied mainly to futures markets, which don't have anything like the quarterly earnings announcements that impact stocks.

I have two rules that will dominate my discussion:

For entry, I don't open new positions in the 30 days prior to publication of earnings. That gives me time to take advantage of the position building that big players do in anticipation of earnings.

For exit, I also have some rules that apply specifically to breakouts immediately after earnings are announced.

I use two terms in this connection.

Earnings Day is the first trading session after earnings are announced. In the case of VFC, that would be today -- Monday -- becomes earnings were published before the open.

Reset Day is the trading session after Earnings Day. The terminology comes from the idea that earnings each quarter provide a reboot of traders' expectations about a company and its stock.

My rule is not to trade a breakout on Earnings Day, and to consider the 20-day high or low on Reset Day to be the breakout level.

Here's how the rules play out on the VFC chart. (That's theoretically. I didn't make these trades in my accounts.) This scenario assumes that I ignore the 30-day rule that would preclude trades so close to earnings.

Oct. 15 - Price pierces the 55-day high (including the 20-day) of $164.35, confirmed by another indicator, the relative strength index (RSI). But the signal fails on the 30-minute rule, since the price retraced to below the breakout level within 10 minutes. No trade.

Oct. 16 -- The price again pierces the breakout level and persists, allowing the opening of a bull position with an entry of about $166.32. The RSI moves into overbought territory.

Oct. 19 -- The RSI exits overbought territory. This triggers an immediately close of the position, probably at about $167, for a very small profit.

Oct 22 -- Earnings. Gap below the 20-day low of $156.87. I don't even consider taking the trade because it is Earnings Day. (Even if it wasn't, the price remained below the breakout level for only 10 minutes, so the trade would have been disallowed in either case.) Today's low (so far) is $154.46, and that's the new 20-day low.

Oct. 23 --  I can consider opening a bear position on Tuesday if the price is below $154.46 at some point in the day, subject the delay and confirmation restrictions outlined in my trading rules.

The original Turtle Trading rules, by contrast, would have taken the Oct. 15 breakout trade, probably for an entry price of $164.35. It would have closed the position today, with the piercing of the 10-day low level of $159.31.

So the score is:

• My rules: Exit $167.00 minus Entry 166.32 equals a 0.4% profit.
• Original Turtle rules: Exit $159.31 minus Entry $164.35 equals a 3.1% loss.

Score one for the home team. Now I know how the Giants felt after the 2nd inning Sunday night.

I'll be keeping an eye on the comparables between the two methods to see how they work more broadly. But I find the VFC chart to be encouraging.

Of course, my 30-day exclusionary rules means that I wouldn't have taken the Oct. 16 bull signal, six days before earnings were scheduled to be published.

Both by my rules and the Turtle Trading rules, the July 19 breakout to the upside would have triggered us to open positions, probably at about $145.70. We would have sold on Sept. 28, when the price fell below the 10-day low, perhaps at about $158. So we both would have made an 8.4% profit.

The difference is, under my 30-day rule I would have kept all of that profit but would have missed out on a 0.4% gain. The Turtles would have lost a portion of their profit, bringing the net down to 5.3%.

The unanswered question is: What to do with existing positions as earnings approach: Sell before publication? Wait for the announcement? I don't have an answer to that yet.

My current practice is to not exit before earnings, absent another signal, such as an RSI cross from overbought or oversold into the middle ground.

Charts aside, there's the question of whether VFC is worth trading or not. It's a big company with a broad reach. Headquartered in Greensboro, N.C., it makes a number of brand names sold in other company's stores: Lee, Rustler, Wrangler, Nautica, The North Face -- these are household names even in households that never heard of V.F. Corp.

Analysts liked the company a lot going into earnings with an enthusiasm index of 32%, up from 28% two months ago.

Going into earnings, return on equity was 21% -- growth stock territory -- with not-bad long-term debt amounting to 40% of equity.

Annual earnings per share rose sharply in 2010 and 2011 from the recession low. Quarterly earnings tend to peak in the 3rd quarter, when stores are stocking up for the Christmas season. Q3 of 2011 was up from the corresponding quarter in 2010.

Of the past 11 quarters, all have been profitable and all have shown upside earnings surprises.

Institutions own 84% of shares -- a high level -- and the price has been bid up a bit: It takes $1.77 in shares to control a dollar in sales.

Overall, my fundamental bias on V.F. Corp. would be bullish, and I would be reluctant to take bearish positions whatever the signals.

VFC on average trades 482,000 shares a day, putting it below my normal liquidity rules -- I prefer 3 million shares a day or greater. Even so, the stock supports a good selection of option strike prices with mainly three-figure open interest near the money.

The front-month at-the-money bid/ask spread on puts is 12% -- a bit high but surprisingly low for a stock trading under 500,000 shares on average.

Implied volatility stands at 2%, having taken a huge drop with today's downside gap. It stands in the lower half of the six-month range and, before today, was in the midst of a month-long climb.

