Tuesday, August 13, 2013

MMS: Obamacare exchanges plus

Maximus Inc. (MMS) broke above its 20-day price channel on Friday and is continuing the rise into a second day. The bull signal was triggered by an earnings announcement that hit the expected target spot on.

The breakout comes as MMS strives to recover from an correction from April peak of $40.69. The price is trading about 50 cents below that level, and a break above would signal the uptrend from October 2012 was continuing.

The correction bottomed at $34.65 in early July. If I assume strong resistance at the peak, then I can postulate only 1.1% more easy sailing to the upside before the headwinds kick in.

My Elliott wave count suggests that the peak will indeed be a significant barrier, with a fairly stomach-churning C-wave falling below the A-wave terminus, $34.65, lying ahead.
MMS 180 days 2-hour bars

Elliott wave counts are notoriously ambiguous, and the lower the stock's liquidity, the greater the ambiguity. So I bring a degree of skepticism to that analysis -- it's more of a caution than a deal killer.

This is the first bull signal since the correction began in April, so there are no odds to be calculated. 

It is the second bull signal since the most recent uptrend began, in October 2012. the first one produced a 22.8% profit over 109 days. So historically, at least, when MMS is on the rise, it's quite consistent in hewing to the trend.

However, that may say little about what is happening on the chart now.

A persistent break above $40.69 will confirm that the correction is over, and a decline below $34.65 will confirm that the correction is still underway.

MMS is one of six symbols under consideration. See "Tuesday's Prospects" and "Monday's Prospects (one day late)" for details of the initial screening.

Three symbols failed confirmation by moving back within their 20-day price channels: AEE, BRFS and TRS.

I rejected CRHKY as too illiquid because of extremely low volume.

The remaining symbol, BAP, was a contender for further analysis. However, its rating by the market analysis company Zacks was bearish, contrary to the bullish breakout. As an anti-contrarian, I prefer trades where the chart trend and the Zacks assessment are aligned.

Maximus Inc., headquartered in the Washington, D.C. suburb Reston, Virginia, provides business process services to government health and  human services agencies.  They provide the software infrastructure that governments need to make their programs run efficiently.

Among other things, that means they'll help states set up a Health Insurance Exchange as mandated by the Affordable Health Care Act in the United States. Maximus also provides services to agencies in Australia, Canada, Saudi Arabia and the U.K.

The handful of analysts covering MMS collectively come down with an 83% enthusiasm rating.

The company reports return on equity of 22% with no long-term debt. Earnings this year are running ahead of what they were last year but there's no strong trend. The company has produced 11 upside earnings surprises the last 12 quarters, and one to the downside back in 2012.

Institutions own nearly all of the company's shares, and the price has been bid up to where it takes $2.16 in shares to control a dollar in sales.

MMS on average trades 425,000 shares a day, sufficient to support a small selection of option strike prices with no open interest to speak of. 

The options are way too illiquid to meet my standards, so any position I would open in MMS would be as long shares, meaning I wold lose opportunities for leverage and hedging. That makes any trade less attractive.

Implied volatility stands at 31%, near the bottom of the six-month range. Volatility has been fluctuating wildly since early July and from Monday began a steep decline from the 80% level, signalling a massive change in traders' assessment of MMS' prospects.

Options are pricing in confidence that 68.2% of trades will fall between $36.71 and $43.83 over the next month, for a potential gain or loss of 8.8%, and between $38.56 and $41.98 over the next week.

Puts today are trading like gangbusters, at nearly three times the average five-day volume. Calls are running at only 17% of average volume.

Today's fair-price zone on the 30-minute chart runs from $39.51 to $40.16, encompassing 68.2% of transactions surrounding the most-traded price, $39.73. MMS opened this morning at the floor of the zone and has risen steadily. With three-and-a-half hours left to trade it stands above the zone ceiling.

Maximus next publishes earnings on Nov. 11. The stock goes ex-dividend in November for a quarterly payout yielding 0.45% annualized at today's prices.

Decison for my account: From the implied volatility activity and the options volume, it seems to me that there's a tremendous bull-bear battle going on for MMS. Traders can't reach a viable consensus.

So, as always, when in doubt, go to the chart. Traders have good reason to hold divided opinions. The chart will remain ambiguous until $49.69 level is pierced or the stock reverses down to $34.65, the terminus of wave A.

With only 1% to go before the prior peak, it costs me little in lost profit to wait and see, and could well cost me a lot in losses if I jump in before the chart resolves itself.

I'm not taking the MMS trade today. I'll keep an eye on it and will reconsider a trade if the price rises persistently above $40.69.


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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