Tuesday, November 26, 2013

INTC moves to a downtrend

3/20/2014: I've closed my bear position in INTC, the fourth in a roll series that began in November 2013. This final position produced a lost, as did the overall series. I don't intend to roll INTC forward into a new bear position.

I opened my most recent position in INTC on March 4. The price continued to meander between the 10-day price channel boundaries until March 19, when it shot above the 20-day price channel and continued to trade higher the day after.

My most recent Elliott wave count shows INTC in a second wave correction to the upside. Under the Elliott rules, it should not exceed $27.12.

The combined series results: Shares rose 3.3% over the 21 days I held the positions, or 58.6% annualized. My options positions produced a negative 26.8% yield on risk, or -475.8% annualized.

Click on chart to enlarge.
INTC 3 years 3-day bars

3/4/2014: I've opened a bear position in INTC, structuring it as a bear put options spread, bought for a debit and expiring in June. 

I count INTC as having seen its wave B {+1} peak at $29.98 on Jan. 15 and as presently being at the start of wave C down within wave C {+1}, also to the downside.

Click on chart to enlarge.
INTC 60 days hourly bars

Update 1/28/2014: I've opened a bear position in INTC, structuring it as short synthetic futures expiring May 16.

Update 1/28/2014: INTC has broken below its 20-day price channel. My most recent position was closed on Jan. 13, prior to options expiration.

I've reanalyzed the chart with an eye toward rolling forward yet again and shall also take a look at volatility to guide how I structure the trade.

My chart analysis shows that INTC has resumed its downward course and so is a good candidate for a fresh bear position.

The Chart

INTC by my Elliott wave count is in wave B {+2} to the downside, the third leg of a correction from the 2009 Great Recession low of $12.05. One degree up, INTC is in wave 2 {+3} of a downtrend from its Tech Bubble peak in 2000 of  $75.83. Second waves break into three subwaves, which is happening on the INTC chart.

Click on chart to enlarge.
INTC 5 years 3-day bars (left), 180 days 4-hour bars (right)
The first wave of the upside correction, A {+2} peaked in April 2012 at $29.27. The second wave, B {+2}, began from that point.

Within B {+2}, I find wave A {+1} to the downside ended at $19.42 in November 2012, and B {+1} ended at $26.98 on Jan. 14, 2014 -- this month. 

If INTC reverses and moves above $26.98, that will mean that my count is wrong and wave B {+1} is still underway.

If the downtrend continues, then my count is correct and INTC is in wave C {+1} to the downside of wave B {+2} to the downside wave wave 2 {+3} to the upside.

I put the beginning of wave 2 {+3} at $12.05 on Feb. 23, 2009. Under the Elliott rules, the B {+2} and its wave C {+2} to the downside cannot move below the start of the first wave, limiting downside potential to a 50% decline at most.


Implied volatility stands at 22% and has recovered somewhat from a sharp decline that began Jan. 16 from 28%.

The 22% level puts implied volatility in the 46th percentile of the one-year range. Historical volatility is quite close to the implied, standing only 8% above it.

Options are pricing in confidence that 68.2% of trades will fall between $23.26 and $26.48 over the next month, for a potential gain or loss of 6.5%, and between $24.10 and $25.64 over the next week.

Contracts are trading slowly today, with puts at 46% of their five-day average volume and calls at 38% of average.

Decision for My Account

I intend to roll INTC forward into a bear position in the half hour before the closing bell if downward momentum continues. Volatility stands in the middle quintile of the annual range, so I'll structure my position as synthetic futures built from options.

If downside momentum falters, I'll continue to keep a close watch on INTC in hopes of finding an entry point.

Update 11/26/2013: INTC peaked for the day in the first 10 minutes of trading and then began to slide, bouncing in the early afternoon. It resumed its downward course in the last 20 minutes of trading.

I've opened a bear position as described in the "Decision for my account section" at the end of this analysis, a bear call spread expiring Dec. 20, short the $24 calls and long the $25 calls. 

Leverage is 6:1, with a 23.5% maximum yield on risk at expiration. The hedge of profitability above the entry price is is 2.2%. The position has a 65.9% chance of expiring with the maximum profit.

I'm breaking my rules today. It's a holiday week, so why not?

Intel Corp. (INTC), the most heavily traded of the 50 symbols that gave bull and bear signals on Monday, failed my initial screening overnight. (See "Tuesday's Prospects".)

I screen based on a score: The historical odds of success in the direction of the signal (a bear signal in INTC's case) multiplied by the average yield per theoretical trade in the that direction. It's a quick way of selecting out the prime cattle in the herd without getting too hung up on detail.

INTC has had even odds of a profitable bear trade under my rules since my present analytical period began on May 22. The problem is with the net gain: 2.8%, which produced a score of only 1.4%. I'm generally looking for scores of three and above in the trades that I take.

