Tuesday, December 11, 2012

UAL takes off for no discernable reason

I woke up this morning to flurry of alerts as the market, setting aside it's Monday sleepiness, began to move. Among the breakouts, all to the upside, were exchange-traded funds covering the broad averages, such as SPY, which tracks the S&P 500.

Bloomberg News, with the usual insight shown by market writing, had the headline, "U.S. Stocks Rise on German Confidence Amid Budget Talks", which must count as the most incomprehensible market headline I've for awhile.

SPY, however, slipped past its 20-day high with a low trend score, just 49% of the average daily range for the past 20 days.

It was individual stocks, as usual, that showed the strongest trends, with four at or beating the trend score I consider to be a minimum for a tradable breakout: IBM at 100%, POT at 101%, STI at 121%, and the winner and grand champion, UAL, with a trend score of 130%.

To put it in context, some days I've seen trend scores of 200% and better, so while an improvement over recent results, it's not a hallelujah market yet.

United Continental Holdings Inc. (UAL), headquartered in Chicago, Illinois, flies the friendly skies (as an old ad slogan put it) under the brand United Airlines. It is the world's second largest airline by passenger count, trailing Delta.

The chart got a high trend score because of four straight days of higher lows that culminated on the fifth day with a break above the 20-day high of $21.65. It's a true breakout, busting past a level that has been tested twice before since early October.

The move carried the price from $19.54 on Dec. 4 to today's high (so far) of $22.14. The rise brings the price into an area of little resistance. The next swing high is at $24.95, attained on July 11.

The price has been in a large sideways pattern since April 2010, ranging from a floor of roughtly $16 to a ceiling of about $30.

There was no positive news to account for today's 6.5% intra-day rise. The company reported a decrease in revenue per passenger mile, in part due to Hurricane Sandy's battering of the American East Coast.

Analysts opinions in aggregate give the company a 33% enthusiasm score.

Return on equity is a super high 52%, but debt is also super-high, at nearly six times equity. 

Quarterly earnings have been all over the map. Four of the last 12 have shwon losses, including this year's 1st quarter. The two ensuing profitable quarters this year were below the profitable quarters of 2011 and 2010.

Three quarters showed negative earnings surprises. The rest surprised to the upside, incluing all four losing quarters.

Institutions own enarly all of the shares, and the stock price is so low that the term "bargain  basement" fails to do it just. It takes just 19 cents in shares to control a dollar in sales.

UAL on average trades 2.6 million shares a day yet has a wide selection of options strike prices with open interest running to the four and five figures in the front month. The bid/ask spread for front month at-the-money calls is 3%, which is fairly low.

Implied volatility is 47%, a high level compared to the S&P 500 and most other big companies I look at. However, it's on the low side for UAL, standing in the lower half of the six-month range.

Options are pricing in confidence that about two thirds of trades ove rthe next month will fall between $18.91 and $24.83 for a potential gain or loss of 14%, or over the next week between $20.45 and $23.29, for a 7% gain/loss.

Trading in options is extremely heavy today, with calls running at more than six times their five-day average volume, and puts at nearly five times the average.

The fair-price zone on today's 30-minute chart stretches from $21.34 to $22.02, encompassing about two-thirds of transactions surrounding the most-traded price, $21.68. 

The stock is trading in the upper half of the zone with about three hours left before the close. Today's next most-traded price is $21.83 to $21.87, suggesting a trader preference for the upside.

United Continental Holdings next publishes earnings on Jan. 21.

Decision for my account: I'm not trading for reasons extraneous to the analysis. If I were trading, I would open a bull position in UAL, structuring the initial holding as a bull put spread, shot the $21 January put and long the $20 January, for a credit of $28 per contract. 

That sets the break-even point at $20.72, a bit above my standard stop/loss of double the average daily range, which is $20.52 in this case.

Subsequent additions to the position would be long call options expiring in March with a delta of around 70.

I'm not trading -- actually, I'm reducing exposure -- because I want to see what happens with the Fiscal Cliff budget negotiations and, perhaps more important, the debt ceiling. The last round in this battle, in 2011, caused a sizable decline in the market. I'd just as soon avoid that.


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.

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