Thursday, November 7, 2013

COG: Bearish on oil and gas

Update 3/14/2014: COG closed above its 10-day price channel on April 1 and confirmed the exit signal the next day. I've closed my position and have no intention of rolling COG. By my count wave A {-1} to the downside is complete and wave B {-1} will carry the price higher in three waves, although not above the wave 3 peak of $41.78.

Altogether, series was made up of three separate bear positions: The original plus two rolls.

Shares gained 2.8% over 29 days over the life of the positions, or 34.6% annualized. The optoins produced a 19.4% loss on risk, or a loss of 240.8% annualized.

Update 3/4/2014: COG moved to a downtrend on Feb. 4, completing wave 3 to the upside at $41.78, and has moved to a downtrending wave 4. 

I've opened a bear position, structuring it as a bear put option spread bought with a debit and expiring in June.

In retrospect, I could have justified opening the position a week or so earlier, but my routine was disrupted somewhat in February by a trip to East Asia, so I didn't roll COG forward. My lateness means that I'll need to be especially alert about exiting once wave 5 to the upside has begun.

Click on chart to enlarge.
COG 30 days 1-hour bars

Update 11/7/2013: I opened a bear position in COG, structuring it as a bear call spread sold for credit and expiring in December. The position has 5:1 leverage with a maximum potential yield of 50.6% at expiration and a 2.8% hedge of profitability expiration above the entry price on the underlying stock.

Wednesday's bear signal from Cabot Oil & Gas Corp. (COG) marks a powerful downtrend within a larger downtrend that began Sept. 3 from $40.34.

My analysis, using Elliott wave techniques, labels the present decline as wave 3 of the larger downtrend, typically the most powerful of the three waves that propel the trend. The wave was strong enough to cause a break beyond the trend channel by nearly 5%.

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

Moreover, Wednesday's fall of 4.3% intraday from high to low has been followed today by a 6.5% decline intraday, so far, as momentum piles atop momentum.

It is true that COG went ex-dividend on Tuesday, and that surely contributed a bit to the decline, but the yield is only 0.24% annualized at today's prices, so the impact is quite small.

It is a very bearish chart and may have even further to go.

The decline is correcting the rise from $14.42 on April 16, 2012 to the September peak -- Wave V on the charts. Typically corrections will reverse at levels tied to the Fibonacci ratio, called Fibonacci retracement.

Common levels for a downside retracement are $38.2%, 50% or 61.8% off of the peak. COG is today approaching the 38.2% retracement level of $30.44 but has not yet attained it. A 50% retracement would bring the price down to $27.38, and a 61.8% retracement, to $24.32.

Also, the third wave cannot be the shortest of the three that move in the direction of the trend. Wave 1 is $5.64 in length, and wave 3 has so far covered only $5.50. If the still unknown fifth wave is longer than wave 1, then wave 3 will need at a minimum to fall below $31.65 in order to meet the not-the-shortest requirement.

As a trader, my emotional response to the chart is to hold back, because surely the best days of the decline are behind us. The Elliott wave and Fibonacci retracement analysis suggest that emotional response may be overcautious.

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

One symbol, GS, moved back within its 20-day price and so failed confirmation.

TSU, a bear signal, lacks sufficient open interest on its options for me to construct a hedged position.

There's little to differentiate the others. I chose COG because it is the most liquid and also has a bearish rating from Zacks, which makes it more attractive. The rest are all rated neutral.

Cabot Oil & Gas, headquartered in Houston, Texas, develops oil and gas properties, mainly in Pennsylviania, Texas and Oklahoma. It's prosperity is tied to the global oil and natural gas markets, with all the volatility and exposure to extraneous events that implies.

Analysts are evenly split in their assessment of Cabot's prospects, with a collective enthusiasm index of zero.

The company reports return on equity of 11% with debt at 50% of equity.

Cabot has been profitable for the three-year period I'm looking at and produced upside earnings surprises in nine of those 12 quarters, with downside surprises in three. Earnings have been all over the place, with peaks and valleys but no trend. The quarter reported in July was the most profitable of the 12 quarters under study.

Institutions own 81% of Cabot's shares and the price has been bid up to speculative levels. It takes $8.78 in shares to control a dollar in sales.

COG on average trades 5.9 million shares a day, sufficient to support a moderate selection of option strike prices spaced $2.50 apart. Open interest runs to three and four figures at the strikes I would use to construct an options spread.

The front-month at-the-money bid/ask spread is 9.1%.

Implied volatility stands at 32%, near the bottom of the six-month range, which has been distorted by two large spikes in volatility in August. It has been rising the past few days.

Options are pricing in confidence that 68.2% of trades will fall between $29.92 and $36.12 over the next month, for a potential gain or loss of $9.4%, and between $31.53 and $34.51 over the next week.

Contracts are trading quite heavily today, with puts running at 11 times the five-day average volume and calls at more than six times average.

Decision for my account: I'll open a bear position in COG if downward momentum continues in the last half hour before the closing bell, structuring the position as a short vertical spread expiring in December, of the type called a bear call spread.

If momentum falters, then I'll add COG to my Watchlist for later entry.


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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