Friday, November 22, 2013

FIX: Room to run at the end

Update 12/11/2013: FIX dropped decisively below its 20-day price channel on Dec. 11. I've removed it from the Watchlist, where it has sat since Nov. 22 wating for an entry opportunity for a bull play.

Because of the breakout to the downside, I have removed FIX from my Watchlist as a trade candidate.

I'm caught in a quandary with the large- and mid-cap stocks. As the major indexes make a series of all-time highs, most of the major bull signals unearthed by my analysis are either rising within a downward correction or nearing the end of their rise according to my Elliott wave analysis.

The bear signals, on the other hand, are mainly on companies that dig stuff out of the ground. My holdings already have gold, silver, coal, oil and gas. If I could find a good potato play, I could cover yet another underground sector, but lacking that, I can only throw up my hands and say, "Enough!"

I don't like any of the 15 charts offered up by my overnight analysis. (See "Friday's Prospects".)

In addition to the large- and mid-cap stocks that are the bread and butter of my trading, I also do, on the side, an analytical run of small-cap stocks. There are 311 fish in the small-cap pool this week, all pulled from companies with market capitalization of under $1 billion that are tracked by the rating company Zacks.

When the big fish fail to come through, I turn to the small fry.

Comfort Systems USA Inc. (FIX), headquartered in Houston, Texas, is one of the many infrastructure companies that make it possible to fill large buildings with workers and customers. They install and maintain the heating, ventilation and cooling systems that go under the moniker HVAC. The company operates in 87 locations in the United States.

If your cubicle sits in one of those cities, there's a good chance you can thank Comfort Systems for making life on the job bearable.

FIX has been on the rise since Nov. 15, 2012, when a long correction that began in April 2006 came to an end at $9.52. It has been in an uptrend since and broke above its 20-day price channel on thursday, confirming the bull signal today by continuing to trade above the breakout level.

To its detriment, FIX has remained below Thursday's high of $20.95, although its has four more hours in the normal trading day to correct that fault.

Since the uptrend began, I count FIX as having completed two uptrends and two corrections, and see it as being in the final uptrend, which I've labelled wave 5.

Within wave 5, I have a similar count, with FIX being in its final wave up during at the lower magnitude, which I've labelled wave v, using a lower-case Roman numeral.

FIX 2 years daily bars (left), 90 days hourly bars (right)

The question is, why would I dive in with a bull play when I'm in wave 5 of v, and when I know, from Elliott wave doctrine, that five spells the end of the line for a trend.

It comes down to a question of look and feel. Elliott wave counts are inherently ambiguous because there is no sure method of assigning a turning point to any particular magnitude within the fractal ladder that constitutes the markets.

I tend to use time as a guide -- the trends at one level should have roughly similar durations. Waves i and iii each lasted a month, and wave v began on Thursday, one day ago. That tells me that wave v likely has some time to go, although there is nothing in Elliott wave doctrine that forbids the concluding wave from being a two-day wonder.

On the other hand, at a higher magnitude, waves 1 and 3 took four months and three months respectively to complete their runs. Wave 5 has been in existence for three months now.

In the case of competing durations, I tend to focus my analysis on the smaller magnitude count as being more representative of what's happening now, rather than a year ago.

The trend channels that I've put in the right-hand chart highlight the distorted nature of FIX's movements. Wave iii was a high-momentum move that broke above the original trend channel, based on the starts of waves i and iiii, and the subsequent wave iv never returned to its upper boundary.

A new trend channel, based on the starts of waves iii and v, so far has contained the wave v move and suggests at least another 5% of room to the upside.

Returning to the higher magnitude -- the wave 5 rise has seen to prior bull signals. They split. The successful trade yielded 11.7% over 28 days. The unsuccessful trade lost 2.8% over 14 days. The resulting 8.9% win/lose yield spread is quite impressive.

Comfort Systems reports an 8% return on equity with very low debt amounting to 2% of equity.

The earnings show a company that spent 2011 and 2012 struggling a bit, with two quarters showing losses. The business turned up in 2013, and the most recent quarter produced an earnings high of the past three years.

Earnings for this company tend to peak in the third or fourth quarters. The peaks in 2012 and 2013 have exceeded their year-ago counterparts.

Comfort Systems surprised to the upside 10 times in the past three years, including the two losing quarters, and to the downside twice.

Institutions own 96% of shares, which are selling at a discount to sales. It takes 57 cents in shares to control a dollar in in sales.

FIX on average trades 228,000 shares a day. It supports a wide range of options strike prices spaced $2.50 apart but with low open interest. Only one strike -- the $20 puts -- reaches the three figures I require.

The front-month at-the-money bid/ask spread on calls is 400% -- that's not a typo. I won't trade options with those characteristics, so any position I might open in FIX will be as long shares.

However, the options can be pressed into the service of analysis.

Implied volatility stands at 31%, in the lower half of the six-month range, and has been on the rise from a 22% six-month low on Nov. 13.

Options are pricing in confidence that 68.2% of trades will fall between $18.82 and $22.50 over the next month, for a potential gain or loss of 8.9%, and between $19.77 and $21.55 over the next week.

Contracts are trading at a slow pace today, with calls at 61% of their five-day average volume and puts at 38% of average.

Comfort Systems next publishes earnings on Feb. 24. The stock goes ex-dividend in February for a quarterly payout yielding 1.06% annualized at today's prices.

Decision for my account: I intend to open a bull position in FIX if it continues to show upside momentum in the last half hour before the closing bell, structuring it as long shares.

True, the chart presents a note of caution with the run-up from 2012 clearly reaching its final stages. But the duration of the prior uptrends suggests that there is sufficient time to profit from the lifespan and the present, final price rise.

I'll add FIX to my Watchlist if momentum falters at the end of trading today.


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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