Options are pricing in confidence that 68.2% of trades will fall between $146.79 and $169.99 in the next month, for a potential gain or loss of 7%, and between $152.82 and $163.96 over the next week, for a gain or loss of 4%.

Options are running well above their five-day volumes: 221% above overall, with calls leading at 259% above volume, compared to 196% above for puts.

The fair-price zone on today's half-hour chart ranges from $159.17 to $162.18, encompassing 68.2% of transactions surrounding the most-traded price, $159.75. With two hours before the close, the stock is trading below the range.

V.F. Corp. next publishes earnings sometime in January. It goes ex-dividend in December for a quarterly payout now yielding 1.82% annualized.

Decision for my account: It's no trade today under my rules, for the reasons outlined above. And even if VFC were to break below its 20-day low on Tuesday, triggering a bear signal, and even if liquidity weren't an issue, I probably still wouldn't take the trade. The fundamentals are so strongly biased to the upside that I don't want to trade counter to them.

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.

Private Trader Trading Rules

Regular readers will know that I've been working on modifications to the Turtle Trading rules in order to reduce head fakes and other loss-inducing signals that hurt my trading results.

Here is my current set of rules for directional trades, on Google Docs:

Private Trader: Rules for Directional Trades

My write-up of the original Turtle Trading rules is here.

I've often said in my analyses that the Turtle Trading rules, while useful, aren't as good as they could be.

William Denis' trend-following system dates from 1983, two years after the IBM PC hit the market. It was a world of command-line interfaces, manual trading and very limited tools for private traders (people who trade on their own account without the fancy stuff brokers can command).

I first began trading in the year before, in 1982, and in those days, getting a daily stock chart could be a challenge, much less something that tracked intra-day movements.

It was a different world from today's, with our high-velocity trading and hundreds of analytical tools at a private trader's fingertips.

Some people treat the original Turtle Trading system as gospel that must never be modified. I say, if we can't do better after three decades, we need to throw in the towel and put our money in a nice money-market fund paying half a percent annual interest.

My modifications of the Turtle rules come in three crucial areas.

I want to select the things I trade so that they are biased toward success. The original Turtle system was used mainly for futures, which limited choices of vehicles for trading. They picked a few things to trade, those archaic Turtles did, and left it at that.

I'm using the system for stocks and foreign exchange, which gives me a huge and changing universe to select from. In my trading rules write-up, I describe the methods I use for constructing pools of stocks and currency pairs.

For entering positions, I want a confirming signal. I've chosen the RSI (the most popular analytical signal in the world) because it works with both stocks and forex.

But the MACD, or something that uses volume, such as the Force Index, would do just as well. (Volume-based indicators won't work with currencies.)

I also want to guard against false breakouts, or head fakes, where the price breaks out but then retraces. The original Turtle rules required that any breakout be taken immediately. I impose a 30-minute waiting period, and won't take the trade if the price has retraced past the breakout point in the opposite direction.

I think of it as a sort of time diversification. There's nothing sacred about half an hour. It can be 15 minutes, or even five, at the trader's discretion. Alternatively, a trader could decide to wait until the next day before trading any breakout.

For exiting positions, I'm trying to address two problems with the original Turtle rules.

One is the stop/loss upon entry, which is based on the price at which the trader opened the position. It never changes. So if the price rises sharply after breakout, the trader is left with a stop/loss that is still loss-making despite the gain in paper profits.

I address this by making the stop/loss upon entry a trailing stop. This will increase the number of trades that are stopped out, but also protect profits.

The second is the Turtle exit point that marks a successful trade: A cross beyond the boundary of the 10-day moving average that is opposite the direction of the trade. This exit method comes into play once the 10-day boundary moves closer to the current price than the initial stop/loss.

My problem is that the 10-day boundaries move independently of each other. Depending upon the price history, the boundary could be far removed from the current price, especially if the breakout happened on sharp rise from a lower level. I found that this method often guarantees larger losses than I like.

If the 10-day boundary is closer to the price than my trailing stop, I'll use it for the exit, but that rarely happens.

I've also added an additional method using the RSI. If the price breaks into the overbought or oversold territory on the indicator, and then returns to the middle zone, I close the position immediately.

In closing, I'll note that I specify directional trading for these rules because I use another strategy for part of my funds: A known-risk strategy involving option spreads, concentrating on diagonal spreads on the indexes and a few very liquid stocks.

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.

The Week Ahead: FOMC and GDP

A big week, economically and politically.

The Federal Open Market Committee meets Wednesday and announces results of the meeting at 2:15 p.m. Eastern. The Fed has been so transparent under Chairman Bernanke that surprises are few (in contrast to the Greenspan era, when the chairman appeared to enjoy maintaining the suspense).

On Friday we get a first look at the 3rd quarter's gross domestic product. The 8:30 a.m. release is a first stab at the quarterly stats; there will be two further revisions, in November and December.

Both the FOMC and the GDP play into themes that have been active this election year.

Republicans have been taking a hawkish view of the Fed's attempts to stimulate the economy and indeed their party's presidential candidate, Gov. Romney, has promised to replace Bernanke if elected.

