Tuesday, October 15, 2013

BBY: How high is high?

Update 10/17/2013: I'm removing BBY from my Watchlist. I'm unable to do a decent short-term Elliott wave analysis. This is a 30-minute candlestick chart for the last five days, with the pre-market and after-hour trading designated by a lighter shade of green on the background. Green candlesticks denote a rise within the 30-minute period, and red candlesticks a fall. 

BBY 5 days 30-minute candlesticks

Note that the rise each day is coming during "amateur hour" -- the first couple of hours of the market day. Then the price trails off with lower volume.

If this were a reliable uptrend, I would expect to see upside momentum at the end of the day, when the professionals adjust their holdings. Absent that, I'm staying away from this symbol.

Update 10/16/2013: BBY rose to a higher high, $42.07, a signal to open my delayed bull position, but declined later in the day, suggesting that the rise was complete. The pattern works out to a clear a-b-c correction to the upside. So I'm leaving  BBY on the Watchlist rather than taking the trade.

Update 10/15/2013: BBY failed to move into an uptrend and is tracing a symmetrical triangle. I've added the symbol to my Watchlist as a potential bull play.
BBY one day 5-minute chart

The Best Buy Co. Inc. (BBY) chart is an example of what traders mean when they say a stock has gone too far, too fast.

It began its rise from $11.22 on Dec. 27, 2012 and in trading so far today has hit a high of $41.46 as it confirms the bull signal sent by Monday's break beyond the 20-day price channel.

I've never liked the "too far, too fast" terminology. It brings back memories of being questioned by a three-year-old: How high is up? How high is high? How high is the sky?

Elliott wave analysis describes the BBY chart with greater precision as being in the fifth wave up of a fifth wave up.

At the smallest level -- since Monday's peak -- BBY has traced three waves of a downtrend that can be interpreted in several ways: A corrective zig-zag within wave v of wave 5, or the first step in a major correction of the rise from the end of 2012.

BBY 1 year daily bars (left), 180 days 2-hour bars (center), 1 day 5-minute bars (right)

The two truths I take from the chart are that BBY has indeed come a long way to the upside, and it cannot be said to be continuing its rise until the present very near term downtrend has resolved itself into an uptrend: At a minimum, a wave 1 up, wave 2 correction down, and a wave 3 up that has exceeded the peak of wave 1.

The analysis gets very ambiguous in the area that I've labeled as an alternate wave 5 top ("Alt: 5"), followed by a sharp decline.

However, whether my preferred top or the alternate top is accepted, it doesn't change the analysis that I must use in making a trading decision.

BBY is an also ran. Eight symbols survived my initial screening last night, all having broken out to the upside. (See "Tuesday's Prospects".)

Four were some combination of a bear/leveraged fund: EDA, QID, RWM and TNA. I generally don't play funds of that type because I can't really judge the tactics the fund managers are using to achieve their goals. I prefer straightforward trading as the basis of my work, then I can do the fancy stuff to tailor it to my needs.

One, PSO, fell back into its price channel and so failed confirmation, although it was toying with confirming the bull signal last time I checked.

IWM tracks the Russell 2000 index and therefore mimics pretty much the whole market. That's too broad a brush for my canvass.

JMPLY is illiquid.

That left CYBX, and I couldn't find an analyzable uptrend on its chart. It might well be an excellent play, but I wouldn't find it. Also, its options lack sufficient open interest to meet my minimum preferences, denying me an opportunity to hedge the position.

With the state of the federal debt still up in the air, I'm nervous about bull plays generally and unhedged plays in particular.

I then did a new screening based on results from mid-May, when the markets began struggling to make further gains. That tossed up BBY as a likely prospect for a bull a play.

Best Buy Co. Inc., headquartered in Richfield, Minnesota, sells a wide range of electronic products through more than a thousand big-box stores in North America and China, with its U.S. operations accounting for more than half of its market capitalization.

Analysts are mildly optimistic about Best Buy's prospects, collectively coming down at a positive 5% enthusiasm rating.

The company reports return on equity of 21%, which is growth-stock territory, but has debt amounting to 45% of equity, which is higher than I would normally want to see in a growth stock.

Like many retailers, Best Buy's profits live or die by the 4th quarter holiday season results. The most recent 4th quarter came in below that of a year ago, which culminated two years of rising 4th quarter profits.

Best Buy has surprised to the upside six times in the last 12 quarters, including the three most recent. It has surprised to the downside five times and was surprise-free once.

Institutions own 7% of shares. The price is surprisingly low; it takes 26 cents in shares to control a dollar in sales.

BBY on average trades 5.3 million shares a day and supports a wide selection of option strike prices with open interest in the four and five figures. The front-month at-the-money bid/ask spread on calls is 2.5%.

Implied volatility stands at 44%, in the lower third of the six-month range. It has been rising since mid-September, although the rise has faltered the past few days.

Options are pricing in confidence that 68.2% of trades will fall between $35.90 and $46.36 over the next month, for a potential gain or loss of 12.7%, and between $38.62 and $43.64 over the next week.

Put contracts are trading today at 42% above their five-day average volume, and call options at 36% above average.

Best Buy next publishes earnings on Nov. 19. The stock goes ex-dividend in December for a quarterly payout yielding 1.65% annualized at current prices.

Decision for my account: The decision to trade BBY hinges on two factors: 1) The resolution of the very near term trend discussed above, and 2) the resolution of the dispute within the American government over whether to pay the national debt.

I think the debt issue will be resolved fairly soon.; I'm comfortable bringing some balance back to my holdings by opening bull positions. 

If the trend issue isn't resolved in time for trading in the last half hour of the market today, I'll add BBY to the Watchlist and open a bull position if the Elliott wave count shows that the uptrend has resumed.


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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