I said in my analysis of HTS on Monday, "I'm generally a bit bearish on the markets, just as a gut feeling, and am not too interested in bull signals at this point." That dictum holds true today.
Every bull signal that I've analyzed of late has been in the final stages of its uptrend according to Elliott wave analysis. The broad uptrend in the markets has been underway since October 2011. How much more up can remain before the markets bounce off the ceiling?
The MU chart is a perfect case in point.
A trend in Elliott wave analysis is five waves, three in the direction of the trend with two counter-trend corrections interspersed. The man for whom the analysis is named, R.N. Elliott, formalized the conclusion that every thoughtful trader already knew: The markets not composed of a singled trend, but of trends within trends. In modern parlance, they are fractal by nature.
MU's present very large scale uptrend began in November 2008 from $1.59, the nadir of the recession. By my count it is the third uptrending subwave of that large move, with a downward correction and then a final upward push to come.
It is important to note the scale of the larger trend. It's first wave up lasted more than a year. The current third wave -- wave III -- has been underway for two years. These movements are so large that there is much gain to be had by playing the subwaves.
|MU 8 years+ weekly bars (left), 2 years daily bars (middle), 20 days 30-minute bars (right)|
At the smallest level of my count, on the right-hand chart, MU is in wave  of wave [v] of wave 5 of wave III since 2009. The small level is counting movements that take a week or so for each wave to run its course.
Wave  has been in effect for six days and I expect to end very soon, to be followed by a downward wave  correction and then a final upward push to complete wave v of 5 of III.
I expect that completion to be followed by a downward correction to as low as $12.35, to be followed by a final upward push to heights above the $18.85 peak set on Oct. 7.
Given that sort of count -- and it is quite common on the bull-signal I've looked at over the past few months -- it is no wonder that my instincts are telling me to avoid over-committing to bull positions.
It is in the nature of Elliott wave counting, like all fractal exercises, that it is rarely possible to define a precise level for each turning point. There is a built-in ambiguity whose existence has been a key element of critiques of Elliott wave theory.
The wave 4 correction in the middle chart only lasted a month, which seems a bit on the short side. It is nowhere near the magnitude of the preceding wave 2 correction. If my placement of the end of wave 4 is incorrect, then MU would be completing wave 3 and have far more upside potential and less downside potential that my preferred count shows.
Also, what I have labelled as wave iii can be counted as wave v, which would suggest that the correction is already underway. Failure of MU to top the $18.85 level would be a good indicator that wave v is completed and the correction has begun.
Note also that the pre-recession high was $18.65 set on Sept. 12, 2006. How many shares bought at that peak are still in accounts waiting for people to finally cash out, putting the years of paper loss behind them.
There is money to be made in MU's downside correction and in the subsequent reversal to the upside. whether that comes in in the form of an uptrend or an upward correction. My conclusion is that at this point, there's not a lot of upside left. A strong break above $18.85 would cause me to revisit that conclusion.
Now that I've thoroughly rained on MU's parade, let's turn to the company's real-world business.
Micron Technology, headquartered in Boise, Idaho, makes semiconductor devices, mainly flash memory of various sorts. Much of computing, at the level most of us experience it, is well on the way to entering the era of no moving parts for storage, so Micron has a compelling story.
Analysts collectively come down to a 9% positive enthusiasm rating, but they're more widely scattered across the spectrum of opinion than I usually see. It wouldn't take many opinion changes to move the rating to the negative side.
And speaking of negative, return on equity is a negative 3% with debt running at 44% of equity. These are numbers that work well for a bearish trade. Bullish? Not so much.
Micron went through 10 quarters of savage losses from the 4th quarter of 2011 to the 2nd of 2013. The last two quarters have shown profits, the most recent higher than the one before.
Out of the last 12 quarters, only two have surprised to the upside. Ten have shown downside surprises.
Institutions own 88% of shares, which are selling at premium; it takes $2.12 in shares to control a dollar in sales.
MU was one of 10 symbols that survived my initial screening overnight. (See "Tuesday's Prospects".)
Three failed confirmation: FB, MS and INXN. One, TSM, had a bear signal but a bullish Zacks rating, and another, ARNA, has a bull signal with a clearly bearish chart.
The five remaining all had bull signals: MU, AMTD, SFUN, YPF and IPGP. There was no prima facie reason to reject any of them. I went with MU for my analysis because it is the most liquid.
MU on average trades 36 million shares a day and supports a moderate selection of option strike prices spaced a dollar apart with four-figure open interest. The front-month at-the-money bid/ask spread on calls is 0.8%.
Implied volatility stands at 36%, at the low point of the six-month range. It has been falling continually from its Oct. 9 peak of 67%.
Options are pricing in confidence that 68.2% of trades will fall between $16.58 and $20.44 over the next month, for a potential gain or loss of 10.4%, and between $17.59 and $19.43 over the next week.
Contracts are trading heavily today, with calls at more than 2-1/2 times their five-day average volume and puts at slightly above twice the average.
Micron Technology next publishes earnings on Dec. 20.
Decision for my account: Even if MU were to break above its October high of $18.85, I wouldn't enter a bull position. I don't go bullish on a stock when equity is producing negative returns.
I won't be opening a bull position on MU, nor will I be adding it to my Watchlist.
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.