WLL: A signal within a triangle

Update: I closed my bull position in WLL on April 2, for a loss on the underlying stock of 4.3%. The position in my portfolio was structured as a vertical credit spread. It closed for a net loss of 28.4% on the leveraged position.

The exit signal came as the price crossed below the lower boundary of its 10-day price day, $48.84.

Update: The order described below in the "Decision for my account" section has been filled and my bull position in WLL is active.

Whiting Petroleum Corp. (WLL) broke above its 20- and 55-day price channels on Thursday as it neared the apex of a long-term symmetrical triangle formation that began in early October 2011.

The price on Thursday and today (so far) has peaked at the triangle's upper trendline. A move beyond the line will mark continuation of the post-recession price rise.

The base of the triangle runs from $28.87, the low on Oct. 4, 2011, up to $75.91, the high set on March 30, 2011. The apex it appears will be at around $47.85. So my the Lore of the Triangle, the target upon breakout would be around $94.89.

I don't entirely believe in Triangle Lore, but there are many who do, and sometimes belief in the markets creates self-fulfilling prophecies.

This is WLL's 18th break above the 20-day price channel since the broad markets began their post-recession recovery in early 2009. Eleven of the beakouts has been profitable, with an average yield of 11.1%. Adjusting the yield by the 64.7% success rate produces a score of 7.2%, well above the 5% minimum I prefer.

Since the triangle's base was established in Oct. 2011, WLL has staged six upside breakouts, four of which produced a profit, averaging 4.8%.

The odds analysis shows diminishing returns, but that is to be expected from a symmetrical triangle, which after all is formed from a series of lower highs and higher lows. A triangle,  by its structure, guarantees diminishing profits and losses.

Whiting is a Denver, Colorado-based indy oil and gas company operating in the United States.

Analysts are mainly positive about Whiting's prospects, with their collective opinion giving the stock a 48% enthusiasm rating.

Whiting reports return on equity of 13% -- around the lower range of  bullish aceptability -- and high levels of debt amounting to 52% of equity, as is to be expected of a venture speculating in minerals.

The company has been profitable in each of the last 12 quarters, with profits having dropped off somewhat in 2012 compared to 2011. EArnings have surprised to the upside five times, and to the downside, seven times.

Institutions own 84% of shares, whose price has been bid up to the point where it takes $2.82 in shares to control a dollar in sales.

WLL on average trades 1.6 million shares a day and has a fine selection of option strike prices for a stock trading at that lower level of liquidity. Open interest runs to the four- and three-figure range near the money and is distributed widely enough to allow for construction of vertical spreads and other complex option positions.

The front-month at-the-money bid/ask spread on calls is 5.6%.

Implied volatility is running at 28% and has been zig-zagging downward since late February.

At several points in the following analysis I use the percentage 68.2%. This is derived from the statistical concept of a standard deviation, boundaries that encompass 68.2% of trades surrounding a base price.

Options are pricing in confidence that 68.2% of trades will fall between $47.64 and $56 over the next month, for a potential gain or loss of 8.1%, and between $49.81 and $53.83 over the next week.

Trading in options suggests speculation to the bear side, with put option volume running 31% above their five-day average volume, compared to only 38% of volume for calls.

The fair-price zone on today's 30-minute chart runs from $51.58 to $51.84, encompassing 61.8% of trades surrounding the most-traded price, $51.79. With 4-1/2 hours left in the trading day, WLL has stayed almost entirely within the zone.

Whiting next publishes earnings on April 22.

Decision for my account: I've put in an order, without much enthusiasm, to open a bull position in WLL, structuring it as a bull put spread expiring in April, short the $49 put and long the $48 put. The position is be profitable down to $48.75 and has a potential yield of 20%.

If I can get a decent fill, I'll have the position. If not, I'll check the chart out again on Monday to see where things stand.

My lack of enthusiasm mainly comes from the triangle structure. If you buy at the top boundary of a triangle, then the odds are good that the price will retreat, sincere there are many tests of the upper boundary but only one upside beakout.

On the other hand, I'm not proposing to open the position based on the triangle strcture, but rather on the price-channel breakout. So the triangle alone isn't enough to discourage me from trading.

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.