Monday, September 23, 2013

ANGI: Social media bull signal

Angie's List Inc. (ANGI) has been flirting with non-confirmation repeatedly the first 90 minutes in trading. I'm doing the analysis with the understanding that the day may well end with ANGI back within its price channel and so ineligible for a trade.

ANGI opened at $18 upon its initial public offering on Nov. 17, 2011, and as so often happens with IPOs, immediately plummeted. It moved briefly above that level the following March and April, but then resumed its downward course to a low of $8.94 on September 6, 2012, 10 months after going public.

The rise from that point marked the beginning of a well formed Elliott wave uptrend that peaked last July 18 at $28.32. I count that as the end of wave 3, and see ANGI as either having just completed, or still being mired in, a wave 4 correction.

The argument for wave 4 having been completed can best be seen on the 90-day chart. The decline is a clear a-b-c zig-zag, followed by two completed lower level movements, wave i to the upside and wave ii as a sideways correction, and then wave iii up.

If that count is indeed valid, then wave iii will be followed by a wave iv correction down and then a final push with wave v above $28.22, the greater magnitude wave 3 peak. The greater magnitude waves encompass a time frame measured in months.

The alternative count sees the present rise as being merely a peak connecting two corrective patterns. It isn't unusual for zig-zag corrections to be twins, or even triplets. A reversal from around the wave b peak, $25.42, would make the alternate count my preferred.

A word on the alternation of corrective patterns. The greater magnitude wave 2 correction was a sideways triangle, suggesting that the wave 4 correction will be a simple zig-zag.

Likewise, if my preferred count of wave 5 being underway is indeed correct, then wave ii over the lower magnitude uptrend is a sideways correction, suggesting that wave iv will be a simple zig-zag that will carry the price significantly lower in a correction.
ANGI 2 years 2-day bars (left), 90 days 2-hour bars (right)
The bottom line conclusion that I reach from the Elliott wave analysis is that ANGI's upside breakout may be merely a fluctuation within a downside correction, or it could well be the start of a new uptrend that will conclude the rise from 2012. It's ambiguous, as charts often are.

This is ANGI's fourth bull signal since wave 3 began on Oct. 24, 2012. Two of the completed signals were profitable, for an average yield of 42% over 68 days. The unsuccessful trade lost 12.6% over 10 days.

The resulting win/lose ratio is 29.4%, which is not at all shabby.

The downside since wave 4 began, on July 18 of this year, has been a far weaker move. It has completed one bear signal, with resulted in a 2.9% loss over 21 days.

ANGI was one of two symbols that survived initial screening over the weekend. The other, FFIV, moved sharply back within its 20-day price channel and so failed confirmation.

Angie's List (not to be confused with the political action committee Emily's List) allows users to rate and review businesses in their area and to share those reviews with others.

The company, headquartered in Indianapolis, Indiana, describes its goal as providing a way to "capture word-of-mouth wisdom" from its 1.5 million subscribers, who pay a small monthly fee -- under $10 in the areas I checked -- for access to the information.

So Angie is sort of a pay-to-play LinkedIn for consumers of local goods and services.

Social media is cool, and hot in the public consciousness these days. Well all love social media, and analysts following Angie are no exception; they collectively give the company a 25% enthusiasm rating.

But then, there's the little matter of profits. Not be crass, but in Angie's case, there are none, except for a few cents per share the last quarter of 2012. Otherwise, it has been double-digit losses in the other six quarters on record.

Even with that record, Angie has managed four upside surprises, countered by two to the downside.

No profits of course means no return on equity. It actually works out to a negative return of more than 1,000%. The company is carrying $14.9 million in long-term debt.

At this point, I've lost interest in Angie. I don't do bull plays on unprofitable companies. But having come this far, let's push through to the end of the analysis.

ANGI on average trades 1.1 million shares a day and supports a moderate selection of option strike prices spaced $2.50 apart with open interest in the three-figure range where it counts for my purposes.

The front-month at-the-money bid/ask spread on calls is 9.5%, which is on the high side.

Implied volatility stands at 65%, quite a high level but it is at the midpoint of the six-month range. Volatility has been pushing higher since Sept. 16.

Options are pricing in confidence that 68.2% of trades will fall between $18.15 and $26.59 over the next month, for a potential gain or loss of 18.9%, and between $20.34 and $24.40 over the next week.

Trading in contracts is quite active with about 4-1/2 hours to go before the closing bell. Calls are running at 170% above their five-day average volume, and puts at 108% above average.

ANGI next publishes earnings on Oct. 28.

Decision for my account: The financials are a deal killer for me. I won't be opening a bull position in ANGI based on this breakout because it is unprofitable. A breakout to the downside might be an interesting play (although the odds of success so far are not good). 

Even if ANGI were profitable, the ambiguities in the chart would give me pause. Before trading, I would want to see what happens as the current very near term uptrend approaches $25.42, the peak of wave b.


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. 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

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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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