Monday, January 28, 2013

TIBX: Filling the gap

TIBCO Software Inc. (TIBX) broke above its 20-day high of $23.39 on Friday, giving its first bull signal since August. The breakout came on a 1.6% opening gap with a volume spike and then continued to push upward for a 5% intra-day rise.

Today's opening, the first trading day since the breakout,  pushed to a higher high of $24.77 in the first half hour of trading.

Prior to the sudden upswing, TIBX had been on a gentle uptrend that began Dec. 5 from $18.95. That movement was a correction of a decline from $32.95 that began in mid-September. The decline was punctuated on Dec. 5 by a 14% opening gap to the downside after the company gave earnings guidance that traders, clearly, didn't like one bit.

In traditional chart analysis, "filling the gap" means that the price retraces to the mid-point of the gap. Friday's breakout by TIBX did that and much more, crossing the prior gap entirely. Traditionally, once a gap is filled, the price reverses and goes on its merry way. But this breakout didn't fill the gap, it erased it, and I question whether momentum of that sort will reverse quickly.

On the weekly chart TIBX has been in a broad sideways pattern since the summer of 2011.

Friday's breakout was the 17th to the upside since January 2009 and the third of the past 12 months.

Overall, the TIBX bullish breakouts hae proven profitable three times out of five, with an average gain on successful trades of 14%. Adjusting the gain by the 62.5% success rate gives an 8.7% score, well above the 5% that is my informal minimum.

The previous breakouts came in a span of 1,252 days. I divided that period into fifths, each having 250 days (plus change).

The first three quintiles, from March 2009 through March 2011, had high success rates: 67%, 75%, and, in the 3rd quintile covering late 2010 and 2011, 100%.

From that point, the success rate declined. The 4th quintile, from May 2011 to the end of the year, had three breakouts but only one was profitable. The 5th quintile, covering 2012, also had three bull signals and only one success.

The odds for success in trading TIBX have fallen sharply from their finest days.

By their nature, stocks on the daily charts don't produce a lot of data. Breakouts under my trading methods come infrequently. So, looking at the historical odds becomes a trade-off between analyzing a longer period of time, with more data points and greater accuracy, or a shorter time period with fewer data points but greater relevance for what's happening now.

I'm dealing with that problem by looking at both the long and short time spans to get a sense of any trend in the odds over time.

The declining odds of success for bull trades on TIBX contrasts with the bullish over-all odds for the period from 2009 onward. Classical technical traders might call this a divergence, and a bearish divergence at that.

Not that analysts would agree. Their collective wisdom gives TIBX at 25% enthusiasm score, a level that amounts to wild applause, although no one is throwing roses on the stage.

TIBCO's software products provides managers with the analytics they need for decision making. It provides tools for managing the processes of a company -- the implementation of management decisions. In short, it's goals to allow companies to be run based on knowledge rather than guesswork.

Some of the Palo Alto, California company's big-name clients have been Yahoo!, NASDAQ, Major League Baseball and Oracle.

From the standpoint of having a compelling story, TIBCO stands out for me. I'm very data driven in my trading, so TIBO has a business I can relate to.

That business has enabled TIBCO to earn an 18% return on equity, with debt running higher than I like, at 58% of equity.

Looking at the last 12 quarters; TIBO has been consistently profitable. Profits for this company tend to peak in the 3rd calendar quarter (the company's 4th quarter).

Although the 4th of 2011 was higher than its counterpart a year earlier, the 4th of 2012 was unchanged from the prior year. Bottom line: Earnings haven't been accelerating of late.

All 12 quarters saw earnings surprises to the upside.

Institutions own 83% of TIBX shares. The price has been bid up so that it takes $3.89 in shares to control a dollar in sales.

TIBX on average trades 2.6 million shares a day and supports a fine selection of option strike prices with open interesting running to the three- and four-figures. The bid/ask spread for front-month at-the-money calls is 3.3%.

Implied volatility is running at 36%, near the bottom of the six-month range. It has been declining since December with the occasional up-tick to keep things interesting.

Options are pricing in confidence that 68.2% of trades will fall between $21.98 and $27.12 over the next month, for a potential gain or loss of 10%, and between $23.32 and $25.78 over the next week.

Call options are trading at seven times their five-day average volume, and puts are at 70% of average volume.

The fair-price zone on today's 30-minute chart runs from $24.50 to $24.68, encompassing 68.2% of trades surrounding the most-traded price, $24.60. With 3-1/2 hours to go before the close, the price has declined over the last 90 minutes to the bottom of the zone, a bearish sign for the very near term.

TIBCO next publishes earnings on March 25.

Decision for my account: The less I know, the easier the decisions are. I know far too much about TIBX for an easy decision.

On the upside are the long-term odds for success in bullish breakouts, analyst opinion, the financials and the cool nature of the business, and the high trading volume today in call options.

One the downside: The declining rate of success, the high debt, and the near-term decline to the bottom of the fair-price zone.

When in doubt, I always go back to the chart. I note that the gap and today's rise filled in an earlier downside gap, on Dec. 5. That degree of momentum sends me a bullish message, since generally gap fills will falter at the middle of the gap. At the least, it tells me that the breakout is pushing past real resistance on the chart.

That reality on the ground is enough to overcome my misgivings about the declining success rate. After all, each quintile has had its winning trades with quite large profits.

I've opened a bull position in TIBX, structuring it as a bull put spread expiring March14, short the $23 put and long the $21 put. This gives a potential yield of 17% and is profitable down to $22.60, for a 7% cushion.

The cushion means that I'm profitable well into the range from which the price broke out. So if the breakout fails to advance but doesn't move into a longer term downtrend, I'll still make money.

If the price continues to rise, I'll add to the position by buying long calls expiring in May.


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.

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.

No comments:

Post a Comment