Monday, November 25, 2013

GILD: Big Pharma bull play

Update 3/10/2014: I'm removing GILD from the Watchlist. My best chance to open a bull position came in mid-January, but I was slow to act, and a good thing it was. The bull signal proved to be a four-day wonder before GILD resumes its desultory sideways meandering.

Therefore, I am removing GILD from the Watchlist.

The Elliott wave analysis suggests that GILD has completed its wave 5 {+1} rise from $69.05 beginning Dec. 17, 2013. That sets up a correction of the rise from $46.70 that began June 24, 2013.

GLD is unlikely to correct all the way below $47, but it is not unreasonable to expect a decline down to around $70, and perhaps as low as $60.

Click on chart to enlarge.
GILD 1 year daily bars

Gilead Sciences Inc. (GILD) is nearing the end of its rise from June. But unlike many of the market's household names, GILD is only midway in its uptrend from December 2011, and indeed, from March 2004.

Even in the shorter term, there is room for profit. GILD is trading 10% the upper boundary of its trend channel, which is rising each day.

There is no rule that says an uptrend must bounce off the ceiling before ending, but often they do. However, $82.50 is not a minimum target, only a possibility.

GILD broke out to a 55-day high on Friday and confirmed the bull signal by trading above that level today.

Elliott wave analysis considers price movements in the direction of a trend to come in three waves, separated by two corrections in the opposite direction. The pattern of stock price movements is fractal in nature -- a trend contains trends of lesser magnitude, and is in turn part of trends of greater magnitude.

At the highest magnitude, I count GILD as being within wave III of an uptrend that began in March 2004 from $6.44. Wave III began on Dec. 19, 2011 from $18.49.

GILD 10 years monthly bars (left), 3 years 2-day bars (center), 180 days 6-hour bars (right)

Down one magnitude, GILD is in wave 3 of an uptrend from $22.67 on May 11, 2012, and still lower, in wave v (lower-case roman numeral five) from $46.70 on Jun 24.2013. At the very lowest magnitude that I've counted, GILD is in wave (5) up from $85.53 on Nov. 7.

A fifth wave is the final push that culminates a trend. That means GILD will be due for a correction in a timespan that could be measured in weeks rather than months, taking back some of the gains since last June. Often corrections retreat by around 50%, which would suggest downside risk down to $60 or so.

No guarantees, however. Elliott wave analysis often does an excellent job of providing a "You are here" arrow on my map of the trend, but I find it to fail as often as not when it comes to target prices. My practice is to use Elliott to place the trade, and to rely on my exit rules to get out.

Durations as well are fickle. GILD could turn quickly, or stretch out its final run to the finish line.

Elliott also comes with a lot of ambiguity, because it is never possible to know with certainty what magnitude a turning point belongs to. The GILD chart, I think, shows unusual clarity. I have no alternate count.

This is GILD's fourth bull signal in the uptrend that began in June. Two the prior breakouts were profitable, yielding 4.8% over 21 days on average. The unsuccessful signal lost 1.6% over 10 days. That gives a reasonably good 3.2% win/lose yield spread.

Over the longer term, completed signals in the rise from 2011 have split evenly between winners and losers, at five apiece. The win/lose yield spread for them is 2.7%.

GILD was one of 15 symbols, all bullish, that survived my initial screening and was the most liquid of a fairly illiquid batch. (See "Monday's Prospects".)

Five failed confirmation: HFL, MUR, ARMH and NXST.

Three had negative Zacks ratings, putting them at odds with their trend: CY, ENV and FLIR.

One, NUS, is already among my holdings, having been rolled forward from an earlier breakout.

I ignored the rest because they lacked options and therefore had no possibility of leverage and hedging.

Gilead Sciences, headquartered in Foster City, California, is a pharmaceutical house that began with a focus on developing HIV therapies and has since branched out into cardiovascular, respiratory, liver and cancer treatments. They promote themselves under the slogan, "Advancing Therapeutics, Improving Lives", and stress in their pitch that they are "research based".

Analysts in aggregate give Gilead a 65% enthusiasm rating, indicating a high opinion of its future prospects as an investment.

Certainly its present is bright. Gilead reports return on equity of 30%, with debt running to 55% of equity.

Quarterly earnings have been positive and steady over the past three years. Gilead has surprised to the upside in seven quarters, and to the downside in four.

Institutions own 92% of shares and the price has been bid up to highly optimistic levels. It takes $10.67 in shares to control a dollar in sales.

GILD on average trades 10.4 million shares a day and supports a wide selection of options strike prices spaced mainly $2.50 apart, with open interest running to four figures at the strikes where I would construct a position.

Implied volatility stands at 30% and has ranged from a low of 27% to a high of 36% over the past month. It has been declining since mid-November.

Volatility stands at the 33rd percentile, which I rate as low volatility favoring long options positions, such as bull call spreads.

Options are pricing in confidence that 68.2% of trades will fall between $68.42 and $81.45 over the next month, for  a potential gain or loss of 8.7%, and between $71.80 and $78.06 over the next week.

Contracts are trading actively today, with calls running 63% above their five-day average volume and puts at 35% above average.

Gilead next publishes earnings on Feb. 14.

Decision for my account: I intend to open a bull position in GILD, structuring it as a bull call spread, bought for a debit and expiring in May. The position I have in mind -- long the $70 calls and short the $72.50s -- gives a maximum potential yield at expiration is 75% with 7:1 leverage and carries an 8.9% hedge of profitability below the entry price.

Options modelling suggests that the probability of attaining maximum profit is 65%.

I'll open the position in the last half hour before the closing bell if GILD shows upside momentum. If momemtum falters, then I'll add GILD 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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