I like INTC because of its chart. On Monday it dropped below prior resistance, creating a clear downtrend for the first time since its present decline began on Nov. 21. This comes in the context of Elliott wave analysis that clearly shows INTC embarking on the middle of three downward moves in a downtrend of larger magnitude.

Big picture, I count INTC has being in an upward correction since February 2009. Most of the blue-chip charts I've analyzed count as a very large magnitude uptrend. INTC is different.

INTC 5 years weekly bars (left), 1 year daily bars (center), 90 days 4-hour bars (right)
From the correction peak of $29.27 in April 2009, INTC has declined in the classic five-wave pattern of Elliott wave analysis: Three down trends separated by two upward corrections.

Under Elliott wave doctrine, a wave second wave correction in a downtrend cannot move above the start of the first wave, and wave 2 in the center chart performed as expected.

Doctrine also says that the third wave in a downtrend will travel below the end of the first wave to lower lows. Wave 1 ended at $21.90 on Aug. 30. Wave 3 can be expected to drop below that level.

The chart, therefore, shows at a minimum about 8% downside potential, and perhaps significantly more.

A more detailed look at the odds shows that my quick-and-dirty overnight scoring of INTC was correct.

The odds of success in the downtrend beginning from the peak of wave C on June 4 are even, but the winning trades yielded 2.8% while the unsuccessful plays lost 4.3%, for a win/lose yield spread of negative 1.5%.

It's a paradox: A strong bearish chart since June but poor odds of success in that period. So which should I believe?

When in doubt, run with the chart.

Few of the 12 symbols that survived my initial screening had disqualifying problems.

All confirmed their signals by continuing to trade beyond their 20-day price channels.

The most liquid, SLW, is a mining play, and I'm already heavily exposed to the bear side in metals. OPI had a negative score from Zacks on a bull signal; I prefer that the signal and Zacks be aligned.

Otherwise, I saw a string of charts that at first glance, seemed OK, but lacked focus.

So I turned to Intel, figuring that the leverage of a stock that liquid would allow me to create a leveraged options position with a high probability of success.

Intel, headquartered in Santa Clara, California, is a household name whose silicon chips are the brains of most of the world's computers. The company has come under pressure from competitors for the low-power chips required by the exploding market for smart phones and pads, but I wouldn't bet against a company with Intel's resources and market dominance, not in the long-term at least.

But I'm a short-term trader, and INTC, like any stock, can decline, no matter how rosy its future might be two years out.

Analysts aren't seeing many roses. Collectively, they come down with a negative 34% enthusiasm rating in their assessments of Intel's prospects.

The company reports return on equity of 18%, with debt running at 24% of equity. My rule of thumb for a growth stock is returns of 20% or more with debt of 10% ore below.  By that standard, INTC may have strong numbers but it's no growth stock.

A look at the last three years shows quarterly earnings hit a peak in the 3rd quarter of 2011 and have since declined. slightly.

Intel's peak quarter tends to be the 3rds, which have come in below their year-ago counterparts for the past three years.

Intel has surprised to the upside 10 times in the last 12 quarters, and to the downside twice. The downers were the first two quarters of 2013.

Institutions own 60% of shares -- a bit low for a company of Intel's magnitude -- and the stock is priced at a premium: It takes $2.26 in shares to control a dollar in sales.

INTC on average trades 33,5 million shares a day, sufficient to support a wide selection of option strike prices spaced a dollar apart, with open interesting running to five and six figures near the money.

The front-month at-the-money puts have a bid/ask spread of only 1.5%.

Implied volatility stands at 21%, in the 93rd percentile of the six-month range. INTC has high implied volatility, suggesting that option spreads sold for credit, as as bear call spreads, will have the best chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $22.07 and $24.99 over the next month, for a potential gain or loss of 6.2%, and between $22.83 and $24.23 over the next week.

Contracts are trading at a lackadaisical pace, as might be expected during Thanksgiving week. Calls are running at 37% of their five-day average volume and puts at 39% of average.

Intel next publishes earnings on Jan. 17. The stock goes ex-dividend in February for a quarterly payout yielding 3.82% annualized at today's prices.

Decision for my account: I intend to open a bear position in INTC if downward momentum continues in the last half hour before the closing bell. If momentum falters, then I'll INTC to my Watchlist for later consideration.

I'm looking to place the trade as a bear calls spread, sold for credit and expiring Dec. 20. 

A spread built by selling the $24 calls and buying the $25 calls produces 6:1 leverage with a maximum potential yield on risk of 19.1% at expiration. The position would 2.6 hedge of profitability at expiration above the entry price.

Market modeling suggests that the short leg of the spread, the $24 calls, have a 69% chance of expiring with maximum profit.


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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