Wednesday, August 21, 2013

PNK: Casino bull play

Update 10/9/2013: PNK again moved below its 10-day price channel. I'm removing it from the Watchlist.

Update 9/26/2013: PNK moved below its 10-day price channel, signalling that my bull position should be closed. The position was structured as shares, so I closed it right away rather than trying for a tactical exit.

I held the stock for 36 days and closed for a 6.3% yield, or 64.2% annualized.

The price peaked at $25.72 but fell sharply that day, meanered for seven days and then dropped sharply again, piercing the channel.

I counted the most recent rise as wave 3, which began on July 24 at $18.85. The high probability correction levels are these:

  • 38.2%, to $23.09
  • 50%, to $22.28
  • 61.8%, to 21.47
If the wave 3 labeling is correct then the next move would be a wave 5 rise that would top the $25.72 peak.

More out of interest than anyting else, I'm adding PNK to my Watchlist with an eye to re-entering based on Elliott wave considerations rather than relying exclusively on Turtle Trading signals.

Pinnacle Entertainment Inc. (PNK) moved above its 20-day price channel on Tuesday and confirmed the bull signal today by trading still higher.

PNK 90 days 2-hour bars
The breakout was PNK's second attempt in a week to move beyond a sideways trend that began July 30. The first attempt, on Aug. 14, failed immediately in a sharp intra-day decline.

The current leg up for PNK began July 24 from $17.75 and carried to a higher high today of $23.10.

Using the Elliott wave count, the rise from July has taken the form of a three waves, with the third still unfolding. Elliott doctrine holds that the third wave will be followed by a fourth wave retracement to the downside and then a fifth wave push to a still higher high.

The present move has brought the price above the trend's Elliott wave channel, suggesting that the third wave may be nearing completion. That conclusion, however, is far from certain.

This is the second breakout to the upside since the July leg up began. The first trade failed, losing 4.8% over 12 days.

More broadly, PNK has been in an uptrend since July 2012. That period has seen five completed bull signals, three successful with an average 15.3% profit over 34 days, and two unprofitable with a 3.4% average loss over 12 days.

PNK was one of four symbols that survived my initial analysis last night, all having broken out to the upside. (See "Wednesday's Prospects".)

Two failed confirmation after dropping back within their 20-day price channels: WRLD and RHHBY.

I rejected CCO because its chart is less bullish and its liquidity is far less than PNK's.

Pinnacle Entertainment, headquartered in Las Vegas, owns casinos and related hotels and entertainment values in Louisiana, Missouri, and Indiana as well as a racetrack in Ohio and interests in Canada.

Gaming trades often go bad through exposure to China, whose economy can be quite volatile. Pinnacle is purely North American which, one can argue, will remove a large area of risk.

Analysts are all over the map on PNK but in aggregate come down at a 12% enthusiasm index.

Return on equity is of the slow and steady variety, at 8%, and debt is quite high, standing at nearly four times equity. The company has been adding to its holdings of late.

That level of debt would be a deal killer if I were a value trader of the Warren Buffett variety. Not so, however, for technical trading of the kind I do.

Profits have been down the first two quarters of this year compared to their counterparts the year before.

Eleven of the past 12 quarters have been profitable, and 10 have shown earnings surprises to the upside. Two surprised to the downside.

Institutions own 99% of shares and the price is near parity with sales. It takes $1.09 in shares to control a dollar in sales.

PNK on average trades 909,000 shares a day. It supports a fine selection of option strike prices, but the open interest runs mainly to the two figures, lower than I like to trade.

Implied volatility stands at 31%, near the bottom of the six-month range. Volatility has been trending sideways since July 22.

Options are pricing in confidence that 68.2% of trades will fall between $20.86 and $24.90 over the next year, for a potential gain or loss of 8.8%, and between $21.91 and $23.85 over the next week.

Trading in options today is heavily skewed to the bull side, with call volume running at nearly double the five-day average. Puts are trading at 40% of average volume.

The fair-price zone on today's 30-minute chart runs from $22.77 to $22.95, encompassing 68.2% of transactions surrounding the most-traded price, $22.89. The price has been undulating within the zone all day, with two hours plus change left before the closing bell.

Pinnacle next publishes earnings on Oct. 21.

Decision for my account: The option liquidity means any position I open in PNK must be structured as long shares, which means I lose leverage and the ability to hedge.

I've opened a bull position, buying the shares, primarily on the basis of the chart and the longer-term odds.


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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