It has become remarkably hard to find a decent chart to trade. The markets have a strong bullish bias. Stocks are rising and breaking past their 20-day price channels, sending bull signals under my rules. The historical odds of success for upside trades are, more often than not, perfectly acceptable.
And yet, the charts all tend to point to the grand finale, when the cast of the opera celebrates the triumph of love, or perhaps of hate,l with a rousing anthem, the curtain drops briefly, and then bounces up so all can bow and bask in the surging applause punctuated by shouts of "Bravo!" and "Brava!"
These charts all look like the curtain call to me. But it's a feeling rather than an indisputable fact, leaving me in the most basic quandary of trading: Trust the heart? Trust the head?
Verisign Inc. (VRSN) at first glance is an exception. Unlike most of the charts I've analyzed of late, it has broken out to higher highs rather than remaining ensnared in a downside correction.
It is only when I go back to the beginning, to the price of $17.54 on June 18, 2009, that the doubts begin to surface.
My preferred Elliott wave count points to the curtain call theory. There is, however, a plausible alternative that would suggest that the third act has only begun.
|VRSN 5 years 3-day bars|
What followed has been an A wave down followed by an energetic B wave up that pushed from $32.81 on Nov. 30, 2012 to a point above the uptrend peak. That in itself weakens, but still leaves intact, the possibility that VRSN is in a major correction of the rise since 2009, the sort of thing that takes years to work itself out.
The best criticism of that count is the magnitude of the wave 2 correction within the uptrend compared to the wave 4 correction of 2011. Wave 4 is a far greater in the distances traveled both by price and time.
An alternate count could begin the uptrend where I have the end of wave 2 marked, and then labels my wave 5 as a wave 3 and the present wave B as a wave 5.
In my present preferred count, B has no business pushing much higher. It is the curtain call, and while that may allow a bit of leeway to move above the peak of the uptrend, it isn't something that reasonably can be carried too far.
Under the alternate count, wave 5 has no limit on how far it can go. The Elliott wave rule is that wave 3 cannot be the shortest. It was longer than wave 1, so the length of wave 5 cannot force that rule to be broken.
There's nowhere I can point and say, "This is where the alternate count becomes convincing." The price has traded above the preferred count wave 5 peak for only two days. The longer it trades above that level, the more persuasive the alternate becomes. The higher the price, the more persuasive the alternate.
VRSN's rise has been extremely dynamic. Since wave 5 under my preferred count began in November 2011, the stock has completed eight bull signals, seven of them successful with an average yield of 5.8% over 34 days. The loser was down 4.3% over 12 days.
Those figures actually buttress the case for the alternate count. Wave 3 moves are supposed to be hugely dynamic, and wave 5 moves are supposed to be of the weak and wimpish variety.
Even the corrective upward move, wave B, has great historical odds. There have been three completed bull signals since it began in November 2012, all of them successful with an average profit of 7.2% over 28 days.
I think the best way to deal with the ambiguities of this chart is to set a point where I switch to the alternate count. There's nothing on the chart to give me guidance. One method would be to look to the prices expected by options traders.
Presently traders anticipate that more than two-thirds of trades will be priced at $53.73 and below over the next month. That's 5.7% above today's high. So, I'll set an alert at $53.73, and if VRSN moves above that level, I'll adopt the alternative count as my preferred.
It's an arbitrary point, but at least it has some grounding in market reality.
VRSN was one of 22 symbols that survived my initial analysis, all having broken out to the upside.
Seven failed to confirm the bull signals they gave in trading on Tuesday: MTG, TXRH, HRS, NDSN, ICLR, WAL and ULTI.
Eight were trading inraday contrary to the bull signal: ROST, AL, BWLD, DNB, ACXM, AIN, AIT and UHAL.
I judged six symbols to have less bullish charts than did the survivor: MET, CYH, CLVS, ISBC, ALGT and JOBS.
Verisign, headquartered in Reston, Va., provides a number of Internet infrastructure services for the top-level domains, such as .com, .net, .edu and others. The services include domain registering, name resolution and registry support and network intelligence. More than 90% of its stock price represents revenue from .com and .net domain names.
If all of that sounds amorphous, remember that the Internet without those services is like a railroad without the rails. Without them, the Internet goes nowhere.
The small number of analysts following Verisign -- more than a handful but less than two hands full, are on the whole not entirely optimistic about the company's future prospects. Their individual opinions collectively come down to a negative 47% enthusiasm rating.
The problem may lie in the the fact that the company has more liabilities than assets, and therefore no shareholder equity.
That is despite earnings the past three quarters that tower mightily above the nine that came before. Verisign has in fact been profitable for each of those 12 quarters with earnings accelerating upward in most. Earnings have surprised to the upside eight times, and to the downside, twice.
Institutions own nearly all of the company's shares which are trading at a sharp premium. It takes $7.79 in shares to control a dollar in sales.
VRSN on average trades 896,000 shares a day, sufficient to support a moderate selection of option strike prices spaced $1 apart.
Open interest on out-of-the-money calls is zero, except for one strike at the money with three-figure open interest. Puts, however, however, have three-figure open interest out of the money, and it is those options I would use to construct a bull put spread if I were to open a position.
The front-month at-the-money bid/ask spread on calls is quite narrow for a stock of this liquidity, at 2.8%
Implied volatility stands at 21%, in the lower half of the six-month range. It completed a rise from early August to early September and is now in a mainly sideways pattern.
Options are pricing in confidence that 68.2% of trades will fall between $47.59 and $53.73 over the next month, for a potential gain or loss of 6.1%, and between $49.19 and $52.13.
Trading in option contracts is on the slow side at this point (about half an hour before the Federal Open Market Committee issues a statement). Calls are running at 46% of their five-day average volume, and puts at 58%.
Verisign next publishes earnings on Oct. 21.
Decision for my account: I won't open a bull position in VRSN today for the reasons given above in my chart talk. The lack of shareholder equity isn't necessarily a deal killer, but it does give me pause.
I am, however, intensely curious whether my Elliott wave count will be disproven. I'll put VRSN on my Watchlist and will revisit the potential trade if the price moves above $53.73.
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.