Monday, September 16, 2013

USNA: Direct marketing bull play

Update 10/8/2013: USNA broke below its 10-day price channel on Oct. 7 and continued trading lower today, producing an exit signal. 

I closed my position on Sept. 27 as part of an roll away from the risk posed by my bull holdings while the House Republicans in Congress decide whether to default on the national debt. (See my post "Rolling away from risk" for my reasoning.)

The position was structured as shares of stock, which ended with a 0.6% loss during the nine days of the position's lifespan. Annualized, that works out to a 22.6% loss.

Update 9/18/2013: USNA moved above $87.40, the wave 3 high in the Elliott wave analysis, suggesting that the triangle pattern has stopped short of its apex, signalling the beginning of wave 5 up. There is no limit under Elliott wave rules for the length wave 5 can travel; it could be over already, or it could have a good ways to go.

I've opened a bull position in USNA, structuring it as long shares.

Usana Health Sciences Inc. (USNA) has been in an uptrend since August 2011. During that period it has traced three of the five waves expected of an uptrend -- two rising waves surrounding a correction -- and is now in the fourth wave correction.

According to Elliott wave doctrine, the fourth wave will be followed by a fifth wave up that will culminate the trend, leading to a correction of the rise of the past two years.

The uptrend has carried USNA from $23.10 at its 2011 origin to a high of $87.40 on July 22, the date the fourth wave began

The second wave correction lasted two months near the end of 2012 and was a simple zig-zag to the downside.

The fourth wave illustrates the principle that corrective waves alternate in form. It is a triangle, tracing a sideways move rather than a sharp decline.

The triangle has been working itself out for about the same length of time as the second wave took. However, there is no rule that corrections be of the same duration. The triangle will hit its apex around Oct. 18.

USNA broke above its 20-day price channel on Friday, sending a bull signal that was confirmed in higher trading today. Today's rise gave USNA its first break above the triangle boundary since the formation began.

USNA 3 years 2-day bars (left), 180 days 4-hour bars (right)
The chart has a degree of ambiguity. Triangles, like all formations, are imperfect reflections of an ideal. Sometimes they break free before reaching the apex.

At this point I can only reach a 20-20 hindsight sort of conclusion: If that early break has indeed happened, then USNA is a trade worth taking today. If the break proves to be ephemeral, then better to wait before taking the trade.

Obviously, that is of no help whatsoever, as it simply says I can't know what to do until I know what will happen. That's an absurdity, although it is the type of "analysis" often seen in market journalism.

But there may in fact be some useful help in the chart. USNA so far today has reached a high of $85.98, only 1.7% below the third-wave peak of $87.40.

A push above the third-wave peak would be a fair indication that the fifth wave had indeed begun.

There is, however, a limit to when that decision can be made. USNA reports earnings on Oct. 22, and so to avoid my rule that forbids opening positions within 30 days of an earnings announcement, USNA would have to exceed $87.40 on next Friday at the latest for me to take the trade.

USNA has a record of success to back up a positive decision to trade. Since the third wave began in December 2012, it has completed two bull signals, both of which were successful, with an average profit of $29.70 over 54 days.

It has given no signals, bullish or bearish, since the fourth wave began last July, showing the sideways nature of the correction.

USNA is one of 12 symbols that survived my initial screening over the weekend. All broke out to the upside. (See "Monday's Prospects".)

All confirmed their bull signals by trading above the breakout level. However, seven followed the trend of the market, which opened high and then dropped for an intraday decline. They are UBS, VFC, PRXL, CBD, MKTX, OWW and PLXS.

Two symbols, CP and PRI, looked like good trade prospects initially, but they are in corrections that seemed to me to be some distance from completion.

Two had bearish ratings from Zacks that ran contrary to their bull signals: KRO and MINI.

USANA Health Sciences, headquartered in Salt Lake City, Utah, develops and manufactures nutritional and personal care products, and operates a direct-sales network in North America, East Asia (including China, Japan and the Philippines) and Australia/New Zealand.

Its product line runs from vitamins, minerals and anti-oxidants to a broad selection of cleansers and creams.

The handful of analysts following USANA are universally negative on the company's prospects, despite return on equity of 40%, which is in the awesome range, and no long-term debt, which combined with the high return puts USANA in growth-stock territory.

The record of the last 12 quarters shows that the company has earned a profit in each. Each quarter has shown a higher profit than the immediately prior period for the last seven quarters. USANA has surprised to the upside 11 times. The one downside surprise came back in 2010.

Institutions own 56% of shares. The price of the stock has been bid up somewhat, to where it takes $1.64 in shares to control a dollar in sales.

USNA on average trades 80,000 shares a day, and the options grid reflects that low level of activity. The grid, in fact, is a little strange. The only month having options is the front month -- expiring Oct. 19. All of the calls listed are in the money, and all of the puts are out of the money.

The options strike prices range from $30 to $55. the current at-the-money strike in a normal grid would be $85, which doesn't show on the USNA grid. The strikes that show do have open interest running from two to four figures, which is high for options that far out of the money, as the puts are.

I doubted my eyes and so checked it with a second brokerage, which had an identical grid.

If I take a trade in USNA, it will have to be as long shares; the options don't meet my minimum requirements for sanity.

And in fact, I doubt that that the options are good for analytical uses. I wouldn't trust them for an implied volatility analysis, nor for the one standard deviation range calculation that I do to figure out the price boundaries expected to contain 68.2% of trades over the next month and week.

The USNA options are trading today, with puts running to more than one-and-a-half times their five-day average volume, and puts at about a third average volume. But what could that possibly mean on such a grid? I have no idea.

Denied my customary tools, I have no choice but to proceed to the wrap, which in fact I've already mentioned earlier in this analysis: USANA Health Sciences next publishes earnings on Oct. 21.

Decision for my account: Strange options grid aside, I see USNA as a reasonable bull play, but not yet. I'll add it to my watchlist. If the price moves above $87.40 -- the third-wave high in the Elliott wave analysis -- then I'll consider opening a bull position as long shares. (See my discussion of the chart at the head of this analysis for why I think that level is important.)


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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