Tuesday, October 29, 2013

AMGN: Bull signal in a correction

I'm treating Monday's bull signal from Amgen Inc. (AMGN) with a healthy dose of skepticism. Yes, the stock has been in an uptrend since Aug. 11, 2011, when the price hit a low of $47.66. Yes, the breakout beyond the 20-day price channel has carried the price to an all-time high today of $118.96.

But sometimes with a chart, it is not the destination but the journey that counts. And AMGN's journey since last April counts like a correction within a larger uptrend.

AMGN 3 years 2-day bars (left), 180 days 4-hour bars (right)

AMGN 20-years monthly bars

In an uptrend, the movements can be counted in five waves, as I've done in the left-hand chart above.

Corrections come in a variety of patterns, but often three waves A-B-C, with A having five subwaves, B three subwaves, and C five subwaves. And that's what fits the right-hand chart above.

I would call this correction a flat.

I've counted this movement as a correction in a very long uptrend that has been going on for 20-years-plus, as seen in the chart on the right. AMGN by that count has just finished wave (III), is doing a wave (IV) correction that could last for years, and then if the count is correct will see a rise to new heights.

This is AMGN's 11th bull signal since the uptrend began in 2011. Seven of the completed signals were successful, for an average gain of 5.2% over 39 days. The three unsuccessful signals on average lost 1.6% over 28 days.

Two of those breakouts have come since the April peak. One was a winner, yielding 2.8% over 19 days, and the other lost 0.4% over 37 days. The winner came first, the loser second.

The period of the peak is so short that thee's very little data to go on. The signal rate for both periods is a bull signal about every 3 months. It is the success rate that varies. Also, the period of the uptrend has a 3.6% spread between the returns from winning and losing trades. The spread since the peak is 2.4%.

Overall, however tentatively, those numbers point to a weakening of AMGN's upside momentum.

AMGN was one of six symbols that survived my initial screening overnight, all having broken out to the upside. (See "Tuesday's Prospects".)

One other survivor, EWW, had options with sufficient open interest for me to trade, but its chart was clearly in an downtrend and so I rejected it. The remaining survivors have lower liquidity and so I set them aside for now.

Amgen is a biotech company headquartered in Thousand Oak, California. It counts as one of the largest companies in the global biotech sector.

Its inventory of approved drugs includes treatments for anemia, arthritis, osteoporosis and colon cancer.

Analysts collectively come down at a negative 16% enthusiasm rating when they consider Amgen's future prospects.

Current performance is quit bullish, with a 27% return on equity with a somewhat high level of debt, equivalent to 125% of equity, taking a bit a the shine off of the returns number.

Amgen has been profitable in each of the last 12 months. Earnings faltered a bit in 2012 but returned to new heights this year. Earnings announcements have surprised to the upside 11 times, including the last seven, and to the downside once.

Institutions own 80% of shares, whose price has been bid up to speculative levels. It takes $4.93 in shares to control a dollar in sales.

AMGN on average trades 3 million shares a day and supports a wide selection of options strike prices spaced $5 apart. Open interest runs to the four figures at the strikes I would use to construct an options spread.

Implied volatility stands at 25%, in the lower third of the six-month range after falling sharply from a peak of 34 on Oct. 9.

Options are pricing in confidence that 68.2% of trades will fall between $109.53 and $126.43 over the next month, for a potential gain or loss of 7.2%, and between $113.92 and $122.04 over the next week.

Contract trading today is skewed toward puts, which are running 40% above their five-day average volume. Calls are running at 43% below average volume.

Amgen next publishes earnings on Jan. 25. The stock goes ex-dividend on Nov. 12 for a quarterly payout yielding 1.6% annualized at today's prices.

Decision for my account: I'm declining to open a bull position in AMGN. Despite the new high, the chart seems bearish to my eyes. I may well be wrong -- there's a lot of ambiguity there -- but if I'm wrong and miss the opportunity, no problem. There is no shortage of trades out there.


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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