Sunday, December 1, 2013

HLS: Rehab in an uptrend

Update 12/20/2013: I've removed HLS from my Watchlist as a potential bull play, where it has been since Dec. 1. The price meandered sideways until Dec. 10, and then began a decline from $36.05.

It pierced the lower boundary of the 10-day price channel on Dec. 19, at $34.27. the chart confirms that the symbol has peaked for now.

HealthSouth Corp. (HLS) broke above its 20-day price channel on Wednesday and confirmed the bull signal on the post-holiday Friday by trading still higher.

Elliott wave analysis shows that HLS is near the end of its rise from the $13.65 low of  Oct. 4, 2011. The final wave of the rise, wave 5, began from $27.51 on June 24.

Within wave 5, wave 3 {-1}, a degree lower than wave 5, peaked Oct. 21 at $36.85, having covered 34%. The actual high point of the rise was $37.01 eight days later, but I count it as the top of the middle wave in the ensuing wave 4 {-1} correction, which ended at $33.26 on Nov. 7.

Click here for an explanation of the curly brackets next to the wave numbers.

At present wave 5 is in the final rise, wave 5 {-1} one degree lower, and wave 5 {-1} is in turn in its middle rise, wave 3 {-2}, the second degree of magnitude below wave 5.

Click on chart to expand
HLS 3 years 2-day bars (left), 30 days 1-hour bars (right)
So there is room to profit to the bull side. Under Elliott wave rules, wave 5 {-1} must exceed the wave 3 {-1} endpoint, $36.85. That is 3% above Friday's close. And there's no rule saying that it can't go higher.

However, there is a barrier that limits the rise. Elliott wave rules say that the third wave cannot be shorter than both the first and the fifth waves. Wave 3 {-1} is shorter than wave 1 {-1}, and so wave 5 {-1} must in turn be shorter than wave 3 {-1}.

That means the price mustn't exceed $38.83, which is 8.5% above Friday's close.  If it does, then my count was wrong.

This is the third bull signal since wave 5 began on June 24. Both were successful, yielding 3.9% over 27 days, on average.

Big picture, the entire rise from October 2011 is a third wave up from $6.71 in March 2009, or possibly a C wave within a correction of some earlier rise of yet a greater degree. HLS went public, for a second time, on Oct. 26, 2006, opening at $24.25. With initial public offerings, the chart opens in mid-story. The IPO isn't the beginning of a trend but merely an unveiling of processes that were going on out of view.

The company was a major player, operating throughout the United States and in four other countries, at its high point in 2003. An accounting scandal led to it being delisted for awhile from the New York Stock Exchange.

The wave 5 peak, under Elliott wave doctrine, will be followed by a three-wave correction to the downside, wave 4 {+1}, followed by a final push to higher levels.

HealthSouth, headquartered in Birmingham, Alabama, owns and operates 101 inpatient rehabilitation hospitals and more than 50 outpatient rehab clinics and home health agencies in 28 states and Puerto Rico. These are the people who put folks back together for practical living after the doctors and nurses have done their work.

Analysts are generally positive about HealthSouth's prospects, collectively coming down with a 30% enthusiasm index.

And no wonder! The company reports return on equity of 53% (not a typo). On the other hand, debt is running at triple equity, which is quite high.

Earnings lack a strong trend. They hit a low in the middle quarters of 2011, bouncing back at the end of the year. That last three quarters have all been higher than their year-ago counterparts. Earnings in the last eight quarters have all surprised to the upside.

The earnings yield is 8.5%, which is higher than 76% of other companies in the healthcare facilities industry.

Institutions own 96% of shares, which are selling at a premium to sales. It takes $1.41 in shares to control a dollar in sales.

HLS on average trades 340,000 shares a day, sufficient to support a moderate selection of option strike prices spaced $5 apart, with open interest running to three figures where I would construct a bull position. The front-month at-the-money bid/ask spread on calls is 14.4%, which is higher than I like.

Implied volatility stands at 22%, the peak of the one-month range. It has been trending sideways since Nov. 14, when it stood at 21%.

HealthSouth next publishes earnings on Feb. 17. The stock goes ex-dividend on Dec. 30 for a quarterly payout yielding 2.01% annualized at today's prices.

Decision for my account: I intend to open a bull position in HLS on Monday if it shows upside momentum in the half hour before the closing bell, based mainly on the Elliott wave chart. 

Implied volatility is high, at the 100th perentile (the month's peak). My preference for an options position would be bull put spreads, sold for credit and expiring in January.

However, the bid/ask spread on options is quite high, and I shall structured my position as long shares. That also gives me a shot at the dividend on Dec. 30.

If momentum falters, then I'll add HLS to my Watchlist for later consideeration.


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. 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

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

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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