Friday, September 13, 2013

DNKN: A tasty bull play

Update 9/20/2013: DNKN moved below its initial stop/loss level and I closed the position for a loss. The decline can be seen as either a smaller wave correction within wave 3, or as a severely truncated wave 5 up from the alternate wave 4. (See the 3-year chart I posted in my original analysis, below.)

The price hit a high of $46.50, a rise of $2.50 from the breakout level pierced two days earlier. From there it declined and hit the stop/loss on the third day down.

I lost 3.4% on the position, which works out to a loss of 177.6% annualized, a high level due to the short holding period.

DNKN finished off today's fall with a symmetrical triangle on the 30-minute chart that is a textbook example of the pattern.
DNKN symmetrical triangle 2 days 30-minute bars

Update 9/17/2013: DNKN recovered its momentum on Tuesday, moving above Monday's high and showing an intraday rise within the last half hour before Tuesday's closing bell. I've opened a bull position structured as long shares.

Update 9/16/2013: DNKN has remained below Friday's session high all day Monday, peaking 10 cents lower in the first half hour of trading. It then fell and is down intraday. I'll keep DNKN on my watchlist for awhile. The company announces earnings on Oct. 24, so to avoid my rule forbidding new position within 30 days of an earnings announcement, I'll need to make the trade by Monday of next week, Sept. 23, or forego it entirely.

Update 9/13/2013: DNKN lost momentum beginning in the 2:35 p.m. five-minute block, falling from its session high of $46.34 to $45.49 with 10 minutes left to trade. 

Very near term resistance appears to be $45.59, a level that DNKN approached twice in the last 15 minutes before the closing bell, but which it never pierced.

Although the price was in the higher range of the fair-price zone, it was falling fast in the last hour. The fair-price zone encompasses 68.2% of trades surrounding the most-traded price, which was $44.53 today. DNKN had dropped below a potential higher most-traded price, and it was that drop that helped persuade me that it was more prudent to wait.

So I didn't open a bull position in DNKN today. I'll add it to my watch list and consider for a trade on Monday if momentum resumes.

Dunkin' Brands Group Inc. (DNKN) began its long-running uptrend from $23.24 in December 2011. Thursday's break above the 20-day price channel, confirmed today as the stock traded higher, keeps intact a third-wave rise that began from $28.97 in November 2012.

A third wave in Elliott wave theory means that DNKN has in its future a correction followed by a fifth-wave rise to culminate the uptrend. There is no limit in theory to how high the third wave can go.
DNKN 3 years 2-day bars

The second-wave correction from June to November 2012 carried the price down 22%, from $37.02 to $28.97. The second and fourth waves tend to alternate their patterns, suggesting that the future fourth-wave correction would trend sideways.

From my shorter-term perspective, the important element of the chart is that today's confirming rise, to a high so far of $45.94, broke past near-term resistance of early August, moving DNKN once again into blue-sky territory.

An alternative count is possible. The sideways move from early July to early August that marked the near-term resistance could be counted as a fourth wave, with the present wave counted as the beginning of the fifth and final wave of the uptrend.

The magnitude of the recent correction, however, seems to me to be too small for the level I'm analyzing -- one month vs. five months for the second-wave correction. On the other hand, there is no rule that says a correction must last a certain number of months.

The alternative would make a major price decline, of a magnitude commensurate with the entire rise from 2011, the next move for DNKN. However, there is no limit to the distance the fifth wave might travel. The only rule is that the third wave cannot be the shortest of the three rising waves in an uptrend. The third has already exceeded the first wave in distance traveled, removing any restrictions on the the fifth.

This is the eighth bull signal since DNKN began its uptrend in 2011. Four the seven completed bull signals were profitable, yielding 9.8% over 58 days on average. The three unsuccessful trades on average lost 3.5% over 17 days.

The stock has completed three bull signals within the present third wave. Two were successful, with an average profit of 12.8% over 74 days. The one unsuccessful trade lost 5.7% over 17 days.

DNKN was one of 10 symbols that survived my initial screening last night, nine with bull signals and one with a bear signal. (See "Thursday's Prospects.")

All 10 confirmed their signals by trading outside their price channels today.

I rejected the bear signal, ABX, because it is a major component of the gold-mining exchange-traded fund GDX, where I already hold a bearish position.

Of the bullish symbols, one, CHMT, has a bearish rating from Zacks. I generally prefer for the Zacks rating and the trend to be aligned.

Another bullish symbol, TRLA, has negative return on equity, a condition that I prefer to reserve for bear plays.

Five show a lack of momentum: P, DIS, STM, NOC and WSH. Although they remain above their price channels, they are down intraday as of this writing (about three hours past the opening bell), although DIS has been flirting with an intra-day rise.

That leaves DNKN and PLT as my prospects. DNKN has the higher volume and so it was the my first choice for analysis. DNKN also has a clearly uptrending chart. PLT's chart is more ambiguous.

Dunkin' Brands, headquartered in Canton, Massachusetts,  runs two restaurant chains, 10,500 Dunkin' Donuts for the pastry-and-coffee crowd in 31 countries, and 7,000 Baskin-Robbins for ice-cream aficionados.

Analysts are close to neutral regarding Dunkin' Brand's prospects, collectively coming down with a negative 6% enthusiasm rating.

Certainly that can't be based on the financials. Dunkin' Brands reports return on equity of 45%, albeit with a heavy load of debt amounting to more than five times equity.

Dunkin' Brands has been profitable in each of the eight quarters since it went public, with a general uptrend to earnings, although there is a lot of fluctuation quarter to quarter. All have produced upside earnings surprises except for the 1st quarter of 2013, which surprised to the downside.

Institutions own 93% of shares, and the price has been bid up dramatically. It takes $7 in shares to control a dollar in sales.

DNKN on average trades 633,000 shares a day, enough to support a moderate selection of option strike prices with two- and three-figure open interest. The front-month at-the-money bid/ask spread on calls is 3.3%.

The open interest on DNKN's options is to low to meet my preferences, so if I trade this symbol, it will be as long shares.

Implied volatility is running at 19%, slightly higher than the S&P 500's 14%. DNKN's volatility stands near the bottom of its six-month range and has been trending downward since mid-July.

Options are pricing in confidence that 68.2% of trades will fall between $43.31 and $48.47 over the next month, for a potential gain or loss of 5.6%, and between $44.65 and $47.13 over the next week.

Trading in options is running at a high pace today, with call volume running six-and-a-half times its five-day average and put volume at five-and-a-third times average.

Dunkin' Brands next publishes earnings on Oct. 21. The stock goes ex-dividend in November for a quarterly payout yielding 1.66% annualized at today's prices.

Decision for my account: I intend to open a bull position on DNKN if intraday upside momentum holds in the last half hour of trading today. I'll structure the position as long shares. I'll update this analysis at the end of the day to say whether I took the trade or not.


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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