They are Cyberonics Inc. (CYBX), a Houston, Texas company that makes very specialized medical equipment used in treating epilepsy and other diseases of the nervous system, and Franco-Nevada Corp. (FNV), a Toronto, Ontario minerals company focused on gold but also having interests in platinum, oil and gas.
FNV is an outlier, with all downside breakouts coming in profitable, with an average return of 7.5% per trade. CYBX has a success rate of 77%, with an average return of 6.8%.
Looking at the odds alone based on the last four years of trading, both stocks are excellent prospects.
The structure of my analysis will in a somewhat different order from what I usually do, because with these stocks, it is the lower liquidity above all that determines whether a trade can be taken and the nature of any trade.
The stocks both have excellent financials, with a return on equity for CYBX of 24% and for FNV of 13%, with very low debt levels.
The breakouts were to the downside, so good numbers actually argue against the trade.
CYBX is the more liquid of the two, trading on average 255,000 shares a day. FNV trades 89,000 shares daily on the U.S. stock exchange, although its principal trading venue is the Toronto Stock Exchange under the same symbol.
CYBX is the more liquid of the two, trading on average 255,000 shares a day. FNV trades 89,000 shares daily on the U.S. stock exchange, although its principal trading venue is the Toronto Stock Exchange under the same symbol.
Most important, neither symbol has options that meet my liquidity standards for trading -- the open interest is too low.
So the only way to trade the stocks would be to sell them short. That's not possible with FNV.
I find the situation to be amusing because it shows how trading rules can work against taking a trade. Under my rules, I can't trade FNV because the options are too illiquid and there's no alternative, since short sales aren't possible.
CYBX front-month puts are tradeable -- they have three-figure open interest on two strike prices-- but that drops off to two figures in the out-month that I would use to buy long puts. And in order to construct a bearish vertical spread on the February options, I would have to buy and sell calls, which dip to open interest in the single digits at the money.
So it's a short sale or nothing with CYBX.
Friday's breakout by CYBX carried the price below the 20-day channel boundary, $50.80, ending a sideways movement that had been in place since mid-November but staying within a wider sideways pattern stretching back to September.
A drop below $43.69 would carry CYBX below the 55-day price channel and, if persistent, would decisively break the sidewinder.
With four hours left before the close, the stock is trading now at $47.56, so the potential "easy money" gain on a bear trade is about 8%. Today's decline has come on volume that has been climbing for three days and is running at about four times the average.
As I look at CYBX, I keep wanting to fall back into narrative and fundamental analysis. The breakout was bearish, but CYBX outside the chart just keeps screaming "Bull play!"
Earnings have been on the rise for seven quarters. Ten of the past 11 quarters have surprised to the upside. Analysts give it a 30% enthusiasm rating. Institutions own 92% of shares and have bid up the price so that it takes $5.82 in shares to control a dollar in sales.
The small, still voice that speaks inside of every technical trader is saying, "Does this really make any sense?" The financial data, for some reason, always seems more "real" than the analytical constructs on a chart.
The price decline began on Jan. 17, the day the CEO announced 7,000 shares of stock, and that, apparently, is what triggered the decline. Why is selling? Who knows? It could have nothing at all, or everything, to do with his assessment of the company's prospects.
Today differs from the prior two days of the decline because the price has pulled up from the day's low. "Profit taking", as the media all-purpose explanation goes.
Implied volatility stands at 48%, just above the middle of the six-month range, and has been on the rise since Jan. 11.
Options are pricing confidence that 68.2% of trades will fall between $40.80 and $53.84 over the next month, for a potential gain for loss of 14%, and between $44.19 and $50.45 over the next week.
The fair-price zone on today's 30-minute chart runs from $46.36 to $48.10, encompassing 68.2% of transactions surrounding the most-traded price, $47.57. CYBX is trading near the most-traded price, but it well on its way to establishing a new most-traded at $47.34, a lower level. That's a bearish paw print.
CYBX next publishes earnings on Feb. 18 (which would require me to bend my rules my a few days to enter a trade).
Decision for my account: I'm on the horns of a dilemma, at least if a dilemma horn's are confugured something like a triceratops. The chart says bear, everything else says bull, and the earnings announcement date says, stay away. I like the 8% potential "easy money" profit; I'm less happy with the fact that I would need to do a short sale to play.
Aside of the loss of leverage without tradeable options, my problem is this: If the price suddenly reverses on a stock with volume in this range, how likely is it that I'll lose liquidity so that I can't easily get out of the position.
I simply don't know. My recent experience with these less liquid issues is insufficient to provide an answer.
So I'm passing on the trade, but I am entering a paper trade, so I can study what happens to this stock. Sometimes, knowledge trumps profit, and that's how I'm playing CYBX today.
References
My trading rules can be read here. 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
A drop below $43.69 would carry CYBX below the 55-day price channel and, if persistent, would decisively break the sidewinder.
With four hours left before the close, the stock is trading now at $47.56, so the potential "easy money" gain on a bear trade is about 8%. Today's decline has come on volume that has been climbing for three days and is running at about four times the average.
As I look at CYBX, I keep wanting to fall back into narrative and fundamental analysis. The breakout was bearish, but CYBX outside the chart just keeps screaming "Bull play!"
Earnings have been on the rise for seven quarters. Ten of the past 11 quarters have surprised to the upside. Analysts give it a 30% enthusiasm rating. Institutions own 92% of shares and have bid up the price so that it takes $5.82 in shares to control a dollar in sales.
The small, still voice that speaks inside of every technical trader is saying, "Does this really make any sense?" The financial data, for some reason, always seems more "real" than the analytical constructs on a chart.
The price decline began on Jan. 17, the day the CEO announced 7,000 shares of stock, and that, apparently, is what triggered the decline. Why is selling? Who knows? It could have nothing at all, or everything, to do with his assessment of the company's prospects.
Today differs from the prior two days of the decline because the price has pulled up from the day's low. "Profit taking", as the media all-purpose explanation goes.
Implied volatility stands at 48%, just above the middle of the six-month range, and has been on the rise since Jan. 11.
Options are pricing confidence that 68.2% of trades will fall between $40.80 and $53.84 over the next month, for a potential gain for loss of 14%, and between $44.19 and $50.45 over the next week.
The fair-price zone on today's 30-minute chart runs from $46.36 to $48.10, encompassing 68.2% of transactions surrounding the most-traded price, $47.57. CYBX is trading near the most-traded price, but it well on its way to establishing a new most-traded at $47.34, a lower level. That's a bearish paw print.
CYBX next publishes earnings on Feb. 18 (which would require me to bend my rules my a few days to enter a trade).
Decision for my account: I'm on the horns of a dilemma, at least if a dilemma horn's are confugured something like a triceratops. The chart says bear, everything else says bull, and the earnings announcement date says, stay away. I like the 8% potential "easy money" profit; I'm less happy with the fact that I would need to do a short sale to play.
Aside of the loss of leverage without tradeable options, my problem is this: If the price suddenly reverses on a stock with volume in this range, how likely is it that I'll lose liquidity so that I can't easily get out of the position.
I simply don't know. My recent experience with these less liquid issues is insufficient to provide an answer.
So I'm passing on the trade, but I am entering a paper trade, so I can study what happens to this stock. Sometimes, knowledge trumps profit, and that's how I'm playing CYBX today.
References
My trading rules can be read here. 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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