Vipshop Holdings Ltd. (VIPS) broke above its 20-day price channel on Wednesday and confirmed the bull signal by trading still higher on Thursday.
The breakout is part of an uptrend that began from $4.76 in August 2012, five months after the company's initial public offering, and reached an all-time high of $38.46 on May 21, 2013.
On subsequent days VIPS followed the major stock averages down in a correction that lasted until $23.26 on June 24. The price, with the indexes, has since recovered and is a dollar plus change shy of challenging the May high.
|VIPS 90 day 2-hour bars
The problem lies with the bigger picture. To my eye the uptrending waves look like a counter-trend rise within a downtrend that began from $38.46 on May 21 -- a [B] wave upward correction beginning from $23.26.
If that is indeed the case, then the [B] wave must terminate below $38.46, and that doesn't give much room for a wave 5 to complete the pattern.
The S&P 500, which VIPS is tracking fairly closely, has in fact exceeded its May high, throwing the whole wave count on the index into uncertainty.
And, to add to the weakness of the argument, this discussion all comes with the usual caveat that Elliott wave counts on individual shares are notoriously fickle, so I'm treating that count in my own trading with a healthy dose of skepticism.
Yet, the count does counsel caution in jumping into this trade while the $38.46 level remains unbroken. The risk, it would seem, is mainly to the downside.
This is VIPS' fourth breakout to the upside since the present uptrend began nearly a year ago. All of the three completed bull signals were profitable, with an average yield of 51.3% (not a typo) over 59 days.
There have been no other upside breakouts since the correction began in May. The one downside breakout was unsuccessful, producing a 5.2% loss.
In terms of odds, then, this is an extremely robust play.
Vipshop Holdings, headquartered in Guangzhou, China, sells more than 360 brands of stuff online, including such names as Disney, FOX, Harry Potter, Mentholatum and Pepsi.
Online sales are a significant part of China's huge and sprawling market space, and that means profit for a company like Vipshop that has nailed down a suite of quality contracts.
Less than a handful of analysts track VIPS, so I'll refrain from calculating an enthusiasm index. Suffice it to say that they are on balance positive about the company's prospects.
Their assessment seems to be based more on future hopes than present reality. Vipshop Holdings reports return on equity of only 4%, albeit with no long-term debt.
It has reported a steady profit the last two quarters following a three-quarter ramp-up period that went from a big loss to a small loss to a small profit. All five quarters have surprised to the upside.
Institutions own 27% of shares and the price is running well above sales parity. It takes $2.19 in shares to control a dollar in sales.
VIPS on average trades 558,000 shares a day, sufficient to support a moderate selection of option strike prices, with open interest running to three and four figures. Front-month at-the-money calls have an 11.8% bid/ask spread, which is on the wide side.
Implied volatility is extremely high, at 81%. It has been fluctuating sideways since mid-June.
Options are pricing in confidence that 68.2% of trades will fall between $28.52 and $45.96 over the next month, for a potential gain or loss of 23.4%, and between $33.05 and $41.43 over the next week.
Options are trading near their five-day average, with a slight bias toward calls at 7% above average, vs. puts, at 12% below average.
The fair-price zone on Thursday's 30-minute chart runs from $36.36 to $37.48, encompassing 68.2% of transactions surrounding the most-traded price, $37.19. VIPS opened below the zone and in the next four hours rose to the most-traded price, where it fluctuated the rest of trading day.
VIPS next publishes earnings on Aug. 5. That indicates an error in my first-wave analysis, because it puts VIPS within my exclusion period for stocks announcing earnings within the next 30 days.
Yet, and yet, it is such a fascinating chart . . .
“He had the feeling that he must make a decision, and though he was used to making many decisions every day, this time he was beset with uncertainty . . .”
Decision for my account: The key to a decision on VIPS lies, I think, in the fact that the current price is so near the highest high, $38.46. A break above that level will suggest that my Elliott wave count is incorrect and that VIPS has the capacity to move to still higher highs.
With that in mind, I'll put off trading unless I see a break above $38.46 confirmed the next day by significant momentum above that level. That means I'll be looking for a break above that level on Friday and a confirmation on Monday, with a potential trade on Monday or Tuesday. If the confirmed breakout never occurs, then I'll drop VIPS from consideration until after earnings.
Fans of Turtle trading, upon which my trading rules are based: Note that $38.46 is the upper boundary of the 55-day price channel, one of two levels used to calculate breakouts in classic Turtle trading. (The other level is the more lentient 20-day channel that I use in my trading.)
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.
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.