From a broader standpoint, BPOP has begun a decline from $34.27 on Aug. 20, 2013, that is correcting the rise from $13.38 on July 23, 2012.
Whether the viewpoint is near term or far term, BPOP's chart is bearish. The question for the near term is how much downside potential there really is. My chart analysis suggests that there's very little.
BPOP's most recent bear signal occurred on Thursday, when the price broke below its 20-day price channel, and the signal was confirmed today as the price continued to trade outside the channel boundary.
The Chart
BPOP is within a downward correction of an upward correction during a massive declining B wave that began from $42.25 on Aug. 30, 2010. That wave sits within a second wave to the upside, wave 2 {+5}, that began July 22, 2009, the Great Recession low.
My positions generally measure their lives in months, so what I care about as a trader is that wave 4 decline from early December.
Click on chart to enlarge.
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| BPOP 5 years 3-day bars (left), 90 days 1-hour bars (right) |
Corrections rarely take back all of the rise that they're correcting. Common stopping points, called Fibonaccci retracement levels, are $38.2%, 50% and 61.8%.
BPOP is already at the 61.8% level, $62.63, and is in the second day of a pause at that point.
The next Fibonacci retracement level is 78.6%, or $25.89. If that is the endpoint, then BPOP's downside potential from today's opening price is down 2.9%.
Fibonacci retracement reversals are often observed but never guaranteed.
The certainty is that a decline below $24.95, the beginning of wave 3 to the upside, would mean that my count is wrong and needs to be redone.
Once wave 4 ends, then wave 5 to the upside can be expected to carry BPOP above $29.34, the peak of the prior wave 3. That is a rise of 10.1%.
As I read the chart, the ratio between the upside potential and somewhat optimistic downside potential is a around 3-1/2 to one, meaning that my chances of losing in a bear play are more than triple my chances of winning.
Odds and Yields
This is BPOP's first bear signal since October 2013, when the present upside correction began, so there is no history in that timespan.
Looking at the longer term, the present wave B {+4} decline has produced 12 prior bear signals. Five were successful, yielding 16% over 53 days on average. The seven unsuccessful trades lost 6.1% over 13 days on average.
The Company
Popular is the largest bank in Puerto Rico and largest Hispanic bank in the United States. It operates under the name Banco Popular through branches in Puerto Rico, New York, California, Illinois, New Jersey and Florida.
Analysts collectively come down to a Goldilocks opinion about Popular's prospects: Neither bullish nor bearish.
The company reports return on equity of 6% with no long-term debt.
It has reported a loss only once in the last 12 quarters; that was in the 1st quarter of 2013. Four the last 12 earnings reports have surprised to the downside and eight to the upside.
The earnings yield is 21.72%, higher than 95% of other regional banks. Stock is selling at 4.6 times earnings and also at a slight premium to sales. It takes $1.22 in shares to control a dollar in sales.
Institutions own 78% of shares.
The company pays no dividend. It next publishes earnings on April 14.
Liquidity and Volatility
BPOP on average trades 1.3 million shares a day and supports a moderate selection of option strike prices spaced a dollar apart, with near-the-money open interest in the front month running to triple digits.
The front-month at-the-money bid/ask spread on puts is at bit wide, at 7.6%.
Implied volatility stands at 40% and has been zig-zagging higher since early November. Volatility stands at the 65th percent in the annual range, suggesting that short options spreads sold for credit, such as bear call spreads, would be the best vehicle for a bear trade.
Options are pricing in confidence that 68.2% of trades will fall between $23.51 and $29.65 over the next month for a potential gain or loss of 11.6%, and between $25.10 and $28.06 over the next week.
Contracts are trading actively today, with puts running at more than seven times their five-day average volume and calls at 2-1/2 times average.
Decision for My Account
I don't see that much downside potential on the chart compared to the upside risk of a bear position. Time and time again, I've seen the 68.2% Fibonacci retracement level be the end of the road for corrections. Not always, but often enough for it to set off my Spidey sense.
Entirely because of the chart analysis, I won't be trading BPOP based on this bear signal.
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. 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.
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.
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