NTAP's breakouts to the downside have been profitable seven out of 10 times since January 2009, for an average gain of 9.1%. Its directional score, combining the downside success rate (70.6%) and the average profit of successful bearish trades, is 6.5.
The breakout was confirmed Wednesday morning as the stock opened a penny below the breakout level and continued to fall.
There were nine breakouts on Tuesday among the 1,052 stocks and exchange-traded funds I'm following this week. They were selected as having a price of $15 and above and average volume of 500,000 and up.
Five issues broke out to the upside, and four to the downside. The directional success rates run from 56.3% up to 64.5%. (Actually, one, a fairly new issue trading under the symbol HLSS, had a success rate of 100%, but I'm discounting that because of short history in the data.)
NTAP's bearish breakout comes after a failed, not very serious attempt to reach a higher high in a six-month trendless period that has seen the price stay in a range from $26.26 to $36.41. The most recent uptrend within that range peaked Jan. 3 at $34.82.
Longer term, NTAP has been zig-zagging downward for the past two years after peaking at $61.02 in early 2011.
NetApp, based in Sunnyvale, Calif., earned its chops building high-end, super-efficient storage architectures for businesses. The Cloud is far less efficient, but also far less expensive, and corporations have been embracing it with a passion.
Also, the barriers to entry as a Cloud storage provider are lower than for NetApp's core storage architecture niche. It's the usual Internet story that is playing out in music, newspapers, video, books -- make it cheap and ubiquitous, thereby challenging the old business models of scarcity.
William Blair is not alone. Analysts as a group aren't very optimistic about NTAP's prospects, with a collective enthusiasm index of negative 38%.
NetApp on the books is in a fairly good position, however, with return on equity of 13% and no long-term debt.
The company has been consistently profitable for at least the last 12 quarters, although the latter two quarters of 2012 showed profits below what had been the norm for the past two and a half years.
Earnings have surprised to the upside 10 times in the last dozen quarters, and twice to the downside.
Institutions own 90% of shares, and the price is only slightly above sales parity. It takes $1.86 in shares to control a dollar in sales.
NTAP on average trades 5.5 million shares a day, sufficient to support a moderately good selection of option strike prices with open interest mainly in the three figures, with a few at four figures. The front-month at-the money puts have a 1.2% bid/ask spread.
Implied volatility stands at 42%, slightly below the mid-point of the six-month average. It has been rising gently since Jan. 3.
Options are pricing in confidence that 68.2% of trades will fall between $28.28 and $36.06 over the next month, for a potential gain or loss of 12%, and between $30.30 and $34.04 over the next week.
Options are less active than has been typical of the past five trading days, with calls trading at 81% of their five-day average volume and puts at 53% of the average.
The fair-price zone on today's 30-minute chart runs from $32.24 to $32.74, encompassing 68.2% of transactions surrounding the most-traded price, $32.60.
The price has been falling since the second half-hour of trading today and now, with four hours before the close, stands below the zone. As the day has progressed, NTAP has set a secondary price peak with high volume ranging from $32.25 to $32.28.
NetApp next publishes earnings on Feb. 13.
Decision for my account: I've opened a bear position on NTAP, structuring the trade as a bear call spread expiring Feb. 15, short the $34 call and long the $36 call. This means the position will be profitable at expiration up to $34.52, giving me a 6.6% cushion in case the the breakout proves to be a false positive. If the price continues to fall, I shall add to the position by buying puts that expire in June.
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.
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.