Wednesday, August 14, 2013

KW: Squaring the circle

Update 9/3/2013: KW fell below its 10-day price channel on Sept. 3, producing a signal to close my bull position, which was structured as long shares. I closed the position for a loss of 1.7% over the 20 days I held it, or a negative 31.1% annualized.

In my entry analysis, below, I identified two questions posed by the chart. 

To the first, "[h]as the price found a new plateau", the answer was "yes". KW went nowhere from the day I bought it. 

To the second, "how much potential lies ahead until [a plateau] is found", the answer was, "not much".

My analysis correctly identified the risks, and the risks came true.

It is worth noting that had KW's liquidity allowed me to structure the trade as a short vertical options spread sold for credit, the position would have turned a profit. 

The downside of long shares, or long options for that matter, is that they make no money when the share price goes nowhere. With short vertical bull spreads, a sideways trend is nearly as good as an uptrend.

Kennedy-Wilson Holdings Inc. (KW) marched above its 20-day price channel on Tuesday and continued the rise to higher levels today.

KW has been in an uptrend since it began trading in March 2010 and has tended to show sharp bursts of upward acceleration to plateaus that sustained sideways movements for months at a time.

The present rise, which began in November 2012 from $11.83, is the longest sustained upswing on the chart. With two major corrections, it has carried the price to an all-time high (so far) today of $18.62.

The KW chart poses two questions: Has the price found a new plateau, and if not, how much potential lies ahead until it is found?

From May the argument could well have been made that a new plateau was in place. The breakout of the last two days seems to negate the argument. Of course, if the price drops back tomorrow, then the plateau will remain in place and we'll all backdate our predictions.
KW 3 years 2-day bars

The Elliott wave count shows a clear impulse wave from November 2012, with wave 3 having begun in late July from $17.17.

The trend channel suggests potential up to the mid-$20 range.

The wave structure suggests a target of at least $22.59, based on this reasoning:
  • Wave 3 cannot be shorter than both wave 1 and wave 5. 
  • Wave 3 is usually the longest of the three. 
  • Wave 1 was $5.41 long. 
  • Therefore, wave 3 must be longer than $5.41, unless the future wave 5 comes in still longer.

In any case, the chart shows room to rise.

This is KW's third bull signal since the present rise began in November 2012. Both of the two completed signals were successful, with an average profit of 11.8% over 44 days.

KW was among six symbols that survived initial screening last night. (See "Wednesday's Prospects".)

Three failed confirmation: DLPH, FR and INFY.

WFT's chart showed the breakout to be a counter-trend rally. The stock was attractive because of its fine options grid, but I'm a trend follower so I don't do counter.

CEA was low liquidity and so was my last choice.

Kennedy-Wilson, headquartered in Beverly Hills, California, provides a wide range of property services to institutional investors, financial institutions, pension funds and developers, and also invests in real estate on its own account.

The services include property and asset management, brokerage and marketing in the United States, Britain, Ireland and Japan.

Fewer than a handful of analysts follow KW, but they all love it.


KW reports return on equity of negative 0.25%, with debt equivalent to 69% of equity. These would be deal breakers in themselves if I were looking for a company that would grow over the long term. (Which of course is not how I trade, but still, many do, and I think numbers like that tend to keep them away.)

Earnings have been in the cellar more often than not over the 12 quarters. the last profit was the 4th quarter of 2011, and before that, back in 2010.

True, earnings have risen the last two quarters, establishing the bare bones of a trend, and the last two quarters have seen upside earnings surprises. But still, it's a fairly awful record that would draw scorn from the usually affable lips of a fundamentals trader like Warren Buffett.


Institutions, which have smart analysts and buckets of algorithms, own 61% of shares. And the price of the stock has been bid up to stratospheric levels; it takes $14.10 in shares to control a dollar of sales.

Frankly, trying to reconcile the chart and the fundamentals of this potential trade is like squaring the circle: Impossible. So I won't try and shall leave them hanging in their incongruity.

KW on average trades $215,000 shares per day, support a small selection of option strike prices with open interest in the double digits. I need triple digits on options I trade, so any play on KW will be as long shares. This won't allow me the benefits of leverage and hedging.

Implied volatility stands at 23%, near the bottom of the six-month range. It is a decline from yesterday's upward spike to 30%.

Options are pricing in confidence that 68.2% of trades will fall between $17.28 and $19.62 over the next month, for a potential gain or loss of 6.3%, and between $17.89 and $19.01 over the next week.

Traders are fairly inactive, with volume on calls running at 28% of the five-day average, and on puts, at 11%.

The fair-price zone on today's 30-minute chart runs from $18.41 to $18.51, encompassing 68.2% of transactions surrounding the most-traded price, $18.44. KW opened bellow the zone, moved to the top within the first 90 minutes and then swiftly dropped to the most-traded level, where it remains with 90 minutes to go before the closing bell.

KW next publishes earnings on Nov. 7. the stock goes ex-dividend in September for a quarterly payout yielding 1.52% annualized at today's prices.

Decision for my account: This stock forces a technical trader to be honest about his methods. 

Love the chart, love the odds, hate the financials.

So do I allow the fundamentals -- the anti-technical analysis -- to override what I consider to be my guiding principle in trading, that the charts show all a trader really needs to know in making a decision?

Or, looking at it another way, am I willing to put my money where my mouth is?

Short answer: Yes. It's a great chart. I'll play. 

I've opened a bull position in KW, structuring it as long shares. Given the stocks tendency to plateau, I'll exit quickly, even without a signal, if the price drops back within the channel.


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.

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