Both parties are staking their success largely on whether or not things have improved since President Obama took office amid collapsing financial and housing sectors and battered economy; Democrats say yes and Republicans, no. A weaker GDP number will play into the Romney campaign's hands; stronger, into the hands of the Obama campaign.


And of course, there's the final presidential debate, focused on foreign affairs, on Monday, to add some spice to the mix.

(Although, with election day, Nov. 3, so close and early voting having already begun in parts of the U.S., the power of events to influence the outcome is rapidly diminishing.)

Also out, and important, new home sales on Wednesday at 10 a.m., and durable goods orders on Thursday at 8:30 a.m.

Leading indicators out this week:

Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.

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

Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.


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

Other reports of interest:

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

Thursday: The Realtors' pending home sales index -- existing homes, contracted but not closed -- at 10 a.m.

Trading calendar

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

Good trading!

MS: Spooked turtle

Morgan Stanley (MS) broke above its 55-day high of $18.50 after earnings were announced this morning, and then immediately retraced like a spooked turtle pulling back into its shell.

The company beat earnings per share estimates by 15%, so it's yet another case of good news having bad results in the markets. Been there, seen that.

The question is what to do about the Turtle Trading bull signal that the breakout occasioned.

By my rules, I wouldn't have taken the trade. The breakout occurred at the opening, but the price dropped immediately. My rule says I must be able to get into the position above the breakout price at least a half hour after the breakout. The price was below $18.50 at that time.

There were two one-minute windows shortly after noon when the price again broke above the 55-day high, but then it dropped again.

I'm interested in MS for what is says about the interaction between Turtle signals and other indicators.

Today was the second test of the $18.50 level, which was a swing high in mid-September that resolved itself into a sideways trend. So far so good. That's what resistance levels do.

At this writing, with about 90 minutes to go before the close, the relative strength index on the daily chart is declining, having reached to within a point of the overbought level. The force index, which puts volume into the mix,  declined into negative territory.

On a half hour chart, those indicators began their downturn within 30 minutes of the open. Person's  Pivot Study flashed "down" a half hour after the market opened.

It was clear from the outset that this breakout was a loser.

On the Time Price Opportunity chart, derived from the Chicago Board of Trade's market profile, the most traded price today, $18.32, is only 5% above the 20-day most traded on the half hour chart.

The current most-traded is far shorter than the 20-day most traded of $17.43, so low that it scarcely qualifies as a competing peak. And it's that creation of a new peak on the TPO chart that suggests a bullish move is for real.

Today's most-traded, $18.32, is the focus of the fair-price zone that runs from $18.11 to $18.38 and encompasses 68.2% of transactions surrounding that most-traded price. MS is trading near the lower boundary with an hour to go before the close.

This points to a major point where the Turtle Trading method deserves criticism. Under the original Turtle rules, a breakout above the 55-day high must be taken immediately -- no questions asked -- and with an initial stop/loss that is double the average price daily range. That's can make for significant losses.

The Turtle rules lack nuance, and by adding in a time delay and looking for confirmation in other indicators, I'm convinced that the trader can mitigate the losing-trade count.

Analysts were fairly happy with MS going into earnings, with a 10% enthusiasm index. Two months prior, their enthusiasm was in a worse place, at negative 5%.

Using the prior quarter's figures, Morgan Stanley's return on equity was an unimpressive 5% with long-term debt more than double equity. Like all of big finance, Morgan Stanley was hit hard by the 2008 collapse, and the recession has not helped anyone's performance.

The company showed an annual loss in 2009, moved back into positive earnings in 2010 but then saw profits drop to less than half the year before in 2011.

One the three 2012 quarters, the 1st, showed a loss, and two showed negative earnings surprises. Only this most recent quarter was both profitable and positively surprising.

Institutions own 57% of shares, sort of low for a major player, and the price is pretty much at part; it takes $1.03 in shares to control a dollar in sales.

MS on average trades 18.4 million shares a day and supports large grid of option strike prices with open interest in the four and five figures near the money. The at-the-money front-month bid/ask spread on calls is one cent, which works out to about 1.5%.

Implied volatility stands at 37% and has been on a long downslide since May. The six-month low was 31%, and the most recent slope down began in early September.

Options are pricing in confidence that 68.2% of trades will fall between $16.08 and $19.92 over the next month, for a potential gain or loss of 11%.  Options suggest a one-week range running from $17.08 to $18.92, for a 5% gain or loss.

Options are active today, running 46% above their five-day average volume. Calls lead at 88% above the average, trailed by puts at 13% below average.

Morgan Stanley next publishes earnings in January. The stock goes ex-dividend on Oct. 29 for a quarterly payout yielding 1.11% annualized.

Decision for my account: As described above, MS failed to get past my filters, so no trade.

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.

FSLR: Solar flare

Pres. Obama last night, during the second presidential debate, again made his pitch for alternate forms of energy to replace the fossil fuels that dominate our global economy.

