Update: I opened a bull position Monday, structured as long shares.
Duke Realty Corp. (DRE) on Friday turned out to be one of the casualties of my rigorous screening process. It broke out to the upside on Thursday, but Friday's trading remained stubbornly below the breakout level, except for brief forays across the boundary, and so the breakout was never confirmed.
Only in the last half hour of trading did DRE muster its powers and cross and close above the 20-day price channel, confirming the breakout.
I, of course, was dead asleep at that hour, trying to cut through the devastating effects of jet lag after an extended stay in East Asia.
So it counts as a missed opportunity, but a private trader must be awake to all opportunities, even those marred by misstep.
Under my guidelines, I can still trade DRE if, on Monday, it trades for at least half an hour above the 20-day price channel. However, I must also guard against getting into the movement too late. So I add a restriction: The price must also be trading within one average daily trading range of the channel boundary.
In the case of DRE, the average true trading range on breakout day was 26 cents, and the breakout level was $16.10. So I can open a bull position in DRE if I can get a fill from $16.11 up to $16.36. The stock closed Friday at $16.12.
Of course, the question of whether I would want to trade DRE remains an open one. Let's check the odds.
DRE has broken out 18 times to the upside since the post-recession market recovery began in early 2009. Ten of those breakouts were profitable, with an average return of 10.1%. That gives DFE a success rate of 55.6%.
Adjusting the return by the success rate gives a score of 5.6%, sufficient to meet my 5% minimum guidelines for the adjusted return.
DRE in the past year has broken out four times to the upside, and half have been profitable, with an average return of 6%. That's even odds, and I generally like at least a slight tilt in my favor.
The average loss on unprofitable trades in that year was 1.6%. So, even if my chances of winning are even, the returns tilt the results in my favor by more than 4 percentage points.
DRE has been treading water since the summer of 2009 in a sideways pattern that peaked in Thursday at $16.22. That technically sets a higher high following a higher low, but I would hesitate to label the move an uptrend.
The sidewinder has seen four highs that define its area of resistance: $13.71 in September 2009, $14.35 in May 2010, $15.63 in May 2011, $15.31 in April 2012, $16 in September 2012 and Thursday's high of $16.22.
All but the last fall within the range of the fifth week of a devastating decline that carried the price from $21.21 in September 2008 down to $3.85 in November 2008.
The sixth week saw a rise as bottom-fishers came in and bought. So any shares still on the table from that period will be put up for sale around the range of those highs as traders caught by the further decline try to get out with minimal loss.
I think it will be a hard push above that level. But the nature of breakouts is often one of resistance overcome by momentum, and waiting for the momentum means missing an opportunity.
In the nearer term, DRE has been on an extended rise from $12.71 on Nov. 15 up to $16.10 on Feb. 8, a move followed by a correction. Thursday's high was the first push above that February high.
Duke Realty, a real-estate investment trust headquartered in Indianapolis, Indiana, has holdings focused on industrial, office, medical and retail rentals. It also prides property management and development services.
Analysts generally are down on the company's prospects, collectively coming down with a negative 25% enthusiasm rating.
And, in truth, the company isn't prospering as we move from the doldrums of recovery to the prospect of politically induced contraction. Duke's return on equity is a negative 5%, with long-term debt more than double equity.
The company has reported losses for eight of the last 12 quarters, and profits in only four. The last four quarters have shown losses, although, it must be said, they aren't accelerating to the downside.
Duke has surprised eight times to the downside in that period, and only four time to the upside.
This is dismal. This is bearish. These are the sorts of numbers that make a bull trade a counter-trend play, at least for fundamental traders.
Institutions own 83% of shares. The price, flying in the face of the financials, is quite high: It takes $4.67 in shares to control a dollar in sales.
What Duke has going for it, in investors' eyes, is that it is a REIT, and REIT's pay dividends. In the case of Duke, the dividend yields 4.22% at today's prices. That makes the stock an attractive play for traders willing to risk the capital loss.
DRE on average trades 4.5 million shares a day. And yet, it's options grid is fairly sparse, and the open interest is lacking: Double digits on the front-month at the money calls, and zeroes elsewhere in the front month
This buttresses the theory that DRE is a dividends play. By my guidelines, the options aren't liquid enough for trading, so its shares or nothing.
However, a high dividend combined with a strong upward push in price can be an attractive combination that provides welcome diversification to a portfolio dominated by hedged positions.
Implied volatility stands at 18%, near the bottom of the six-month range. Options are pricing in confidence that 68.2% of trades will fall between $15.29 and $16.95 over the next month, for a potential gain or loss of 5.1%, and between $15.72 and $16.52 over the next week.
The quarterly dividend, if the next payout equals the last, will be 17 cents, sufficient to cover a price decline down to $15.95 from Friday's close.
The stock will go ex-dividend in May for the next quarterly payout.
Decision for my account: I have a spot in my account for a diversification play, and am inclined to open a bull position in DRE, structuring it as long shares, if I can fill the order at a price from $16.11 to $16.36.
Although the position would be a dividend play, it would obey the same stop/loss rules as my other holdings: An initial stop/loss at twice the average true range below the entry price, and then the lower 10-day price channel boundary, whichever is nearest the current price.
If I open the position at $16.12, the initial stop/loss would be $15.62.
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.