Thursday, November 21, 2013

ABX: Bearish on a gold miner

Update 1/3/2014: Since my ABX options expired in December, I've been awaiting a fresh break below the 20-day price channel to trigger the opening of a new position. That day never came, and ABX on Jan. 2 closed above the 20-day price channel and confirmed that breakout in trading today.

So I've removed ABX from the Roll Shelf and tallied the results.

During the position's 22-day lifespan, ABX shares declined by 1.1%, or 18.7% annualized. My bear call options spread produced a positive 13.6% yield on risk in that period, or 224.8% annualized.

Update 11/21/2013: I've opened a bear position in ABX, structuring it as a bear call spread sold for credit and expiring in December. The position has 4:1 leverage with maximum yield at expiration of 29%. There is a 3.5% hedge of profitability above the entry price.

Wednesday's trading was punctuated by a series of bear signals on gold mining shares, as well as on gold itself in the form of the bullion exchange-traded fund GLD. I've chosen to take a closer look at the most liquid of the bunch, the miner Barrick Gold Corp. (ABX).

ABX broke below its 20-day price channel on Wednesday and its 55-day channel today, confirming the first bear signal since September.

The chart presents an easy Elliott wave analysis in its broad strokes, but it is a bit messier in detail.

ABX 3 years weekly bars (left), five months 2-hour bars (right)

ABX hit a low of $13.43 on July 5, rose 57% to $21.20 on Aug. 27 in the start of what has proven to be a sideways correction.

In the right chart, the most recent uptrend's failure to come closer than 2.8% to the peak of wave A, and the subsequent push  below the Oct. 14 low suggests that the sideways correction is at an end and a new major push to the downside has begun.

That's the way I've labelled it, putting the completion of the correction as the end of wave C on Oct. 28 and the downtrend in progress as wave 1, to be followed by two more downtrends separated by corrections to the upside or sideways.

Counting corrections using Elliott wave analysis is rarely a cut and dried exercise. There are many corrective patterns, and what seems to be one form can morph into another as it progresses. The main trends -- three in the direction of the major movement with two corrections -- tend to be much clearer.

So it is quite possible that the correction from last August is still underway. If that's the case, then ABX is unlikely to exceed the wave A peak of $21.20, nor would it be likely to fall much further. That would greatly increase the odds of it being a losing position over the shorter run.

If wave 1 has begun, then the price will continue to fall and a bear play will show excellent profits.

ABX was one of nine symbols that survived initial screening overnight. (See "Thursday's Prospects".)

Three failed confirmation: K, PLT and WTR.

Three in addition to ABX were gold-mining companies: EGO, IAG and AU.

HE has options that are too illiquid to support a bear trade according to my preferences.

That left NPSKY, the sole  bull signal from Wednesday, with average volume of only 5,000 shares a day.

Barrick Gold, headquartered in Toronto, Ontario, is the world's largest gold miner, with operations ranging around the world far from its native Canada. Gold accounts for nine-tenths of its market capitalization, with copper making up the rest.

Gold's best days are behind it, despite the reluctance of many to give up on its promise. David J. Lynch and Peter Robison, writing in BloombergBusinessweek, captured the conflicting views in a Nov. 14 article headlined online, "Republicans Asserting Reliance on Gold as World Loses Faith".

Analysts, certainly, are falling more on the lost faith side of the meme, collectively coming down with an 83% negative enthusiasm rating.

Barrick's financials don't support the pessimism. The company reports 16% return on equity, although the debt level is rather high, at 91% of equity.

Earnings hit a four-year peak in the 3rd quarter of 2011 and have since fallen, with one upward nudge, while showing a profit throughout the period.

Barrick has surprised to the upside seven times in the last three years, and five times to the downside.

Institutions own 42% of shares, a very low level for a major company, yet the price has been bid up above sales parity. It takes $1.45 in shares to control a dollar in sales.

Barrick on average trades 17.4 million shares a day and supports a wide selection of option strike prices spaced a dollar apart, with open interesting running to four and five figures. The front-month at-the-money bid/ask spread on puts stands at 1.4%.

Implied volatility stands at 38%, near the bottom of the six-month range, and has been working its way downward from 68% in early July.

Options are pricing in confidence that 68.2% of trades will fall between $15.25 and $18.55 over the next month, for a potential gain or loss of 9.7%, and between $16.11 and $17.69 over the next week.

Contract trading is active today, with calls and puts both running about 50% above their five-day average volume.

Barrick Gold next publishes earnings on Feb. 17. The stock goes ex-dividend on Nov. 26 for a quarterly payout yielding 1.18% annualized at today's prices.

Decision for my account: The chart is ambiguous but it is bearish enough to be worth the risk, in my opinion. I intend to open a bear position in ABX if downside momentum continues into the last half hour before the closing bell.


My shorter-term 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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