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.
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.