Tuesday, November 19, 2013

CNX: Bearish on coal and natural gas

Update 2/19/2014: It has become clear that CNX is in the midst of a symmetrical triangle of immense proportions. The lower boundary's base is $18.50 on Nov. 20, 2008, and the upper boundary's is $58 on Jan. 11, 2010. 

Triangles in an Elliott wave count ideally have five reversals from the boundaries, labelled "a" through "e", with each leg from boundary to boundary composed of the three-wave correction pattern, "A" through "C". I say "ideally" because they are in some instances distorted, but nevertheless, triangles tend to approach that ideal.

Click on chart to enlarge.
CNX 7 years 3-day bars (left), 180 days 2-hour bars
By my count, CNX has completed two reversals and is now in its third leg, rising toward the "c" point on the upper boundary, somewhere around $50.

Internally, the "c" leg is in its first of three waves, which I've labelled as A {+2}. A waves, in turn, are composed of the five waves of a trend, and I place CNX has presently being in wave 3 {+1} to the upside.

A triangle this large can be played, even by a trader with my relatively close time horizon. Each leg from boundary to boundary takes years to runs its course.

I've attempted a count within wave A {+2} in the right-hand chart, but there is at this point no reliable way to determine my count's relationship to the {+2} degree; is it just one degree below, or is it four? 

At any rate, for now, I'm removing CNX from the Roll Shelf, where it has sat since December as a potential bear play.

I held CNX for only one options cycle. The stock rose by 8.1% over the 23 day lifespan of the position, or 128.8% annualized. The options produced a 33.5% loss on risk, or negative 531% annualized.

I'll take a closer look at the chart to decide whether or not I want to open CNX as a bull play.

Update 12/12/2013: I've closed my CNX bear options-spread position that expires on Dec. 21, with the intention of rolling it to a position expiring in January. 

I opened near the bottom of the first wave of a third wave decline. 

The stock has broken past the 10-day price channel, setting up the possibility of a close signal, but it has always pulled back and so has never produced a confirmation.

I still consider CNX to be a bearish chart below $39.23, the second wave peak of Oct. 11, 2013. A convincing rise above that level would cause me to revisit that conclusion. The present orthodox signal for reentry is a break below $33.67, the wave 1 {-1} low.

However, a break below $36.34, the wave 4 {-2} low on Dec. 6, would signal that the wave 3 {-1} downtrend is indeed underway, and I am setting my alert at that level.

A final closure now would mean quite a devastating loss. The shares moved 8.1%  counter my position over 23 days, and the options had a 33.5% loss on risk.

But my practice is to calculate profit and loss over the entire life of a symbol within my portfolio; that can mean several positions encompassing many trades over a long span of time.

Here is a very near-term chart to illustrate why I'm still bearish on CNX.

Click on chart to enlarge.
CNX 90 days 4-hour bars

Update 11/19/2013: I've opened a bear position in CNX, structuring it as a bear call spread sold for credit and expiring in December. The position has 5:1 leverage with maximum yield on risk of 35.1%. It has a 4.1% hedge of profitability at expiration based on the price of the underlying stock.

CONSOL Energy Inc. (CNX), along with many other energy companies, is showing a downtrend on its chart. It took another step in that direction with a bear signal on Monday that was confirmed in trading today.

The price began its most recent downward move on March 21, 2011 from $58.32. It comes within a larger decline that began in 2008 from $119.10 (left chart).

Using Elliott wave analysis, I count CNX as having considerable downside potential. At its present location within the trend, CNX is in the middle of three downtrends, each separated by an upward correction.

CNX 10 years weekly bars (left), 3 years 2-day bars (middle), 20 days 30-minute bars (right)

Moreover, the present wave 3 downtrend under Elliott rules must fall below the July low of $26.25, about $8 away from the present price.

The magnitude of wave 3 is at a level that takes perhaps a year to complete. It's happening as part of a larger wave [C] at a magnitude that takes several years to complete (middle chart).

At the lower end, I find wave 3 (right chart) to be a difficult count, perhaps because it is so early in the decline. It appears to be a lower magnitude first wave down, but I say that without a lot of confidence.

This is the first bear signal of the wave 3 decline from October. The odds for wave [C] from June 2012 are so far are unimpressive: Seven completed bull signals with five failures. The win/lose yield spread is negative 3.5%. The period from June includes a long sideways correction, so I don't find the preponderance of failures to be surprising.

CNX was one of eight symbols that survived my initial screening overnight. (See "Tuesday's Prospects".)

One, IMPUY, failed confirmation. Three had trends counter to the direction of the signal: SBS, INFY and WEICY. Two were bull signals that appeared to be topping: EDU and EEFT.

RGA, with a bullish signal and trend, might also be in the topping category but deserves a closer look.  I chose to analyze CNX, my one bull signal from Monday, as having the most certain chart.

CONSOL Energy, headquartered in Canonsburg, Pennsylvania, mines coal and drills for natural gas. It is the largest underground coal-mining company in the United States and the countries largest poducer of bituminous coal.

As with any commodities business, CONSOL's has its risks, but they seem to be entirely manageable to analysts, who collectively come down with a 55% positive enthusiasm rating.

The financials are less cheering. Return on equity is only 2%, and debt is on the high side, given that low return, at 80% of equity.

Earnings in 2012 and 2013 are well below their 2011 levels, and the last two quarters have produced losses, the most recent more than five times any other losses in the last three years.

In the last 12 quarters CONSOL has surprised to the upside five times, and to the downside seven times.

Institutions own 98% of shares and the price has been bid up a bit. It takes $1.54 in shares to control a dollar in sales.

CNX on average trades 2.2 million shares a day and supports a wide selection of options strike prices spaced a dollar apart with three- and four-figure open interest. The front-month at-the-money bid/ask spread on puts is 2.6%.

 Implied volatility stands at 32%, near the bottom of the six-month range, after falling from 53% in mid-October.

Options are pricing in confidence that 68.2% of trades will fall between $31.12 and $37.52 over the next month, for a potential gain or loss of 9.3%, and between $32.78 and $35.86 over the next week.

Contracts are trading at a slow pace today, with puts running at 47% of their five-day average volume and calls at 25% of average volume.

CONSOL next publishes earnings on Jan. 29. The stock goes ex-dividend in January for a quarterly payout yielding 1.46% at today's prices.

Decision for my account: I intend to open a bear position in CNX if it continues to show downside momentum in the last half hour before the closing bell. I'll structure the position as bear call spreads sold for credit and expiring in December.

If momentum falters, then I'll add CNX to my Watchlist for later consideration.


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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