Thursday, November 1, 2012

UTX: Uptrend in an uptrend wannabe

United Technologies Corp. (UTX) broke strongly above its 20-day high on Thursday, peaking at $80.39 just shy of half an hour after the market opened. From that point, the price has slid down to  as low as $79.25 at one point.

The UTX breakout, triggering a bull signal under my trading rules, set a high high in the third leg of an uptrend that began Oct. 12 from a low of $75.69. 

That uptrend comes in the context of what may be a larger uptrend beginning from a low of $71.40 on July 24. That July uptrend will be confirmed if the price pushes past $82.56, the Sept. 17 high, to set yet another higher high.

Overall, there's less ambiguity to the UTX chart compared to the other signals I've seen of late. It's an uptrend within an aspiring uptrend, just the sort of thing that warms a trend-follower's heart.

The UTX breakout is confirmed by a rising relative strength index, which stands at 58, giving ample room before it reaches overbought territory.

The Hartford, Connecticut company makes big-ticket, high-tech items concentrated on aerospace but also stretching into other sectors. It makes aircraft engines, air conditioning units, fuel cells, elevators and escalators, fire and security systems, helicopters -- including the UH 60 Black Hawk for the U.S. military -- missile systems...

And analysts love the company, with an enthusiasm index of 61%.

The financials back up the enthusiasm. Return on equity is 22%. The long-term debt level is a bit higher than I like, at 90% of equity, but it's not a crippling level.

The company has shown an annual profit the last five years. Indeed, the recession barely made a dent in annual earnings per share.

Quarterly earnings have been non-trending but profitable from 2010 onward. Eight of the last 12 quarters showed upside earnings surprises, three surprised to the downside and one was spot on. 

Institutions own 80% of shares and the price is just a bit above par: It takes $1.27 in shares to control a dollar in sales. 

UTX on average trades 4.7 million shares a day and supports a good selection of option strike prices with three-figure open interest and a 1.6%  bid/ask spread for the front-month at-the-money call options.

Implied volatility stands at 23%, in the lower half of the six-month range. It has been meandering sideways since late September.

Options are pricing in confidence that 68.2% of trades will fall between $74.33 and $84.73 over the next month, and between $77.03 and $82.03 over the next week.

Call options are trading very actively, at a rate 57% above the five-day average volume. Puts are in the doldrums, at 68% below the average.

Today's fair-price zone on the 30-minute chart runs from $79.19 to $80.19, encompassing 68.2% of transactions surrounding the most-traded price, $79.41. With a bit more than two hours before the close, the stock is trading about at the most-traded price.

United Technologies next publishes earnings on Jan. 21. The stock goes ex-dividend on Nov. 14 for a quarterly payout yielding 2.69% annualized at today's price.

Decision for my account: I opened a bull position on UTX, structuring it as a December bull put spread, short the $77.50 puts and long the $75. The $59 credit per contract provides a yield of 19% of risk. 

The breakeven point, $76.91, is slightly below the $77.38 stop/loss, meaning the position will be profitable at expiration even if the price moves below the stop/loss point, as long as it remains above the breakeven.

The next point for adding to the position is above $40.74, and I'll meet that requirement by buying long calls expiring in February with a delta of around 70.

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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