First Solar Inc. (FSLR), which makes and sells power systems fueled by sunlight, celebrated by breaking above its 20-day high, triggering a Turtle Trading bull signal. The company also announced that it was building a solar power plant for the electric utility in Dubai, which may have had more to do with the rise.

The breakout is confirmed by a rising relative strength index that stands within six points of the overbought line.

I'll say up front that under my rules, I can't trade FSLR today. The company publishes earnings on Oct. 25 (or Oct. 29, another brokerage says), less than two weeks from now, and I don't open positions within 30 days of earnings. So if I play FSLR post-earnings, it will be based on trend and resistance rather than the Turtle analysis.

Yet, it's a company worth watching. If Pres. Obama win election, the solar industry will be near the front of the line for a lot of government support. If Gov. Romney wins, the goody supply will decline. That reality alone provides an element of volatility for the next six weeks, until election day.

And volatility in the mother of profit.

The break above the 20-day high, $24.60, brings the price close to the 55-day high, $26.31, which forms the ceiling of a sideways trend in effect since early August. The $26.31 level is key resistance, and a break above that level would be a strong sign that the uptrend was resuming.

FSLR on June 4 ended a steep and deep decline that began the prior year, hitting $11.43. From that point, which was between earnings, it rose and established a sideways trend with a $16.42 ceiling, and then in early August rose again, in conjunction with earnings, to the present trading level.

Some stocks trend easily. FSLR appears to be one that moves by fits and starts.

FSLR in anything but a darling in the eyes of analysts. Their enthusiasm stands at a negative 60% on the index. True, this is down from 77% three months ago, but still, it's pretty abysmal.

I don't entirely understand why the analysts are so angsty.

True, it's new tech, but remember how companies were rated during the tech bubble. True, it's an industry that is subsidized to an extent, but remember GM, and further back, Chrysler. Or the oil industry, for that matter.

None of those factors has been an automatic deal killer historically.

The return on equity is pretty good, at 12%. Long-term debt is pretty low, at 14% of equity. I've seen companies doing a lot worse that analysts loved.

It is true that annual earnings stumbled into a loss, of under 50 cents per share, in 2011, ending a rise of at least three years that peaked above $7 per share. And 2012 quarterly earnings have been down from prior years.

But that's not unusual for new tech.

Institutions own 66% of shares, and the price is below par: It takes 67 cents in shares to control a dollar in sales.

FSLR on average trades 6.6 million shares a day, sufficient to support a wide selection of options strike prices with open interest running at three- and four-figures near the month. The front-month, at-the-money bid/ask spread on calls is very narrow at 1%.

Implied volatility stands at 93%, near the middle of the six-month range. It has been stair-stepping upward since late September. That is an extremely high level of volatility, around six times that of the S&P 500.

Options are pricing in confidence that 68.2% of trades will fall between $18.42 and $31.92 over the next month, for a potential gain or loss of 27%.

Options are hot today, running at 163% above their five-day average volume. Calls lead slightly at 186% above the average, compared to 136% above average for puts.

Today's fair-price range on the 30-minute chart runs from $24.85 to $25.52, encompassing 68.2% of transactions surrounding the most-traded price, $25.14. A second, higher most-traded level, around $25.50, is running a close second.

With 90 minutes before the market close, FSLR is trading just below the most-traded price.

First Solar next publishes earnings in late October, maybe Oct. 26, or maybe Oct. 29 -- my brokers disagree, the company website is no help.

Decision for my account: As noted above, I won't be trading FSLR until after the earnings announcement. I'll take a look at it in early November.

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.

DE: Fool me twice...

An earnings season makes it tough to find trades, at least for traders who, like me, don't open new positions within 30 days of an earnings announcement.

The pre-announcement month is when a the market anticipates what the quarterly report will show. The market may be dead wrong, but that volatile month is when trends happen that can be profitable. If I open my position closer to the announcement, then I miss out on that potential profit.

Some traders also close their positions before the announcement, but that's not my practice. If the markets are right, then I want to harvest the big bucks from any post-earnings gap. If they're wrong, well then, I may lose some money, but through prudent position sizing and stop/loss management, I'll live to trade another day.

Deere & Co. (DE) was the one stock in my pool of liquid issues to both show a Turtle Trading signal and to also be far enough away from earnings for me to play it.

DE began its current uptrend on Aug. 29, ironically on the day of a break below its 20-day low of $73.73, triggering a Turtle bear signal. It then immediately retraced above the breakout point, beginning a rise that today hit a swing high of $84.43.

As the saying goes, Fool me once, shame on you. Fool me twice, shame on me.

The Turtle Trading system is prone to this sort of head fake. I didn't take that bear trade back in August, and spared myself a quick loss as a result. I skipped it because of a stupid error in reading the chart. I had pegged the prior bearish breakout as a failure, which is a filter for 20-day breakouts. In fact, it was a success. Dumb luck.

Even so, I saw the sort of loss I would have endured, and I made some changes in my methods as a result of that skipped trade.

