There was no shortage of breakouts today, but only two were trending with enough strength to draw my interest. GME had a five-day trend score of 180% of its average daily trading range. The other was the chemical giant E I Du Pont De Nemours and Co. (DD), a bullish breakout with a trend score of 139% of range.
The breakout came during the last leg of an uptrend that began in August at $15.32. The six-day rise from $25.40 to $28.19 (so far today) followed an eight-day fall that, under my rules, put the stock back in neutral phase.
So the breakout means that its game on in an ongoing game. Forget the analytical niceties -- GME is in an uptrend, and under Newton's 4th Law of Motion, a stock in motion remains in motion until traders and analysts get bored.
(Newton on a stock bubble of his day: "I can calculate the movement of the stars, but not hte madness of men.")
Despite the rise, analysts aren't showing the stock a lot of love, collectively giving it an enthusiasm index of precisely zero. One way to interpret that is "Don't love it, don't hate it, don't care".
The financials, however, are quite good. GameStop, with more than 6,600 stores in the U.S., Australia, Canada and Europe, shows a return on equity of 14%, with no long-term debt.
As is always the case with retailers, the 4th quarter, which includes Christmas, is where the money is made. The last two 4th quarters for GameStop have shown higher earnings per share compared to the year-ago quarter. Of the past 12 quarters, ten have shown upside earnings surprises and two surprised to the downside. All were profitable.
The stock is a darling of institutional investors, yet the stock price is dirt cheap -- it takes but 38 cents in shares to control a dollar in sales.
GME on average trades 2.7 million shares a day and supports an excellent selection of option strike prices, most in the front month with four-figure open interest. The front-month at-the-money bid/ask spread is 3.4%.
Implied volatility stands at 41%, near the floor of the six-month range. Options are pricing in confidence that about a third of trades will fall between $24.63 and $31.21 over the next month, for a potential gain or loss of 12%, and between $26.34 and $29.50 in the next week.
The fair-price zone runs from $27.78 to $28.05 on today's 30-minute chart, encompassing about two-thirds of transactions surrounding the most-traded price, $27.91. The price was trading above the zone but has dropped back to the most-traded price with 45 minutes left in the trading day.
GameStop next publishes earnings on March 18. The stock goes ex-dividend on Nov. 26 for a quarterly payout yielding 3.58% annualized at today's price.
Decision for my account: I'm not entering into new positions at this point as we wait for the politics of budgeting and debt to percolate in Washington, D.C.
If I were trading, I would note that the price has dropped below the $28 breakout level. I would open a position if the price moved above $28 again, initially selling a bull put spread, short the January $26 put and long the January $25 put.
That structure puts the breakeven point at $25.72, below my standard stop/loss, $26.46 in this case, calculated as the entry price less twice the average daily trading range. The maximum yield is 22%
If the price continued to rise, I would add to the position using long April calls with a delta of about 70.
My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.)
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.