Wednesday, December 4, 2013

PCYC: Bull play in a correction

Update 12/10/2013: PCYC went on the Watchlist on Dec. 4 when it failed to show upside momentum during my trading window, the half hour before the closing bell.

On Dec. 9 the price dropped sharply, piercing the lower boundary of its 10-day price channel, and confirmed the signal by trading below the channel on Dec. 10.

I've removed the symbol from mye Watchlist and won't consider it for a trade until there is a fresh break beyond the 20-day price channel.

Pharmacyclics Inc. (PCYC) was Zacks bull pick of the day at the end of October (read their write-up it here).

And in that lies a cautionary tale about the vice of prediction, because even as Zacks was singing PCYC's virtues based on financial forecasts, the chart was displaying the beginnings of a correction of the past six months' gains.

PCYC broke above its 20-day price channel on Tuesday and confirmed the bull signal by trading above the channel today. However, the price has lost momentum as the day as progressed and I analyzed the chart, and it may well turn out that PCYC will close back within the price channel, making a trade impossible today.

Elliott wave analysis defines PCYC's Oct. 24 peak at $143.34 as the end of the third wave in a much broader uptrend that began from 55 cents on March 24, 2008. I count it as the end of wave 3 of 5 {+1} within wave 1 {+2}.

My immediate concern is what happens next.

Click on the chart to enlarge.
PCYC, 1 year daily bars (left), 90 days 1-hour bars (right)

PCYC has entered a fourth wave correction of the wave 3 rise, which began May 10 from $74.60. The price is now in wave A {-1} to the downside.

A waves subdivide into five-wave declines. I put PCYC in a wave 2 {-2} upswing that will culminate below $143.34 and will be followed by a wave 3 {-2} decline. Third waves are typically the strongest waves of the trend.

On the chart I've labelled the price movements since early October as being two and three degrees below my base degree, but they could be further removed. It is often impossible to say for certain in the early stages of a trend what degree of wave is being counted. The proper degree unfolds with the passage of time.

At the smallest level in my count, I see wave C {-3} in its final push to the upside. Typically, C waves will push beyond the start of the A wave of the same degree. That suggests that the present rise has at least 3.5% up headroom before it ends, and perhaps much more.

PCYC has created a poor record of success in its rise from the start of wave 3 in May. This is the fourth bull signal in that period. The three completed signals saw one winner, with a 6.6% yield over 26 days, and two losers, on average declining 3.1% over 31 days.

The resulting win/lose yield spread is positive, at 3.5% -- not a horrible record but not particularly strong. Moreover, this is the first breakout to the upside since the correction began in early October. All in all, "May the odds be ever in your favor" would seem a cruel Panem-style jest when applied to PCYC's recent chart.

Pharmacyclics, based in Sunnyvale, California, develops drugs for treating cancer and immune-system diseases. Drug development plays have always giving me the sense of being in Las Vegas. More than most sectors, pharmaceuticals are prey to regulatory forces that are beyond the ken of the markets.

Analysts in aggregate have a positive assessment of Pharmacyclic's prospects, coming down with a 42% enthusiasm rating.

Financially, the company isn't a standout. Return on equity is 11%, a figure enhanced by the lack of long-term debt.

The last two years have seen three losing quarters, the most recent and deepest being the 1st quarter of this year. The company returned to rising profitability in the two most recent quarters. However, the most recent report saw earnings of a bit more than half of those reported a year prior.

The earnings yield is a miniscule 0.42%, lower than 98% of other companies in the biotechnology and drugs industry. The stock is priced at a premium of 244 times earnings.

Institutions own 64% of shares, and the premium over net earnings is matched by one on company's gross. It takes $50.09 in shares to control a dollar in sales.

Long story short: This is an expensive stock.

PCYC on average trades 1 million shares a day and supports an extremely wide selection of option strike prices spaced $5 apart, with open interest running to mainly three figures at the strikes where I would construct a position.

The front-month at-the-money bid/ask spread on calls is 9.4%.

Implied volatility stands at 54% and has been rising steadily from its month low, 44% on Nov. 21. Volatility stands in the month's Quintile III. That neutral level implies that the best position structure would be long shares.

Contracts are skewed heavily toward puts, which are trading nearly 50% above their five-day average volume. Calls are running at 40% of average volume.

PCYC next publishes earnings on Feb. 12. It pays no dividend.

Decision for my account: I intend to open a bull position in PCYC, structuring it as long shares, if the price shows upward momentum in the last half hour before the closing bell.

The substantial headroom on the chart was the deciding factor in my decision.

If PCYC's momentum falters, I'll add the symbol to my Watchlist for future consideration.


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 practitioner 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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