I no longer open positions immediately on breakout, but rather wait half an hour, in case there's a rapid retracement. I'm thinking of lengthening that to an hour. I only trade if I can open the position at a price beyond the breakout point. I also demand that the breakout be in the direction that the relative strength index is moving. In the case of DE, there was a divergence.

Today's break above the 55-day high has this in common with the August failure: Both have moved 0.8% beyond the breakout point. The difference is that the price retraced last August before the day was ended; today the price remains beyond the breakout point.

Also, a break above a 55-day extreme, in theory at least, is a sign greater momentum. On the other hand, both breakouts are happening with lower volume, a sign of flagging momentum.

In my August write-up (you can read it here), I also identified a triangle. I wrote:

DE's price has been trading a symmetrical triangle since July (or since February by another measure, or possibly since October 2011). This is a continuation pattern. The nearer-term view would see it as a continuation of a downtrend that began in April 2011. The broader view would see it as continuing an uptrend that began in 2009.

The breakout from the triangle happened in mid-September, to the upside, resolving that particularly un-helpful piece of ambiguity.

The upside breakout argues for the large base of the triangle, from $59.92 to $89.70. Triangle lore says the continuation will travel the width of the base -- about $30 in this case -- so the target price would by this method be about $108.

I'm not a Triangle trader. I find them to be sort of messy. But there are those who find them to be useful. The target price would bring DE about 8% above its 20-year high of $99.80, set in April 2011, so it's not an unreasonable goal.

Today's breakout carried the price above a sideways area of congestion from last March and April. The top of the triangle base -- $89.70 -- is the next resistance to the upside.

DE's financials remain unchanged from my August write-up. The broker enthusiasm index for DE remains unchanged, at a miserable 6%.

The stock's average volume is down sharply, now at 2.9 million shares a day compared to more than 5 million in September. Options are trading with open interest running in the three- and four-figures. The front-month at-the-money bid/ask spread is 3%.

Implied volatility stands at 22%, near the bottom of the six-month range. It has been falling in the past week within a longer sideways pattern.

Options are pricing in confidence that 68.2% of trades will fall between $79.11 and $89.61 over the next month, for a potential profit or loss of 6%.

Options are being actively traded today, with volume running 27% above the five-day average. Puts lead at 51% above average, trailed by calls, at 5% below average volume.

The heavy put trading suggests to me that the consensus isn't buying into the breakout and that traders are expecting a pull-back.

Today's fair price range stretches from $83.90 to $84.43, encompassing 68.2% of transactions surrounding the most-traded price, $84.33. The price has made three broad attempts today to establish a most-traded price. This means that the rise is making its way against some headwinds that are slowing its progress.

A bit more than three hours before the close, DE is trading near the most-traded price.

Deere next publishes earnings on Nov. 21. The stock goes ex-dividend in December for a quarterly payout yielding 2.18% annualized.

Decision for my account: I took the trade, a half hour after breakout. I structured the position as January calls with $80 strike prices, for 9x leverage.

I also think it's a position I would take if I were relying entirely on support and resistance, by virtue of the break above last spring's congestion, although I might wait a day to see if it falls back before making the trade.

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.

The Week Ahead: Consumers, houses & more

Two retailing indicators, retail sales and consumer prices, along with industrial production and two real-estate indicators, housing starts and existing home sales, dominate the week.

But of most interest to many traders is that next Saturday is when October options expire, and Friday is the final trading day.

Retails sales, released Monday at 8:30 a.m. Eastern by the Commerce Department, is the broadest measure of store activity. The conventional wisdom is that the economy won't come roaring back until consumer start to once again shop 'til they drop. So this is a key indicator.

Of course, consumer's ability to shop depends in part on consumer prices, out Tuesday at 8:30 a.m. I've long felt that the consumer prices index is something of a paradox. If prices are rising, then people are less able to shop; if they're falling, then they're reluctant to shop because they think what's cheap today will be even cheaper tomorrow, so why not wait.

Industrial production, out Tuesday at 9:15 a.m., covers manufacturing big and small. Production and its proportion of capacity are measure of how the economy is faring, somewhat upstream from the consumer side of things.

Housing starts are out Wednesday at 8:30 a.m. By definition a house is started when the shovel hits dirt, so the indicator measures what's going to be coming onto the market several months down the road.

The other real-estate measure is existing home sales, out Friday at 10 a.m. Homes that have had more than one owner are by far the larger share of the market, so this indicator measures whether lenders and the people who take their loans are in fact confident that the housing market is on the road to recovery.

Leading indicators out this week:

Building permits for new private homes is part of the housing starts report, out Wednesday at 8:30 a.m. Starts are when the excavation begins, and building permits pushes back even further upstream.

Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.

Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.


The leading indicators index, which is a compilation of 10 individual leading indicators, will be released Thursday at 10 a.m. This index isn't consider a big deal by many who keep tabs on the economy -- perhaps because by its nature it is a trailing indicator based on leading indicators, so why not use the real deal.

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

Other reports of interest:

Monday: The Empire State manufacturing survey at 8:30 a.m. -- as goes New York, so goes the nation -- and business inventories at 10 a.m.

