In terms of Elliott, wave 3 {-2} ended on March 19 and 4 {-2} is well underway.
HZNP gave an exit signal on April 4, closing bellow the 10-day price channel, and confirmed it on April 7 by closing below the signal level. I'm therefore removing HZNP from my Watchlist and no longer look at it as a potential trade.
Click on chart to enlarge.
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| HZNP 90 days hourly bars |
Update 3/19/2014: Horizon Pharma announced that it is buying an Irish pharmaceutical house, sending HZNP shares into a 22.6% opening gap. (Read the Bloomberg report by Caroline Chen here.)
I sold my position immediately, on the assumption that profit taking will bring the price down off of its peak of $18.30. Also, the purchase makes HZNP into a new company of sorts, and I'll be more comfortable once a fresh baseline has been established on the chart, beginning 20 trading days from now in mid-April.
The major outlines of the Elliott wave count remain unchanged from the chart posted Feb. 19 (see below). HZNP is in wave 5 {+1} of wave 5 {+2}.
The stock rose by 59.2% over the 28-day lifespan of my position, or 771.3% annualized.
I've added HZNP to my Watchlist.
Update 2/19/2014: HZNP moved conclusively above $10.68 on Monday, meeting the requirement of my original analysis, below, and I opened a bull position on Tuesday, structuring the position as long shares. By my count, HZNP is in wave 3 {-1} of wave 3 to the upside.
Click on chart to enlarge.
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| HZNP 20 days 15-minute bars |
Update 1/30/2014: HZNP's chart suggest that the price has completed wave 3 to the upside and moved into wave 4. It's not conclusive, but it's enough to give me pause before opening a bull position.
In the three-day chart below, note the whipsawing prior to the peak, a sure sign of a market that struggling to attain that new high.
Yet, the count is not conclusive. HZNP has stalled just below $10 in the half hour before the closing bell and remains above the base of the whipsaws. So the whole structure might well be a sideways correction at a degree below wave 3, with the conclusion of wave 3 still lying ahead.
I'm playing it this way:
- A conclusive rise above $10.68, the peak that I've labelled as wave 3, will lead me to conclude that wave 3 to the upside is still underway and I can open a bull position. It will also mean that my wave 3 label is incorrect.
- A conclusive decline below $9.77, the whipsaw base, will tell me that the correction has indeed begun and HZNP has moved into wave 4 to the downside. This will confirm my placement of the wave 3 label.
If the correction is indeed underway, how far can it be expected to go? HZNP has paused at the 23.6% Fibonacci retracement level of the rise from the end of wave 2, also the start of wave 3, $7.63.
The more common retracement levels and their positions on the HZNP chart are:
- 38.2% at $9.52
- 50% at $9.16
- 61.8% at $8.80
Click on chart to enlarge.
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| HZNP 3 days 3-minute bars |
Horizon Pharma Inc. (HZNP) has been in a sharp rise for the past three days as it pushes ahead in the middle uptrend of a larger rise that began Dec. 13, 2013 from $6.43.
The price broke above its 20-day price channel on Wednesday, sending a bull signal, and continued to rise today, hitting a high so far in morning trade of $10.68.
The bullish chart puts HZNP at odds with the general trend of the market, which has been bearish since last week.
The Chart
As is often the case with stocks on the move, the Elliott waves in HZNP's chart are poorly differentiated by degree. Such is the momentum of the rise, the downward corrections all tend to be of about the same magnitude.
Any Elliott wave count on such a chart will be educated guess when it comes to the precise degree of each wave, while being quite accurate in assessing the relative postion of each wave.
HZNP went public on July 28, 2011 with an initial public offering price of $9 per share. As is often the case with IPOs, the price immediately headed south, hitting bottom at $1.97 on March 4, 2013.
It is from that point that the major uptrend began.
Click on chart to enlarge.
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| HZNP 2-1/2 year chart 2-day bars (left), 90-day chart 2-hour bars (right) |
An IPO creates a chart that jumps into the story in the middle, so I can't with any certainty characterize the nature of the {+3} degree, one higher than the larges waves I've counted.
None of that matters for any potential trade today.
HZNP's upside potential is suggested by the length of wave 1, which is $2.70.
Wave 3 began Jan. 27 from $7.63. Third waves can never be the shortest of the three waves that move in the direction of the main trend and are often the longest.
Assuming that the future wave 5 is longer than wave 1, then wave 3 must at a minimum travel $2.70, to $10.33. It accomplished that feat on Wednesday. There's no rule in Elliott that says the rise has to stop at that level, nor is there a rule forbidding it from doing so.
What can be said is that HZNP has used up its minimum upside potential.
Of course, the end of wave 3 isn't the end of the uptrend from March 2013. HZNP would move into a downside correction that would end above $7.63 and then, as wave 5, move to still a higher high, above the peak of wave 3.
It is a bullish chart with enough chance of more upside potential over the next month or so to hold my interest.
Odds and Yields
This is HZNP's sixth bull signal since the major uptrend began in March 2013. Three of the completed signals were successful, on average yielding 25.9% over 28 days. The two unsuccessful trades lost 6% over 16 days on average.
That is a 19.9% win/lose yield spread, which is excellent by any reasonable standard.
The Company
Horizon Pharma, headquartered in Deerfield, Illinois, develops medicines to treat arthritis, pain and inflammatory diseases. Its flagship products are Duexis, Rayos/Lodotra and Vmovo. Market capitalization is $680.2 million.
Like all pharmaceutical development houses, Horizon is subject to regulation by the Food and Drug Administration and the vagaries of research results. These can, on occasion, lead to quite violent price springs caused by news outside of the company's control and beyond the power of any trader to analyze.
Fewer than a handful of anlaysts follow Horizon and they are universally optimistic about the company's future prospects.
That's with an emphasis on "future". Horizon reports negative return on equity of -79% and debt amounting to 42% of equity. This isn't unusual for a company that is developing new products; the narrative is one of future promise rather than current returns.
Horizon has yet to earn a profit but its losses since the 1st quarter of 2012 have grown steadily lower. Earnings have surprised to the upside five times in the nine quarters the company has reported, with four downside surprises.
The earnings yield is negative 10.2% and the company pays no dividend. However, the stock is priced at a high premium to sales. It takes $12.17 in shares to control a dollar in sales.
Liquidity and Volatility
HZNP on average trades 2.1 million shares a day,sufficient to support a moderate selection of option strike prices spaced a dollar apart.
Open interest runs to three and four figures near the money. The front-month at-the-money bid/ask spread on calls is 23.1%, far wider than I'm willing to use in my trades. So any position I consider would be structured as long shares.
Implied volatility stands at 68% and has been rising from 47% since Jan. 17. It stands at the 21st percentile in the one-year range, which is on the low side. There were some major outliers early on in past 12 months. Looking at the six-month range, HZNP is at the 37th percentile, which I still consider to be low.
Implied volatility, based on options pricing, stands 32% below historical volatility, which is based on actual price behavior.
Options are pricing in confidence that 68.2% of trades will fall between $8.25 and $12.31 over the next month, for a potential gain or loss of 19.8%, and between $9.30 and $11.26 over the next week.
Contracts are trading actively today, with calls running at more than four times their five-day average volume, and puts at 70% of average volume.
Decision for My Account
It's a bullish chart and a shorter-term trade, so I don't worry about the current finances. I intend to open a bull position in HZNP if upside momentum continues in the half hour before the closing bell. If momentum falters, then I'll add HZNP to my Watchlist for later consideration.
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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