Monday, November 18, 2013

LL: Nearing the end of its trend

Lumber Liquidators Holdings Inc. (LL) hit a low a low of $13.43 on Sept. 25, 2011. The price bounced,  and a few days latter was joined by the broad market in an uptrend of epic proportions that has yet to reach an end.

LL hit a new high today of $119.98 as it confirmed Friday's break above the 20-day price channel, a signal that the symbol is worth considering for a bull trade.

The chart shows a remarkably clear Elliott wave count, without the ambiguity that generally plagues my analysis.

LL 3 years 2-day bars (left), 180 days 2-hour bars (right)

By my count, the uptrend from September 2011 is wave V of a larger rise that began in 2009. Within that I count two more fifth waves of decreasing magnitude, one beginning on Oct. 9 from $99.40 and another on Nov. 7 from $109.32.

Long story short: LL is in wave (5) of v of 5 of V. The fifth wave is the final wave of a trend. The rise is almost over.

LL has completed nine bull signals since the wave V rise from 2011 began. Five were successful, for an average yield of 29.3% over 61 days. The four unsuccessful signals lost 7.5% over 17 days on average.

The lower magnitude wave 5 rise, from last July, has had very strong momentum. Friday's bull signal is the second. The prior, completed bull signal last 75 days and gained 18.6%.

To say, as I did above, "the rise is almost over" sounds wise but actually is fairly useless for practical trading. What does "almost" mean"? Depending upon the granularity of the trader's viewpoint, it can range from a day to a year, and beyond those bounds in either direction.

There's no way to set a reliable target from the Elliott wave counts on this chart. At the smallest magnitude, wave iii, lasted for only a few days, so really an end to wave v is overdue from a time standpoint. But there's no set duration in Elliott wave lore.

LL was one of 12 signals that survived my initial screening over the weekend. (See. "Monday's Prospects".)

Confirmation failure, counter-trend charts and contrarian Zacks ratings eliminated all but three from consideration.

The one bear signal among them, BVN, had an overly wide wide bid/ask spread on its options, which are necessary for a bear play. That left two, with both charts showing long-lasting uptrends. I chose LL over SWFT because LL had a bullish rating from Zacks, while SWFT is rated neutral.

Lumber Liquidators, headquartered in Toano, Virginia, is one of the largest hardwood flooring retailers in the United States, selling from 300 stores in the U.S. and Canada.

The company's story is attractive at this point in the economic cycle: The recovery is underway, and people will be looking to fix up the house after putting things off during hard times. Under that scenario, Lumber Liquidators is in a position to prosper.

The small number of analysts following the company are less than optimistic about its prospects. Altogether they come down at a negative 25% enthusiasm rating.

That flies in the face of the financials. Lumber Liquidators reports return on equity of 27% with no long-term debt.

The company has been profitable throughout the three-year period I'm looking at. Earnings have risen steadily quarter over quarter since the 2nd quarter of 2012. Out of the last 12 quarters, 10 have produced upside surprises and two have surprised to the downside.

Institutions own nearly all shares and the price has been bid up to speculative levels. It takes $3.46 in shares to control a dollar in sales.

LL on average trades 370,000 shares a day, sufficient to support a wide selection of option strike prices spaced $5 apart with open interest running to three and four figures. The front-month at-the-money bid/ask spread on calls is 4.8%.

Implied volatility stands at 36% and is again rising after a fall from nearly 60% since mid-October.

Options are pricing in confidence that 68.2% of trades will fall between $105.68 and $130.34 over the next month, for a potential gain or loss of 10.4%, and between $112.09 and $123.93 over the next week.

Both call and put contracts are running near their five-day average volume today.

Lumber Liquidators next publishes earnings on Feb. 17.

Decision for my account: Love the company, hate the chart. 

The financials and the story both argue for taking the trade. But the chart is a different story, as I concluded above in the chart talk.

The Elliott wave count suggests that there is little upside left. Elliott targets are notoriously off the mark, so I limit my analysis to the relative position of the price within the Elliott wave patterns.

I tend to doubt my conclusions when the chart fails to support my gut opinion of the trade. However, I've been working with Elliott waves for three decades and trust them within their limits. If I fail to listen to the chart this time, then I have no business using Elliott in any of my work.

Bottom line: The chart is whispering, "No trade", and as a long-time chart whisperer, that's what I say, too.


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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