Monday, January 13, 2014

BDE: Bullish on mountains

1/30/2014: BDE has continued its decline and I am removing it from the Roll shelf. In the eight days I held my position, BDE lost 3.1%, or -142.31% annualized.

1/22/2014: By my count, BDE has completed wave 2 to the upside and begun a wave 3 decline that will carry it from the Jan. 3 wave 2 peak of $14.55 to below the end of declining wave 1 of the same degree, on Nov. 6, 2011 at $12.15, a minimum of 13.2% below today's price at the opening bell.

A move above $14.55 will mean that the wave 2 peak has not yet occurred and my count is incorrect.

Click on chart to enlarge.
BDE 90 days 2-hour bars
I shall put BDE on my Roll Shelf with the possibility of re-entering if my count is proven wrong. As always with rolls, I won't calculate profit or loss until the possibility of further rolls forward no longer exists.

Update 1/14/2014: BDE reversed course, completing wave 4 at $13.86, and moved higher, to $14.38 at one point. I've opened a bull position, structuring it as long shares. Wave 4 began from $14.55, and so a move above that level will confirm that wave 4 is under way. A reversal and move below $13.86, will mean that I've gotten the degree wrong and will invalidate my count.

Black Diamond Inc. (BDE) is in the midst of an uptrending leg within a very large downtrend that began from $144 on March 9, 2000.

The stock broke above its 20-day price channel on Friday and confirmed the bull signal by continuing to trade beyond the channel today, albeit with a decline intra-day as of this writing, three hours after the opening bell.

At this magnitude, uptrends within large downtrends are opportunities for bullish profit. The present upward retracement within the larger downtrend began from $3.75 on Dec. 30, 2008, and the final upward movement within that downtrend began on Dec. 4, 2013 from $12.19.

There is evidence on the chart that the remaining lifespace of BDE's present rise may well be measured in weeks rather than months.

The Chart

The Elliott wave count places BDE within wave 2 {+4} to the upside, a retracement within the downtrending wave 1 {+5} that began in 2000.

Second waves are typically zig-zags that break down into three waves of lower degree. BDE is in wave C {+3} to the upside, the final leg of the correction. The C wave began in 2008.

Click on chart to enlarge.
BDE 64 months 3-day bars (left), 30 days hourly bars (right)
C waves divide into five waves of lower degree, and this is where I can begin to assess what point BDE has reached in its journey in terms of practical trading.

Wave 5 {+2} began on Dec. 4, 2013 from $12.19, and it is in its first wave to the upside, wave 1 {+1}, which also began on Dec. 4.

Internal to wave 1 {1}, wave 3 out of five ended at $14.55 on Jan. 13 and moved into the present downward retracement, wave 4, which will breakdown into three waves one degree lower, or sometimes into a series of triple waves.

Once wave 4 is complete, the ensuing wave 5 will carry BDE above $14.55, although how far above that level is beyond the scope of Elliott wave theory.

Elliott rules give this guidance regarding the scope of wave 4: It cannot move below $12.19, the start of wave 1.

That gives wave 4 a maximum downside potential of 13.4% from Friday's close. There is no rule that requires the fourth wave to go that far. In fact, fourths tend to be shallower than second waves, so a 4% to 8% retracement is a reasonable back-of-the-envelope guess.

A 50% retracement would set BDE up for a minimum 6.1% rise in wave 5, and perhaps much more.

At the base level, wave 1 lasted a week, wave 2 lasted 10 days, wave 3 took 24 days and the present wave 4 began today.

So if wave 4 is proportionate to other waves of the same degree, it will take a week or two to complete its work. However, there is no rule that requires time relations to be proportionate, neither for wave 4 nor the futures wave 5 to the upside.

With this chart, any upside play will require nimble decision making by the trader.

This is the second bull signal since wave 3 {+2} began. The first 20.5% over 65 days, a real powerhouse of the species.

The odds and yields calculation tells me that bull signals in BDE have been reliable and profitable, as far as they. But one signals isn't very far in this field of analysis. It means that BDE had one decent breakout, and spent the rest of its time dithering in a manner that typically isn't wildly profitable.

In other words, it's quirky.

The Company

And BDE's quirkiness comes as no surprise. Black Diamond is a small-cap stock, a Holladay, Utah manufacturer of equipment for climbing, skiiing and mountain sports. In addition to its Utah headquarters, Black Diamond has offices in Switzerland and China.

Small-cap stocks often exhibit chart behaviors that differ from their larger cousins, probably due to lower liquidity providing a small, less predictable sample of trading decisions.

Analysts who follow Black Diamond tend to be optimistic about its prospects, collectively coming down at a 25% enthusiasm rating.

The company's financials are less than impressive, with a 0.5% return on equity and debt amounting 16% of equity.

Earnings over the last three years have been all over the map, with four of the last 12 quarters showing losses, including the three most recent quarters. Black Diamond has surprised to the downside seven times in three years, and to the upside three times.

Black Diamond showed an earnings loss in the most recent quarter of negative 1.4%. Despite the losses, the stock is selling at a premium to sales. It takes $2.38 in shares to control a dollar in sales.

Black Diamond next publishes earnings on March 10. It pays no dividend.

Liquidity and Volatility

BDE on average trades 122,000 shares a day and supports a moderate selection of option strike prices spaced $2.50 apart. The front-month at-the-money bid/ask spread on calls is quite wide at 30%.

Open interest runs to two figures at the money and singles or zeroes elsewhere. The options are insufficiently liquid to meet my trading preferences. Any bull position I open in BDE will be structured as long shares.

Implied volatility is at 41% and has been declining from 52% on Jan. 9, after rising from 32% on Dec. 13. Volatility stands in the 32nd percentile of the three-month range, meaning that it is relatively low.

However, volatility isn't low in absolute terms. The S&P 500, by comparison, has volatility of 12%.

Options are pricing in confidence that 68.2% of BDE trades will fall between $12.35 and $15.69 over the next month, for a potential gain or loss of 11.9%, and between $13.22 and $14.82 over the next week.

Options are trading actively to the bull side, with calls running at more than double their five-day average volume. Puts are running at a quarter of their average volume.

Decision for My Account

BDE is the kind of symbol that tells tells traders what sort of traders they truly are.

The chart is in a downtrend from today. A trader who ignores Elliott theory will pass on the trade.

The financials are unimpressive and the earnings record is awful. The fundamental trader will pass.

The price is at a large multiple of sales for a company with such a string of losses. The superficial value trader will sniff "Overpriced!" and walk away.

And the trader who is averse to risk would never have looked at BDE in the first place. Small cap. Big risk.

But, I'm an Elliotician who sees prices as a fractal construct, with downtrends containing both the actuality of lower-degree uptrends and the promise of future uptrends, and downtrends as well.

I'm also an unabashed speculator who believes that risk is the mother of profit and hopes never to let Mom down by running away from risky trade, as long as I judge that the risk can be managed.

I don't want to open a bull position while wave 4 to the downside is under way. I'm adding BDE to my Watchlist and will keep an eye on it, hoping for an opportunity to take the bull play once wave 4 to the downside is complete.


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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