Thursday, October 18, 2012

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.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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