Thursday, February 28, 2013

TPX: Ignoring the Grand Canyon

Tempur-Pedic International Inc. (TPX) broke above its 20-day price channel on Wednesday and continued to trade above the $41.11 breakout level today, confirming the bull signal. The move was prompted by a strong sales report for January.

Since January 2009, when my data begins, TPX has sent 20 bull signals, 11 of them profitable, for a success rate of 55% and an average yield of 19.7%. The yield, adjusted for the success rate, gives a score of 10.9, which is quite high.

In the past year TPX has broken out twice to the upside. Both of those breakouts were profitable,  and highly so, for an average yield of 24.5%.

TPX on the chart has since May been recovering from a sharp decline that carried the price from $87.43 on April 18 down to $21.05 on June 7.

Since then the price has stairstepped higher to a swing high, so far, of $43.45 on Jan. 25. It has since retreated from that level to a retracement low of $35.08 on Dec. 25.

It's a fairly bullish chart, as long as I ignore the awful 76% price drop. But ignoring a hole of that magnitude is a big ask, in the same league as ignoring the Grand Canyon.

The TPX canyon was marked by a 49.8% downside price gap on June 6, after the company told analysts it expected sales to be 3% to 5% lower.

The January swing high touched the top of the gap, and the price retreated thereafter.

I think it will be a hard push to get the price above that level. Many who held shares pre-gap will be eager to get out at the pre-gap price, putting an effective ceiling on future price rises.

At this point I can end my analysis. The position of the price relative to the gap is a deal-killer for me. A push substantially above the gap top would renew my interest, but absent that...

But let's at least see whether I'm alone in my skittishness about TPX.

Analysts are treating the stock as a loser, with a negative 38% enthusiasm rating. (I've never quite worked out what to call a negative enthusiasm rating. Loathing score, perhaps?)

The most interesting point about the financials is the debt, which is at a level amounting to 98% of assets. That gives some shareholder equity in the most recent quarter, but barely, and the company had negative equity to two preceding quarters.

I don't generally allow the financials or the analysts to determine my trades, but in this case, the negative analyst rating and the crippling load of debt argue strongly, in my opinion, against a bull play.

The options grid gives a good selection of strike prices with open interesting running to the three figures. The front-month at-the-money calls have a moderately wide bid/as spread of 7.5%.

TPX on average trades 2.2 million shares a day. The company next publishes earnings on April 15.

Decision for my account: I'm not opening a bull position in TPX because of the positioning of the price in relation to last year's gap. See my discussion above for details.


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.

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