Update 5/8/2013: The price has turned and dropped back into the price channel while I was analyzing. See the "Decision for my account" section below. I've run through the less liquid prospects and don't find anything that I like -- either the chart is flawed or the odds are insufficiently good. So, no trade today.
LyondellBasell Industries (LYB), when it gave a bull signal on Tuesday, was in the third day of a three day price run up after going ex-dividend following a three day price decline following earnings that beat the Street estimate by 7.1%.
Which, if you think about it, is a reversal of the natural order. Upside earnings surprises are more often rewarded, and ex-dividend dates normally cause a price decline.
Tuesday's break beyond the $62.88 upper boundary of the 20-day price channel was confirmed today as the stock traded still higher.
The breakout set a new higher high, moving above the peak of the previous leg up, which carried the price from $44.36 in mid-October 2012 up to $63.81 on March 14. The ensuing correction covered 13.2%., down to $55.41 on April 18, before retracing up to today's high (so far) of $64.57.
It's an excellent chart of an uptrending stock, the sort I like for bull plays.
This mark's the seventh bull signal given by LYB since its uptrend on the weekly chart began in October 2011. The six completed trades divided evenly between successes and failures, with the three wins producing an average yield of 19.1% and the others producing losses averaging 7.2%. The winners' yields, when adjusted for the success rate, come out to a score of 9.6%, and the win/loss yield spread is high, at 11.9%.
Since October 2010, when the company was listed on the NYSE after being acquired by a Dutch enterprise, LYB's eight completed bull signals have also split evenly, with the four winners yielding 24.4%, the losers losing 8.1%, the winners having a score of 12.2, and the win/loss spread coming in at 16.3%.
ETN and TWC, the other two highly liquid stocks on my prospects list, have better odds of winning than LYB.
However, I rejected TWC because although it broke beyond the price channel, it didn't exceed the prior swing high.
ETN also set a higher high, making it a viable prospect, but it's a technology company, and I'm over-extended in that hot sector. LYB is in basic materials, and I have no holdings there.
So, for reasons specific to my account, LYB is the stock I will consider today.
LyondellBasell is a trans-national chemical company that makes plastics. It has 58 manufacturing sites in 18 countries on five continents and sales in more than 100 countries. It is headquartered in Rotterdam, Netherlands and trades principally on the New York Stock Exchange.
Analysts like the company a lot, collectively giving it 57% enthusiasm rating, and the financials bolster that enthusiasm.
Return on equity is quite high, at 28%, and debt is fairly low, at 37% of equity. Some of the stricter fundamental analysts like to see debt at below 10% of equity, but with interest rates so low, I see debt as being much less of a problem. I mean, it's raining money that's almost free. So grab a bucket!
LyondellBasell has reported profits in each of the past 11 quarters, but without a particular trend. Nine of the quarters have surprised to the upside, and two to the downside.
Institutions own 78% of shares, and the price is below sales parity; it takes 82 cents in shares to control a dollar in sales.
LYB on average trades 4.5 million shares a day, a level of liquidity that allows for a wide selection of option strike prices with four-figure open interest. The bid/ask spread on front-month at-the-money calls is 6.1%.
Implied volatility stands at 31%, at the middle of the six-month range. It has been stair-stepping lower since mid-April.
Options are pricing in confidence that 68.2% of trades over the next month will fall between $56.84 and $68.16, for a potential gain or loss of 9.1%, and between $59.78 and $65.22 over the next week.
Trading today in options is heavily to the call side, with volume running about 90% above the five-day average. Puts are trading at about average volume.
The fair-price zone on today's 30-minute chart runs from $62.72 to $63.50, encompassing 68.2% of transactions surrounding the most-traded price, $63.14. The stock began the day at the top of the zone and has dropped fairly steadily throughout the day. With two hours to go before the closing bell, LYB is trading below the fair-price zone.
LyondellBasell next publishes earnings on July 26. The stock's ex-dividend date is uncertain but possibly in late May. The quarterly payout yields 2.6% annualized at current prices.
Decision for my account: Well, this is ugly. LYB has turned and dropped below the breakout level. By my rules, I can't enter unless it moves above $63.27 today. After today, it would take a fresh breakout for me to consider it as a trade.
I like the stock and would take a bull position, structuring it as a vertical credit options spread expiring in June.
References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
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.
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