My project this week will be to work up some routines to analyze my historical market data, with an eye to understanding better how to reduce false positives among price-channel breakouts.
Also, I get the impression that the 20-day and 55-day channel boundaries -- the standards for Turtle Trading -- serve more as reversal points than breakout levels for forex. I want to test that out, because currencies have the advantage of having higher leverage than options do, but it's an advantage only if the trade goes in my direction.
There were four breakouts -- all stocks -- in the early trading on Thanksgiving Week Monday. That called for triage.
The four breakouts were PGR to the downside and NWL, SWN and TSO to the upside.
All four passed my half-hour test. The price had not retraced to within the price channel a half hour after the signal was given. And all four had acceptable liquidity. So, no help there.
The fundamentals and brokerage sentiment (I use Zacks for this) were bullish on two of the stocks that broke out to the upside, and neutral on the remaining two. When the fundamentals match the direction of a breakout, I take that to be something that gives some slight bias toward a successful trade.
My final step was to judge the trend, in two ways, both looking at the five days of trading prior to the breakout.
First, I wanted to know what percent of those five days trended in the direction of the breakout. To draw a trendline for a rising trend, my practice is to connect the daily lows. This marks price support for the trend direction. A falling trendline is the opposite -- I connect the highs, providing a line that marks resistance against a further rise.
NWL led the pack with for out of five days showing higher lows, which I scored as 80%. The others came in a 20% and 40%.
My second test is to test the close on the day before the breakout against the close five days earlier. This not only shows whether or not the price over that period is moving in the direction of the breakout, it also shows the magnitude of the move.
I express the move in terms of the 20-day average true trading range, which puts all the stocks in the triage on a level playing field. In Turtle Trading, and in my trading plan, the 200-day ATR is abbreviated as N.
So I code the result as Nx2.2, for example, meaning that the movement in those five days was a bit more than twice the average true range in the direction of the trade. Nx-2.2 would mean, opposite the direction of the trade.
NWL came in best, which a score of Nx1.2. SWN was second, with a miserable Nx0.01. PGR and TSO both moved contrary to the direction of the breakout.
So NWL it is. I've gone into such detail on the triage and the scoring because they'll be part of the analysis I hope to develop as part of my programming project this week. My hypothesis is that higher scores suggest stronger momentum at the time of the breakout.
We shall see.
Newell Rubbermaid Inc. (NWL) broke above high price of the past 55 days, $21.33, and pushed to a swing high of $21.52. It remained above the breakout point for the first 2-1/2 hours of trading, but it bounced back below breakout about the time I started to write this piece and after I had opened a position. Not a promising start.
But the Atlanta, Georgia company makes a lot of rubber products. So perhaps a bounce was inevitable. It's products are ubiquitous across a wide range of uses, such as the bookshelves in my basement.
The stock began a mid-term rise on Aug. 31 from $16.87 and has been in a weak correction since mid-October. I say weak because even though correcting, the price managed a slight upward tilt.
The breakout level was a true resistance point, which also adds weight toward taking a trade.
Analysts are optimistic about NWL's prospects, having given it a 55% enthusiasm index for at least the past three months.
And with good reason. Return on equity is 25%, and long-term debt, although higher than I like, amounts to two-third of equity, not a crippling level by any means.
Earnings tend to peak in spring and summer -- the 2nd and 3rds quarters -- and 2012s quarters are about the same as those a year earlier. That sort of pattern marks a mature market in my eyes. NWL is a money maker, but its earnings aren't accelerating.
Institutions own 87% of shares, and the price is about at part: It takes $1.02 in shares to control a dollar in sales.
NWL on average trades 3.9 million shares a day an supports a moderately good selectoin of optoins strike prices with open interest running in three and four figures.
The bid/ask spread on front-month at-the-money calls is quite wide, at 27%, and implied volatility isn't especially high, standing at 21% at the bottom of the six-month range.
Options traders are pricing in confidence that about two thirds of trades over the next month will fall between $19.94 and $22.53, for a potential gain or loss of 6%, and between $20.61 and $21.86 over the next week, for a gain or loss of 3%.
Options trading is slow today -- it is a holiday week -- with calls at 45% of their five-day average volume, and puts at 75%.
The fair-price zone on today's 30-minute chart ranges from $21.22 to $21.46, encompassing about two-thirds of transactions surrounding the most-traded price, $21.35.
One thing I look for in this analysis is whether other prices are gaining on the most-traded. NWL has a second peak in the making around $21.26 or so, the action where the trading is presently occurring. That suggests that the breakout momentum is dissipating and that the trade has a greater chance of failing.
Decision for my account: I took the trade earlier in the morning, back when it looked better. As is my common practice these days, I hedged it, structuring the position as a bull put spread, short the December $21 put and long the December $19 put.
The $37 net credit for each contract means that the position will be profitable at expiration on Dec. 21 if the stock is as low as $20.63, a bit above a $20.48 stop/loss set at double the average true range.
For bullish vertical spreads like this, my rules dictate that I hang on to the position until either the price breaks breaks beyond the 20-day low price, or the relative strength index rises above 70 and then falls back below that level.
My trading rules can be read here.
And the classic Turtle Trading rules on which my rules are based can be read here.
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.