Shares rose by 10% over the 29-day lifespan of the position, or 125.6% annualized. The options produced a 23.7% yield on risk, or 297.8% annualized.
YHOO has a long-running resistance area at around $43.66, and this time it again turned away from near that level. The Elliott wave structure appears to be a long-running sideways pattern, known as a flat.
Click on chart to enlarge.
|YHOO 20 years monthly bars
Update 11/22/2013: YHOO on Thursday again broke above the 20-day price channel after a three-day decline and recovery, and near the close was above the channel today. That gives me sufficient confidence in YHOO's upside momentum to open a position, structured as a bull put spread, sold for credit and expiring on Dec. 20.
The position has 3:1 leverage with a maximum potential gain of 23.6%. The position has a 3.1% hedge of profitability at expiration.
Yahoo! Inc. (YHOO) is an anomaly in the world of big-cap charts.
Nearly all are bullish over the period of the past year, most have flipped over from peak into what appears to be the beginnings of a downward move of significant duration.
YHOO, however, counts clearly as being in a continuing uptrend that has not yet met its end. For the bullish trader, this chart is close to paradise.
|YHOO 3 years 2-day bars (left), 90 days 2-hour bars (right)
The stock's price broke above its 20-day price channel on Wednesday and confirmed the bull by signal by trading still higher today. In YHOO's case, such breakouts to the upside are not unusual occurrences. It has been in an uptrend from $14.59 on Aug. 31, 2012.
Using Elliott was analysis, I count that date and price level as the starting point of wave 3 to the upside, a movement that has carried YHOO to today's high (so far) of $35.49.
At a larger level of analysis, YHOO has been in wave III to the upside from since bouncing off a low of $11.09 on Aug. 8, 2011.
Elliott lore teaches that third waves almost always come turbo-charged, and the power of a third wave of a third wave can be seen in the wave 3 odds.
YHOO has completed six bull signals since the 2012 rise began. Four were successful, for an average yeild of 12.7% over 46 days. The two failures lost 3.3% over 17 days. The resulting 9.4% win/lose yield spread is quite attractive, to say the least.
When I drill in on the chart, however, the pictureg rows less bullish. YHOO peaked at $35.06 on Oct. 4 and then moved into a period of sideways movement marked by mainly lower highs but also flat lows.
That pattern is called a descending triangle, and chartists consider it to be the precursor of a downward move.
Having said that, it's a very sloppy triangle, as though drawn by a happy three-year-old. It broke above the upper boundary once early on in the structure's progress. The floor is rather bumpy, more like a gravel path than a hardwood floor.
And the dramatic break above the triangle's upper boundary on Wednesday is in the wrong direction. Descending triangle! Bear trend!
And what does a descending triangle signify?
It means that the bulls are losing their ability to sustain the price or drive it upward, while the bears, although hard pressed, are holding the line.
Wednesday's breakout was accompanied by higher volume, but not dramatically higher when compared to the spikes punctuating the preceding sideways movement over the past month or so.
Clearly, not so many traders, relatively speaking, are seeing the break above the triangle as significant. They aren't stepping up to play.
My caution alarm is starting to sound.
It gains volume as I look at the surrounding market. The S&P 500 achieved a new high on Wednesday, not with outstanding confidence but a high all the same.
More than two-thirds of the trading signals uncovered in my analysis of more than 2,000 large- and mid-cap stocks were bullish, a fairly significant skewing of results that in recent weeks have been tending more toward the bear side.
Given that environment, Wednesday's spike might well be big-cap YHOO just going along with the rest of the gang.
The volume reaches ear-shattering proportions when I look at YHOO's long-term history. The stock is trading at a level that puts it within the range of a sideways stuttering period that led up to the stock's all-time high of $43.66 in 2006. The fall off from that point led eventually to the post-recession cellar of $8.94 in 2008.
I'm betting that there is still some $40+ stock sitting in brokerage account that have been waiting for a chance to cash out for a profit, or at least a small, rather than catastrophic, loss. That bodes ill for much more upside potential.
YHOO was one of 18 symbols that survived my initial screening overnight. (see "Thursday's Prospects".)
Three, including the two bear signals, were ultra/counter-trend funds of the type I rarely trade.
The remainder were all bull signals, and a quick walk through their charts convinced me that YHOO, the most liquid, was the closest thing to a bull signal I could believe in. As subsequent analysis as shown, belief is a fairly fickle rock upon which to stand.
Yahoo! (the exclamation point is theirs, not mine) is a household name headquartered in Sunnyvale, California. It got its start as a human-built directory of web sites, back when the web was small enough for humans to do the job, and it branched out into a major portal provider of news and other content.
It fell from its dominant position when inhuman competition hit the market, mainly Google with its robot scanning and ranking of websites. However, it has come back from its low point and remains a major player in online advertising.
Analysts in aggregate treat Yahoo!'s prospects with a bit of a shrug. Their enthusiasm rating is a negative 12%, a level that means don't love it, don't hate it.
Yahoo! reports return on equity of 10% with a very low level of debt amounting to only 1% of equity. Those numbers compare well with competitor Google's, which has 16% return on equity and debt at 3% of equity.
Earnings have consistently beat their year-ago quarter within at least the past three years. Ten of the last 12 quarters have produced upside earnings surprises, and one surprised to the downside.
Institutions own 70% of shares, a bit low for such a large company. The share price has been bid up to speculative levels. It takes $7.48 in shares to control a dollar in sales.
Put it another way: The forward price/earnings ratio is near 29, which expresses a lot of faith in Yahoo!'s future growth.
YHOO on average trades 16.9 million shares a day and supports a wide selection of optoins strike prices spaced a dollar apart. The front-month at-the-money bid/ask spread on calls is narrow, at 1.7%.
Implied volatility stands at 28%, in the lower half of the six-month range. Volatility has been working its way downward since peaking at 47% on Oct. 8.
Options are pricing in confidence that 68.2% of trades will fall between $32.71 and $38.53 over the next month, for a potential gain or loss of 8.2%, and between $34.22 and $37.02 over the next year.
Contracts are skewing toward the call side in today's trading. Calls are running at 22% above their five-day average volume. Puts are at the average volume.
Yahoo! next publishes earnings on Jan. 27.
Decision for my account: I'm caught between my trading model and my caution.
I'm an unabashed and proud trend follower. I don't try to beat the crowd. I run with them, and if they prove to be lemmings, I try to turn aside before hitting the edge of the cliff. This is a wonderful chart for that model.
But the things that have sent my caution alarm off, detailed above in the chart discussion, are quite real. The upside breakout from what may be a descending triangle is the most troubling item of all. It is happening to early in the triangle's development. The apex is not yet in sight. And the breakout is in the wrong direction.
So I'm going to temporize. I want to see what YHOO does when the market isn't rising. And I just want to see what happens over the next few days before committing any funds.
So on the Watchlist YHOO goes, and I'll update this analysis when I make a decision one way or the other.
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.