Tuesday, November 5, 2013

AHS: Pause on the trail?

Update 1/16/2014: I've revisited the AHS chart and have concluded that the stock has resumed a downward trend, or is close to doing so. A push above $16.20 would invalidate that opinion. I never opened a bull position on AHS, so I'm simply removing it from the Watchlist.

By my Elliott wave count, AHS is completing wave C{+1} of wave 2 {+2} to the upside, and once that work is done, it will decline into wave 3 {+2} of wave 5 {+3}.

Click on chart to enlarge.
AHS 180 days 2-hour bars

AMN Healthcare Services Inc. (AHS) broke above its 20-day price channel on Monday, sending a bull signal as the price rose further following an impressive post-earnings response on Friday that covered 12.1% intraday.

The Elliott wave count is a bit messy, but I see AHS as hitting a pause on the trail as it approaches the final upward push of a rise from $3.60 on Oct. 4, 2011. The rise, as Elliott wave doctrine requires, is taking the form of three uptrending waves separated by two corrections.

Alternatively, the final upward push may already be underway. The chart tells the tale, albeit dimly.

AHS 3 years 2-day bars (left), 90 days 2-hour bars (right)

I count the March 25 high of $15.94 as the peak of wave 3 -- the second uptrending wave -- and the Aug. 7 peak of $16.20 as part of the wave 4 correction to the downside.

Wave 4 internally is taking the form of a three-wave zig-zag, $16.20 is the peak of wave b and AHS either has already or is in the process of completing wave c of the correction. Once wave 4 is complete, it will be followed by a wave 5 push to new highs.

The odds calculation for AHS during wave 4, since March, has not favored the bullish case. AHS has completed three bull signals during the period. The one winner broke even during its 31-day lifespan. The two unsuccessful trades on average lost 10.1% over 11 days.

At this point I can conclude that AHS is a weak bull play. It has been in a downtrend since August and my Elliott wave count continues to show it in a downtrend, until wave [5] is completed at the least.

The alternate count on the left-hand chart, which would put AHS at the start of a new uptrend, is unconvincing because it would make wave [3] the shortest of the three downtrending waves in the five-wave set. That violates a principle of Elliott wave counting.

The two counts will be sorted out somewhat if AHS breaks above its wave [2] high of $14.38, set on Sept. 16. A close above that level would prompt me to revisit the count and investigate a more bullish case.A move above the end of wave b, $16.20, set on Aug. 7, would erase all ambiguity surrounding an uptrend.

That's a long way of saying that Elliott wave analysis isn't the science some would have it to be. It's a tool for focusing the mind on the chart, but the ambiguities of chart reading are with us always.

The longer-term odds on AHS, from $3.60 on Oct. 4, 2011, are more bullish, although they still favor the bear case slightly: 11 completed bull signals, five successful. for an average gain of 17.6% over 43 days, six unsuccessful for an average loss of 7.7% over 15 days.

Six symbols survived my initial screening overnight, all having broken out to the upside. (See "Tuesday's Prospects".) The screening is based on odds calaculation from Oct. 4, 2011, when the present uptrend began in the S&P 500.

Four failed confirmation: FAST, TTWO, VPS and LFC, although later in the day TTWO began flirting with confirmation.

SAFM has a bearish rating from Zacks; I prefer a bullish Zacks rating to back up my bull positions.

That left RVBD, but it has an extremely bearish chart, as does TTWO, which may yet confirm its bull signal.

I turned to my alternate analysis of large- and mid-cap stocks. The procedure calculates odds from screening from May 21, when the S&P 500 began struggling to make new highs. The only survivor there was TTWO, which I had rejected from my first screening.

My last chance to find a prospective trade was to turn to an analysis of small-caps stocks that I do on the side. It's not part of my main thread of analysis, although it may become so in the future.

Among the small caps was one screening survivor, AHS, with a reasonably uptrending chart at first glance.

AMN Healthcare Services, headquartered in  San Diego, California, recruits doctors and nurses for health-care providers as well as handling staffing for other staff positions. If you buy the argument that the Obama administration's expansion of health-insurance coverage will create greater demand for health-care services, then AMN has a good story behind it.

The handful of analysts following the company are mainly bullish about its prospects. Collectively they come down at a 60% enthusiasm rating.

The company reports a 17% return on equity with debt a bit on the high side, at 78% of equity.

AMN Healthcare has reported consistently rising earnings since the 4th quarter of 2012. Nine of the last 12 quarters have shown an upside earnings surprise, and two have surprised to the downside. The last unprofitable quarters was the 4th quarter of 2010.

Institutions own 88% of shares, which are priced below sales parity. It takes 65 cents in shares to control a dollar in sales.

AHS on average trades 560,000 shares a day and supports a modest selection of option strike prices space $2.50 apart. Open interest is low. Only one strike in the front-month has three-digit open interest, one has double-digit and the rest are single-digit or zero. The options way too illiquid for me to trade, so any position I open in AHS will be as long shares.

The front-month at-the-money bid/ask spread on calls is 23.3%, which is quite a bit wider than I like.

Implied volatility stands at near the mid-point of the six-month rage at 45%. It has been trending downward from 61% since mid-October.

Options are pricing in confidence that 68.2% of trades will fall between $12.16 and $15.80 over the next month, for a potential gain or loss of 13%, and between $13.11 and $14.85 over the next week.

Contract volume is skewed toward calls in today's trading. Calls are running at nearly five times their five-day average volume, while puts are running at nearly double the average.

AMN Healthcare next publishes earnings on Feb. 21.

Decision for my account: I'm not opening a bull position in AHS today because of the downtrending nature of the chart. I'll add it to my Watchlist for a bit and revisit the chart if AHS breaks above $14.38, the wave [2] high in the Elliott wave count discussed above.


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.

No comments:

Post a Comment