Tuesday: Treasury's report on foreign capital flows into and out of the U.S., at 9 a.m., and the Home Builders' housing market index, at 10 a.m.

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

Thursday: The Philadelphia Federal Reserve's survey of the economic state of the mid-Atlantic region, at 10 a.m.

Fedsters

Two members of the Federal Open Market Committee are speaking during the week: Richmond Fed Pres. Jeffrey Lacker on Monday and San Francisco Fed Pres. John Williams on Tuesday.

An alternative member of the FOMC, St. Louis Fed Pres. James Bullard, also speaks on Monday.

Trading calendar

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

Good trading!

WFC: Broken Turtle

Passionate advocates of the Turtle Trading system (you can read about it here) make it sound so simple:

1) Get the signal.

2) Make the trade.

3) Set the stops.

4) Wait for either a small loss or a big profit.

Real life is rarely that simple.

The original Turtles back in the 1980s were futures traders. Most private traders nowadays deal in stocks and their options.

And stocks are far more complex that futures. You've got earnings announcements and the quantum price jumps they cause. You've got ex-dividend dates and the price drops they cause. You've got thousands of potential trades, far too many to understand with any degree of thoroughness.

Corn or coffee futures, by comparison, are a snap: No earnings, no dividends, a fundamental environment that can be grasped.

So for traders who have adapted Turtle methods to stock and option trading, there's always the question of how far to modify the original rule set.

Wells Fargo Co. (WFC), the national bank, is a case in point. It broke above the 55-day high on Sept. 6.

The breakout point was $34.76, and in subsequent days the price dropped a bit and then rose some more, to a swing high of $36.60 on Sept. 14. From there it dropped, never again to rise above the 55-day (or even the 20-day) high.

Yet it also stayed above both the initial stop/loss -- double the average trading range below the entry price -- and also above the 10-day low. Either point would have triggered an exit.

The exit came at the open today, in the form of a 5.1% downside gap following the company's earnings announcement before the open. Wells Fargo's profit rose by 22%, but its profit margin and take from mortgage banking were less than analysts liked.

The gap moved WFC below the 10-day low, triggering closure of the position for a loss, and below the 20-day low, $34.29, triggering a Turtle bear signal.

I won't go through the company's financials again. You can read them in my write-up from September -- you'll find it here -- in which I quite wisely label WFC as a potential head fake. And so it proved to be.

I'll focus instead on trading methodology. The Turtle system has been tried by many, and it works, although by its nature it produces a lot of outs at first and makes up for them with a couple of home runs into the grandstands.

But when I look at WFC, I feel as though I'm looking at a broken Turtle, a methodology that isn't being all that it can be.

The only possible solution to the problem, short of throwing out the Turtle with the bathwater, is to use filtering rules that have the effect of tossing out some potential trades, despite the bull or bear signal.

One rule that I've used with my traditional trend trading is to not take a trade within 30 days of an earnings announcement. That wouldn't have helped with WFC -- I opened the position 36 days ahead of earnings. But it seems like a reasonably good rule, even so, since it is in that last month that many traders position themselves for the next earnings publication.

A rule that many traders adhere to is to never hold a position across an earnings announcement. That would have prevented part of the loss, and in fact would have made the position a wash. I've not gone with that practice because it excludes both good and bad surprises, and since Turtle trading relies on big moves for its success, it seems to me that excluding surprises is a bad practice.

At the time WFC gave its bull signal on Sept. 6, the 55-day high and the 20-day high were identical. This is what happens on a chart with the stock has been on a rise for some time. One possible rule would be to take breakouts beyond the 20-day high or low, but only when they differ from the 55-day high or low. Breakouts when the nearer and further out levels are merged would be ignored. In the case of WFC, that would have disallowed the Sept. 6 signal.

The stop/loss rules for Turtle Trading is to get out at a level double the average trading range (I use the 20-day Wilder version of the ATR), or at a drop below the 10-day price extreme in the opposite direction from the position. Either of these would have produced losing trades in the case of WFC.

An alternative would be to use a trailing stop that's double the average trading range. That sort of stop rises (in a bull position) along with the price, but doesn't fall. In the cae of WFC, the trailing stop/loss would have been double the range below the peak price,m or $35.36. That level was hit on Sept. 26, and it would have produced a loss similar to the one that actually happened.

I've been using the relative strength index as an entry filter, and it would have allowed the WFC trade. What about using it for exits, as well? The RSI moved above the 70% level on Sept. 14, producing and overbought signal, and the next day dropped below, producing an exit signal. That would have closed the position for a 1.6% profit or better.

In my September analysis of WFC, I called it a potential head-fake because it kept breakout above the 55-day high and then retreating. It had done it twice since August when the September signal came. Is there a way to use that false breakout information to construct a filter? I don't know the answer to that, but I'll be looking at it going forward.

Finally, I've been using a time filter in opening a position. When I get a Turtle bull or bear signal, I wait half an hour before trading. If the price has retraced back across the breakout point, I skip the trade. That wouldn't have barred the WFC trade. But what I lengthen the waiting period, for a rule that says, for example, if the price retraces and closes back past the breakout level  within the next two (or three?) days after breakout, then the position must be closed. A three-day period would have worked with WFC, but it would have missed the swing high.

