Rovi Corp. (ROVI) fell below its 20-day price channel on Friday, producing a bear signal that was confirmed today by an open that gapped 2.5% below the prior close. However, ROVI spoiled the bear play by rising strongly in the first half hour of trading, covering 2.9% intraday.
ROVI has been in a downtrend since January 2011, when it peaked at $69.50. The decline can be
|ROVI 3 years 2-day bars
Since then ROVI has completed what I count as an A wave up that ended June 7 at $26.55, the start of a counter-trend correction, followed by a B wave down that is still a work in progress.
The question for the chart, then, is how far can the B wave go. By the Elliott wave rules, it can't go below the start of the A wave, $9.91. But there is of course no guarantee that it will fall anywhere near that level.
So far, it has retraced 50% of the A wave rise. The next lower Fibonacci retracement levels are 68.1% at $16.27 and 78.6% at $13.47.
Details aside, the bottom line is that there is plenty of room for the price to fall, but the wary trader will keep an eye on the stop/loss points.
This is ROVI's sixth bear signal since the January 2011 peak. Three of the completed signals were profitable, yielding on average 32.6% over 55 days. The two unprofitable signals lost 5% on average over 19 days.
Since the June peak this year -- the start of the B wave -- ROVI has produced two other bear signals, one successful and one not. The winner yielded 0.6% over 13 days, and the loser lost 0.05% over 15 days.
ROVI was one of three symbols that survived my initial screening over the weekend. RKT moved back within its 20-day price channel and so failed confirmation.
CEB was confirmed. However, it has a bullish rating from the analytical house Zacks, which gives heavy weight to the fundamentals. My preference is to trade in line with the Zacks recommendation when I have that option. ROVI has a bearish rating and so was my choice for a closer look.
Rovi Corp., headquartered in Santa Clara, California, is a software company that provides gateways into digital entertainment. They make the menu that leads you, the user, to the content.
Analysts are all over the map on ROVI but collectively come down to a negative 20% enthusiasm index, not a ringing endorsement by any means, but I've seen much worse.
The company reports a pedestrian return on equity of 8.3% with debt running at 95% of equity, higher than I like to see in a bull play, but this is a bear play so everything is turned on its head.
Rovi has reported a profit for each of the past 12 quarters, but the level of profits fell from the 2nd quarter of 2012 to a level significantly below that of the quarters that came before.
The last two quarters have produced negative earnings surprises, and thee was a third back in 2011. The nine other quarters have all surprised to the upside.
Institutions own 92% of shares, and the price has been bid up to a high level. It takes $2.95 in shares to control a dollar in sales. Analysts may be unenthusiastic, but clearly ROVI has a some real fans out there.
ROVI on average trades 756,000 shares a day, sufficient to support a moderate selection of optoin strike prices that, to my surprise for a stock at that volume level, has open interest running to the three figures. The front-month at-the-money bid/ask spread on puts is running at 17.4%.
The problem is the strike price interval. ROVI at $17.73 is a fairly low-priced stock, yet the interval is $2.50. This creates logistical issues in creating a bearish vertical credit spread. The nearest out-of-the-money call strike is $20 -- the short leg -- and that pushes the long leg out to $22.50, with a bid price of zero.
I could go slightly in the money and create a short $17.50/long $20 spread, but that would allow me to hedge only a small portion of the risk, given the difference between the short-leg ask and the long-leg bid.
It's a technical issue, and one that I'll look at more closely if I decide to open a position. An alternative, of course, would be to simply buy puts, increasing the leverage but foregoing the hedge.
Implied volatility stands at 42%. It has been dithering sideways in wide swings since mid-August.
Options are pricing in confidence that 68.2% of trades will fall between $15.66 and $19.98 over the next month, for a potential gain or loss of 12.1%, and between $16.78 and $18.86 over the next year.
Put options today are trading at 6-1/2 times their five-day average volume, and calls a 2-1/2 times average volume.
The fair-price zone on today's 30-minute chart runs from $17.58 to $17.85, encompassing 68.2% of trades surrounding the most-traded price, $17.58. The price opened below the zone and his now trading just above it.
I'm writing this analysis two hours or so before my normal time, so the data used to calculate the zone is fairly limited, about 90 minutes worth of trading.
Rovi Corp. next publishes earnings on Nov. 5.
Decision for my account: The chart is quite bearish, but today's strong intra-day rise, contrary to the bear signal, is a deal killer for now. I'm adding ROVI to my watch list and will revisit it on Tuesday. If it resumes its decline, then I'll consider opening a bear position.
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.