It is the 32nd breakout from the 20-day price channel for CHS since January 2009. Three-fourths of the CHS bearish signals have been profitable, for an average gain of 9.2%. The average profit from successful bearish trades, adjusted for the rate of success, is 6.9%.
By comparison, bullish breakouts have only a 40% success rate.
CHS has been in a sideways movement since mid-August, with a floor of $17.48 and a ceiling of $19.76.
It culminates a rise from $9.57 that began in November 2011 and peaked on Nov. 6, 2012 at $19.76 for a stunning doubling of the price in a year.
As I look at this chart, my best narrative is that the sidewinder is a large topping structure that is prelude to a downside correction. The bearish breakout on Thursday supports that narrative, but an alternative narrative, that the sidewinder is a pause before the rise resumes, also has plausibility.
Altogether 21 of the 1,052 stocks I follow broke beyond their 20-day price channels on Thursday, four of them to the downside, with returns adjusted for success in the direction of the breakout ranging from 12.5% down to 1.1%.
Only five of the breakouts are tradeable because of earnings announcements; my rule is to not open new positions within 30 days of earnings, and we are heavily in the 4th quarter earnings season.
Chico's, headquartered in Fort Myers, Florida, designs and markets women's apparel through more than 1,200 stores and outlets in the United States and its Caribbean territories, under the names Chico's, White House | Black Market and Soma.
The company is faced with declining favor among analysts. Three months ago they were collectively neutral on the company; they've now dropped to a negative 29% enthusiasm rating.
The lack of enthusiasm flies in the face of the long rise in the stock price and also Chico's 16% return on equity with no long-term debt. The latter are a happy, healthy pair of financial numbers that any company would love to have.
Chico's has been profitable for the 12 past quarters. Profits tend to peak in the 2nd and 3rd quarters -- spring and summer -- and those quarterly profits have risen steadily since at least 2010.
The company has surprised to the upside in 10 quarters, and to the downside in two.
Institutions own 82% of shares, and the price is near sales parity; it takes $1.16 in shares to control a dollar in sales.
CHS on average trades 2.8 million shares a day, supporting a moderately good selection of stock option strikes with open interest running mainly to the three figures, with a few outliers in either direction.
The bid/ask spread on front-month at-the-money puts 11%, a bit on the high side.
Implied volatility stands at 31%, in the bottom half of its six-month range. Volatility has been meandering sideways since November.
Options are pricing in confidence that 68.2% of trades will fall between $15.92 and $19.02 over the next month, for a potential gain or loss of 9%, and between $16.73 and $18.21 over the next week.
Call options are trading today at more than triple their five-day average volume, compare to puts at 70% of average volume.
The fair price zone on today's 30-minute chart runs from $17.28 to $17.43, encompassing 68.2% of trades surrounding the most-traded price, $17.36. Four hours before the close, CHS is trading above the fair price zone but is far from establishing a new most-traded price.
So it's a somewhat bullish pattern in today's trading due to a sharp rise between 11:30 a.m. and noon Eastern. But the mini-rise has stalled and may well drop back into the zone.
Chico's next publishes earnings on Feb. 28. The stock goes ex-dividend in February for a quarterly payout yielding 1.2% annualized at today's prices.
Decision for my account: The strong historical odds of success to the downside make a bearish decision for CHS an easy one to take. Yet that bias is offset by a bullish bias to the chart and to the company's financials. The decision, like all of my trading decisions, was based on the short-term, chart-based nature of my trading style. It's a bearish breakout under my rules. Previous bearish breakouts have tended to be successful. Playing with the odds is a no-brainer.
I've opened a bearish position on CHS, structuring it as a bear call vertical spread expiring Feb. 15, short the $18 call and long the $21 call. This structure makes the position profitable at expiration up to $18.85, for an 8% cushion. The maximum yield on the position is nearly 40%.
If the price continues to fall, I'll add to it by buying puts expiring in May.
References
My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.
And the classic Turtle Trading rules on which my rules are based can be read here.
Disclaimer
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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