Here's what I plan to do for now:

I'll retain my ban on taking trades with 30 days of earnings.

I shall take breakouts produced by earnings announcements.

I'll disallow Turtle bear signals produced by ex-dividend dates.

I'll retain my 30-minute waiting period.

I'll retain the Turtle trading stop/loss scheme.

I'll continue to use the RSI as an entry filter -- it must be moving in the direction of the trade.

I'll start using the RSi as an exit signal. In the case of bull plays, if the RSI crosses the 70% line in a downward direction, I'll take that as a signal to close. Likewise, in bear plays if the RSI crosses the 30% line in an upward direction.

That's it for now. I'll also be studying two other possibilities: Using a trailing stop at double the average daily trading range (which, in addition to potentially mitigating losses, would simplify my trading logistics), and somehow using a history of failed breakouts in determining whether or not to take a trade.

By the way, the WFC bear signal meets my criteria: It is below the breakout level a half hour after breakout, and the RSI is dropping. True, the price is up intra-day, and that can be a cause for concern. But, the drop did cause a lower low following a lower high, meaning that WFC is in a bear trend according to traditional analysis.

Implied volatility stands at 22% and has been dropping since Oct. 10. Options are pricing in confidence that 68.2% of trades will fall between $31.98 and $36.32 over the next month, for a potential profit or loss of 6%.

Options are active, running 181% above their five-day average volume. Puts lead slightly at 192% above average, compared to 174% above for calls.

Today's fair-price zone on the half-hour chart runs from $33.90 to $34.19, encompassing 68.2% of transactions surrounding the most-traded price, $34.04. With 90 minutes before the close, WFC is trading near the top of the zone.

Decision for my account: I'm not taking the trade because my trading funds are fully committed under my rules. But if I had funds available, then I would take the trade, structuring it as  January puts with a $36 strike price, for 8x leverage.

Good trading!

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.

GS bull signal

Goldman Sachs Inc. (GS), the global investment bank, pushed above its 55-day high, triggering a Turtle Trading bull signal as the confirming Relative Strength Index nudged its way into overbought territory.

As earnings loom, it's the second test for this level since GS began trading in a range from early September, with a high of $122.60 (today's breakout level) and a low of $111.90.

Last time GS moved into over bought territory on the RSI, it gained 16 points over dropping back into the mid-zone, giving an RSI sell signal.

Goldman Sachs is famous and, in some quarters, loathed. The Manhattan financial powerhouse survived the collapse of capitalist finance in 2007-2008, but did it by short-selling junk mortgage-backed securities at a time when some of its customers were buying.

It's as famous for its alumni as for its practices. Two Treasury secretaries -- Robert Rubin and Hank Paulson -- used to work for Goldman, as did Mark Carney, the governor of the Bank of Canada, Mario Draghi, the governor of the European Central Bank whose tenure has been dominated by efforts to save the euro, and Mario Monti, the prime minister of Italy, a country whose financial practices have been accused of contributing to the euro crisis.

Quite a crew.

GS was hammered hard by the recession, like everyone else, staged a sharp recovery in 2009, like everyone else, and now -- unlike everyone else, has been doing a downward zig-zag since peaking at $193.60 in October 2009.

It has tested the $90 level twice, forming a flat bottom. Today's breakout falls short of the $128.72 needed to form a higher high in the big pattern, so the jury is still out on whether GS is reversing its downtrend.

The one-day fair-price zone on the 30-minute chart runs from $119.06 to $121.69, encompassing 68.2% of the transactions surrounding the most-traded price, $119.93. The post-breakout trading has begun to produce another transadtions peak, somewhere between $122 and $122.35, but it is still far from equaling the lower peak.

GS has been trading above the zone beginning in the second hour from the market open.

Analysts are less than enthusiastic about GS, with an enthusiasm index of negative 45%, worst than the negative 35% recorded a month ago.

GS is no growth stock. Its return on equity is only 5%, and that's with long-term debt amounting to more than double equity.

The company made large, double-digit profits per share in 2009 and 2010, but the latter year showed a huge drop, and 2011 saw a decline to the single digits. Not the direction to inspire bullish confidence.

Quarterly earnings have shown no trend. Of the last 11 quarters, all but one loser has shown a profit. Eight produced upside surprises, and three surprised to the downside.

Institutions own 63% of shares -- not a high figure for a large, liquid company -- but the price is above par: It takes $1.69 in shares to control a dollar in sales.

GS on average trades 3.5 million shares a day and supports a wide selection of strike prices with open interest running in the four and five figures near the money. The front-month at-the-money calls have a 3% bid/ask spread.

Implied volatility stands at 30%, in the lower half of the six-month range. It has been trending sideways since mid-September.

Options are pricing in confidence that 68.2% of trades will fall between $111.72 and $133.03 over the next month. Options are trading like hotcakes, with volume triple the five-day average. Calls lead at 263% above the average, compared to 110% above for puts.

