EFX: Three-alarm-fire curry

Update 8/15/2013: EFX broke below its 10-day price channel, signalling closure of the position, which was constructed of long shares.

The stock lost 2% over the 14-day life of the position.

It's a sad day when three-alarm fire curry turns out to be soggy oatmeal.

Equifax Inc. (EFX) broke above its 20-day price channel on Monday and confirmed the bull signal with a further rise on Tuesday. The movement is part of a larger uptrend that began in October 2011.

It is the 10th bull signal for EFX during the uptrend. Of the completed signals, four have been successful, with an average yield of 9.3% over 56 days. Five have been unsuccessful, with an average loss of 3.6% over 13 days.

EFX 90 days 2-hour bars

Although the resulting win/lose yield spread of 5.7% is perfectly acceptable for trading in my book, the fact remains that the longer-term historical odds stand against me if I trade this breakout.

A more current way to count the trend is from the peak of $63.91 on May 10. From there the price declined in three Elliott waves down and then recovered nearly all of the loss in three, or perhaps five, waves up.

This is the first breakout to the upside since early May. There has been one downside breakout, and that bear signal lost money, to the tune of 0.7%.

I also find the Elliott wave count to be uncertain. 

My primary count sees the present rise from July 25 to be a third wave that must exceed $64.10. In other words, it has 24 cents to go before it meets the minimum criteria of Elliott wave counting.

I've penciled in an alternate count that shows EFX to be in a fifth wave up, but it has already broken the rules by trading higher than $63.10, making the alt-count fifth wave longer than the third.

I favor the third-wave count, with a bit more to go to the upside, and perhaps a lot more. It has 24 cents to go before meeting the minimum requirements, but it could well have much higher to go. There's no law that says the minimum is the is the end of the third wave.

The chart leaves me on the horns of a dilemma. The odds are unpromising, but the wave count promises future profit. If ambiguity is the spice of trading, then EFX is a three-alarm-fire curry.

Equifax is one of the three big consumer credit reporting companies in the United States. Based in Atlanta, Georgia, Equifax runs a global business with 7,000 employees in 15 countries in the Americas and Europe.

Analysts are somewhat negative in their collective assessment of the company, with opinions coming in as a minus 22% enthusiasm rating.

Equifax has been posting solid results, with return on equity of 20% and debt running at 67% of equity. That's higher debt than I like but not totally awful.

The company has been profitable during the 12 quarters I'm tracking, with steadily rising earnings since the 2nd quarter of 2011 and upside earnings surprises in all but one quarter. The downside surprise was long ago, in the 1st quarter of 2011.

Institutions own 85% of shares and the price has been bid up to a high multiple of sales. It takes $3.41 in shares to control a dollar in sales.

EFX on average trades 566,000 shares a day, sufficient to support a moderate selection of option strike prices but with no open interest to speak of. I don't trade options that lack at least three-figure open interest, so any position I open in EFX will be structured as long shares.

Options, however, do have their uses in assessing likely trading ranges. Implied volatility on EFX stands at 17%, near the bottom of the six-month range. It dropped sharply beginning July 25.

Options traders are pricing in confidence that 68.2% of trades will fall between $60.39 and $66.61 over the next month, for a potential gain or loss of 4.9%, and between $62.01 and $64.99 over the next week.

Trading in options on Tuesday was heavily weighted toward the bull side, with calls running at 175% above the five-day average volume. Puts were running at 83% of the average volume.

Tuesday's fair-price zone on the 30-minute chart ran from $63.35 to $63.39, encompassing 68.2% of trades surrounding the most-traded price, $63.49. The price opened at the low end of the range and traded in the upper portion for most of the day.

Equifax next publishes earnings on Oct. 21. The stock goes ex-dividend in August for a quarterly payout yielding 1.39% annualized at today's prices.

Decision for my account: It is an ambiguous chart, as I noted above. Given the unpromising odds, I'll rely on the Elliott wave count. 

A move above $64.10 would strengthen the case that EFX is in a third wave up, with a decline and then a further rise to be expected. I'll take a second look at it if the price exceeds $64.10, but I won't open a bull position now.

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.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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.