TWTR: A chart talk

The U.S. markets are closed on Thursday for Thanksgiving Day. Barring war, riot or natural disaster, trading volume will be down today and down even further on Friday.

The rest of the week isn't a good time to trade, with so many market participants home for the holiday.

So, today is for fun.

Twitter Inc. (TWTR) is in its 15th trading day since going public on Nov. 7. Initial public offerings, in their earliest months of trading, are curious beasts.

Most, in my experience, tend to slide. After all, buying interest is concentrated on the opening day and trails off thereafter.

TWTR doesn't disappoint in that negative view. It opened at $45.10 on Nov. 7 and opened today at $40.47, down 10.3%.

TWTR 15 days daily candlesticks (left), 15 days 15-minute bars (right)

Moreover, IPOs typically have a lock up period, where employees and company officers and owners are forbidden from selling their shares. When those shares eventually hit the market, the event increases supply, which typically depresses prices. There is, even now, a natural anticipation on the part of traders of downward pressure to come.

USA Today's Mark Krantz reports that some Twitter employees will be allowed to sell shares on Feb. 15 to cover taxes. That will bring 9.9 million shares onto the market. But big shareholderss -- executives, directors, owners -- will be required to wait until May 6 before cashing in a portion of their new-found wealth.

Given that fact, I never trade a new stock until the lockup period is over, and generally prefer to wait until six months after the lock up ends in order to see how the price behaves in a free market. I don't expect to be trading Twitter prior to November 2014.

In five more trading days TWTR will establish its 20-day price channel, which I use as an initial indicator to tell me what stocks are on the move and warrant further analysis. TWTR's channel boundaries are presently at $50.09 and $38.80. If the price stays within those bounds over the next five trading days, then those will be the 20-day breakout levels that will produce a bull or bear signal if traversed.

The Elliott wave count is like walking into a movie an hour after it has started. By my count, TWTR has opened in a downtrend correction.

At the highest magnitude, it can be analyzed as either a three-wave downward correction -- A-B-C -- within an uptrend, or as the first three waves of a five-wave downtrend.

I counted it as I did because wave B comes in three distinct sub-waves of lower magnitude. If the alternate count, wave 2, were correct, then it would divide into a five-wave pattern, three waves up separated by two downside corrections.

If my preferred count is correct, then it is too soon to interpret what is happening with the rise off of the $38.80 low of Nov. 25. If the alternate count is correct, then the present rise is a wave 4 correction to the upside within a downtrend of higher magnitude.

I often remark on the fractal nature of the market's price movements. TWTR will eventually resolve its path into a trend of far higher magnitude than what we can see today. But given my experience over the decades with Elliott wave counting, I would expect the higher magnitude movements to mirror the patterns of the micro-trends on this chart.

Of the 16 symbols that survived my initial screening overnight, none on a second look made the grade for analysis. (See "Wednesday's Prospects").

Three failed confirmation: YNDX, RGLD and COLM

Two were too illiquid for my taste: PEUGY and ZONMY.

One had sent a bull signal but was rated bearish by Zacks: AXE.

The rest had charts that, without doing detailed analysis, either were trending contrary to the price-channel breakout signal or appeared to be nearing the end of their trend.

So I turned to Twitter, the San Francisco, California company that, along with Facebook, has come to dominate the global social media market since it was founded in 2006.

Its statistics are phenomenal:

• Active users per month: More than 230 million
• Tweets per day: 500 million
• Accounts outside the U.S.: 77%

Analysts, unimpressed by the big numbers, in aggregate come down with a negative 60% enthusiasm rating about Twitter's prospects. One concern, common to all information services in the Age of Tiny Screens, is where do you put the ads so you can monetize the business.

Twitter is so new as a public company that the financials are yet available.

TWTR on average trades 9.3 million shares a day and supports a wide selection of option strike prices, with open interest near the money running mainly to four figures. The front-month at-the-money bid/ask spread on puts (since the price is in a downtrend) is 2.1% and a bit higher on calls.

Implied volatity stands at its low point, 46%, having fallen from its initial 55% level.

Options are pricing in confidence that 68.2% of trades will fall between $35.66 and $46.46 over the next month, for a potential gain or loss of 13.2%, and between $38.47 and $43.65 over the next week.

Contracts are skewing toward the put side, which are running at 38% above their five-day average volume. Calls are at 92% of average.

Decision for my account: As noted above, my rules discourage trading a stock until six-months after the end of its IPO lockup. I may find profit in TWTR down the road, but not yet.


References

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.

Disclaimer

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.