ALV: Upside breakout in a triangle

Update: I closed my ALV bull position on March 25 as the price fell below the 10-day price channel lower boundary, $67.71. The loss on the position, which was constructed of long stocks, was 2.8%. The triangle pattern discussed in the original analysis remains active on the weekly chart.

Autoliv Inc. (ALV) broke above it's combined 20- and 55-day price channels on Tuesday, it's third test of the  $68.92 level. The move would be a bull signal if the stock trades above that breakout level on Wednesday.

This is the 36th breakout for ALV since January 2009. In that period breakouts have been evenly divided between upside and downside. The upside breakouts have had a 55.6% success rate for an average yield of 10.6%.

In the past year ALV has broken out three times to the upside and four times to the downside. The upside breakouts have succeeded twice.

The breakouts show a bias toward profit when the stock is rising that has increased the the last year from the average from 2009 onward.

ALV has been trending sideways since Jan. 2 after a rise from $54.72 on Nov. 16 to the breakout level on Jan. 3.

Today's breakout pushed to a high of $69.26.

Longer term, ALV appears to be tracing an ascending triangle, with a breakout point at $69.61, slightly above Tuesday's price-channel breakout.

I calculate the base of the triangle as $21.66 wide, which gives an upside target of $91.27 upon breakout.

That's all if you believe in triangles, of course. Me-- I'm not entirely convinced, because a triangle pattern is visible to all traders and so gets priced in before the pattern concludes. It seems--illogical.

ALV, based in Stockholm, Sweden, makes auto safety equipment, such as seatbelts, airbags and child safety seats. The company resulted from the merger of a Swedish and an American company. It has a global reach, with 80 facilities and employees in 29 countries.

It is also traded on a European exchange.

Analysts on balance dislike ALV's prospects, showing an enthusiasm rating of negative 60%.

On the books the company has a respectable return on equity at 13% and moderate debt, at just 15% of equity.

Earnings have been profitable for at least the last 12 quarters, with nine upside surprises and three to the downside. There's nothing in the earnings for that period that could be called a trend.

Institutions own 42% of shares and the price is low: It takes 80 cents in shares to control a dollar in sales.

ALV on average trades 515,000 shares a day. It has options, but the open interest is insufficient to meet my criteria. The bid/ask spread on the front-month at-the-money calls is a crippling 16%.

So the way I trade, it's shares or nothing when it comes to ALV.

We can, however, use the options in our analysis. Implied volatility on ALV stands at 32%, the result of a sharp rise on Tuesday.

I analyze stocks statistically using two standard deviations, which capture 68.2% of trades within the bounds.

Options are pricing in confidence that 68.2% of trades will fall between $62.73 and $75.63 in the next month, for a potential gain or loss of 9%, and between $66.08 and $72.28 over the next week.

Options were active to the bull side on Tuesday, with calls trading at nearly five times their five-day average volume.

Autoliv next publishes earnings on April 26. It goes ex-dividend in May for a quarterly payout yielding 2.89% based on current prices.

Decision for my account: I intend to open a long stock position in ALV on Wednesday if the issue trades above the breakout level, $68.92. The historical odds for success on upside breakouts are acceptable, and whatever the analysts may think, I see nothing poisonous in the company's financials.

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.