Goldman Sachs next publishes earnings on Oct. 16. The stock goes ex-dividend in November for a quarterly payout yielding 1.5% annualized.

Decision for my account: GS met my criteria under Turtle rules, so I opened a position. I structured it as January calls with a strike price of $115 and 11x leverage.

I also would have taken the trade using traditional trend analysis on the strength of the break above the prior near-term high of $122.60, set Sept. 14.

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.

AIG: On the happy track?

American International Group Inc. (AIG) is a multinational insurance company built on the wreckage of one of the biggest casualties of the collapse of capitalist finance in 2008.

One unit in the company had traded heavily in credit-default swaps securities. When that market turned sour, AIG came up short of money to keep operating, a condition that pushed it to the brink of failure. It survived only thanks to the support of the U.S. government, and has been selling off assets like crazy to repay that support.

Yet the six-month chart depicts a stable company that's on the happy track. It hit a low of $27.18 on June 4, but rose gently to a high on that chart of $35.71 today. That new high pushed the price above the 20- and 55-day day highs, triggering a Turtle Trading bull signal.

It is true that the signal came on a strange day, a faux holiday in the U.S. markets, where bond trading is suspended in honor of Christopher Columbus but stock trading continues in honor of hope, fear, profit and loss.

The upward push began Oct. 1 at $33.02, and continued to rises for for of the five ensuing days.

In terms support and resistance, AIG is trading above any level it has seen stretching back to the spring of 2011. However, there is much older resistance at this level tracing back to the catastrophic fall in price in late 2008.

With the Turtle rules these days I'm using a couple of filters. I want to ensure that when I buy, it is beyond the breakout point. If the price has pulled back, then I'm not interested. And I want to relative strength index (RSI) to moving in the direction of the trade, yet not be beyond the overbought and oversold points, above the 70 level for bull positoins or below the 30 for a bear position.

AIG met those criteria. The RSI stands at 65 and has been rising since Sept. 28.

In the past I've also looked at the force index, which uses volume as part of its analysis, as an additional filter. The one-day half-hour index was rising the first hour of trading,but has since declined.

AIG pushed above the fair-price zone in the first 90 minutes of trading. The zone runs from $35.07 to $35.40 on a one-day 30-minute chart, a range that encompasses 68.2% of transactions surrounding the most-traded pricde, $35.23.

Subsequent trades are concentrated on the $35.54 level, but it has a long way to go before it rivals the $35.23 level. The analysis is bullish, but points to somewhat weak momentum so far.

American International Group has a substantial following of analysts, who are in the aggregate neutral on the stock. The enthusiasm index is a goose egg, zero. That's down from three months ago, when enthusiasm stood at 6%.

And truly, AIG's financials aren't entirely impressive. Return on equity is a mere 3% -- you can do that well with the yield on any decent dividend-paying utility. Long-term debt stands at 71% of equity, much higher than I like, especially with such a low ROE.

Since rejoining the world of publicly-traded companies in 2010, AIG's quarterly earnings have been a mixed bag, with four losing quarters. One of them, the first after it came out of receivership, was a huge write-down resulting from the company's near failure.

But of the 11 quarters, seven showed a profit, including the three most recent, but without any acceleration of earnings.

Seven quarters showed upside earnings surprises, and four surprised to the downside.

Institutions own just 36% of shares -- the company's liquidity crisis spooked them -- and the price is below par. It takes just 79 cents in shares to control a dollar in sales.

At this point, I'll interject that given AIG's history and condition, it seems like madness to open a bull position in its stock. But the Turtle strategy is quite rigid in its rules, and AIG met the criteria. The chart doesn't show a propensity of sudden collapses, so that's an argument in favor of the position.

AIG on average trades 21.6 million shares a day and has an outstanding selection of option strike prices, with open interest up to the five figures near the money. The front-month at-the-money bid/ask spread on calls is  only 1%, making AIG an options traders dream.

Implied volatility stands at 29%, in the lower half of the six-month range. I has been trending pretty much sideways since August, with a couple of gentle undulations.

Options are pricing in confidence that 68.2% of trades will fall between $32.58 and $38.60 over the next month, for a potential gain or loss of 8%.

Trading in options is extremely active today, running 279% above the five-day average. Puts lead slightly at 311% above the average, but calls aren't far behind, running at 261% above average.

AIG next publishes earnings on Nov. 1. The May earnings, which exceeded analyst expecations, triggered a downside gap that turned into a multi-week slide. The August announcement, which also exceeded expectations, produced a measured rise to just short of current levels.

Is it smart to hold this position over the earnings announcement? A tough decision. And speaking of decisions...

Decision for my account: I opened a bull position in AIG on the basis of the Turtle signal. I structured it as January calls with a strike of $33, for 10x leverage. The initial stop/loss is $33.97

I would also have taken the trade based on traditional support and resistance analysis. The breakout was not into blue-sky territory, but the resistance is old and so many have little relevance to the near-term picture.

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.