However, it comes within an upward correction that is far advanced since it began in 2009. The challenge in the chart analysis will be to understand how much more upside remains.
The lack of volatility and the resulting low capital yields also give me pause.
The Chart
The Elliott wave count puts NGG within wave B {+4}, an upside correction that began March 30, 2009 from $36.64. The price rise is correctoin the decline that began Dec. 12, 2007 from $87.
"Correction" is often a scare word in market discourse, implying that the trend is ephemeral and a danger to profit. A correction this magnitude contains uptrends of long duration from which even relatively long-term traders can profit.
Click on chart to enlarge.
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| NGG 7 years 4 months 3-day bars (left), 180 days 4-hour bars (right) |
A C wave breaks down into five subwaves, and C {+3} is in the final wave of its rise, wave 5 {+2}, which began June 24, 2013.
NGG is in the middle wave, 3 {+1} of the fifth wave of higher degree, and within the third wave it is in wave 3 {-1} of wave 5.
By the chart, NGG has room to continue its upward journey. However, Fibonacci retracement analysis shows that it has taken back nearly 61.8% of the decline from 2007. The 61.8% retracement level tends to be a major reversal point, as does the 50% level, which produced a stall of several months in NGG's rise.
The 61.8% Fibonacci resistance level is $67.76, which is 2.3% above today's price at the opening bell, $66.23. The next resistance above that is the 78.6% retracement at $76.22, or 15.1% above today's open.
There's no rule in Elliott that forbids a complete retracement. Elliott wave analysis only requires that NGG not exceed the $87 start of the decline.
Best case, NGG has 31% of upside potential. Worst case, there's no reason it couldn't complete its upward rise in the next five minutes. That's the best that Elliott can offer.
I find Elliott waves to be excellent at providing a "You Are Here" label for the chart, a pointer that let's me know where the symbol is in its journal. They are less useful in locating the destination.
Wave 5, at the base degree, began Dec. 5, 2013 from $60.67, and it is the key to understanding NGG's chart. Once wave 5 is complete, then the wave 4 {+1} correction, one degree higher, will began, taking back a portion of the rise that began on Aug. 30, 2013 from $57.12.
As a relatively shorter-term trader, that is not a decline that I would want to ride.
At at a lower degree, however, NGG is in wave 3 {-1} of wave 5. When that third wave is complete, it will correct the rise from $63.19 that began Jan. 13. When that correction is complete, NGG will move to a new high above the wave 3 {-1} peak, which is presently $66.40, the high set on Wednesday.
The wave 4 {-1} correction will serve as the canary in the coal mine, the warning that the final act of NGG's rise has began.
The Odds
This is NGG's fourth bull signal since wave 5 {+2} began on June 24, 2013. Of the three completed signals, two made money, yielding on average half a percent over 34 days, compared to a 2 % loss over 19 days for the unsuccessful signal.
The two successful signals came within wave 3 {+1}, one degree lower, which began Aug. 30, 2013.
Longer term, NGG has completed 18 bull signals in wave C {+3}, beginning July 10, 2010, with the results splitting evenly between winners and losers.
The yields and losses are also close to even. The successful trades produced a 3% profit over 37 days on average. The unsuccessful trades lost 2.9% over 19 days, on average.
The nearer term odds are in my favor and therefor are acceptable. The winning yields are abysmally low.
The odds are a measure of symbols reliability. They'll be low if a symbol is prone to whipsaws and higher if it is not. NGG in the rise from mid-2013 has tended to avoid whipsaws.
The net yields are a measure of how much juice a symbol has once a signal has occurred. The low yields on NGG suggest that it has been struggling in its rise, something that I would expect within a counter-trend correction.
The Company
National Grid trades primarily on the London Stock Exchange under the symbol NG. The symbol I'm analyzing, NGG, is an American Depository Receipt traded on the NYSE.
The electricity distribution utility owns the electrical transmission system in England and Wales and also two networks in Scotland, with links to France, the Netherlands and Northern Ireland. It also owns and operates transmission networks in the northeastern United States, as well as distributing natural gas in the UK.
U.S. analyst coverage is too sparse to assess their enthusiasm level.
National Grid reports return on equity of 24% with a fairly high debt amounting to 236% of equity.
Earnings, reported semiannually, have been trending upward for the last two years within a larger mainly sideways trend.
The earnings yield is 8.38%, higher than 80% of other electric utility companies. The semi-annual dividend yields 3.54% annualized at today's prices and amounts to 58% of the earnings yield.
The stock is selling for 12 times earnings, lower than the S&P 500 premium of 19 time earnings. Shares are selling at a premium to sales. It takes $1.97 in shares to control a dollar in sales.
Institutions own 4% of the ADR shares.
National Grid goes ex-dividend in June for a semi-annual payout expected to be about $1.17. Earnings are published twice a year, with the next due out around May.
Liquidity and Volatility
NGG on average trades 419,000 shares a day and supports a moderate selection of option strike prices spaced $5 apart with open interest on only two strikes, triple digits on the call and double on the put.
Liquidity is too low for me to trade the options, so any bull position I open on NGG will be as long shares.
The front-month at-the-money bid/ask spread on calls is 10.7%, a bit on the wide side.
Implied volatility stands at 12% and has been declining since hitting an annual peak of 31% in late May. It is low in the annual range, at the 30th percentile, and is running 8% below historical volatility.
With volatility on the low side, I remain comfortable withh long shares as a vehicle for any position I might open.
Options are pricing in confidence that 68.2% of trades will fall between $63.63 and $68.25 over the next month, for a potential gain or loss of 3.5%, and between $64.83 and $67.05 over the next week.
Contracts are trading heavily on the put side, at 3-1/2 times the five-day average volume. Calls are lagging at only 4% of average.
Decision for My Account
My decision tree starts with the chart and then branches out to the odds. The company's fundamentals are mere twigs. The liquidity and volatility analysis have more to do with structuring a position but can also feed into the trading decision.
Long story short, I like the chart, with reservations about the upside potential, but I don't like the odds. They are in my favor for the near term, but the low returns barely make it worthwhile.
My trepidation is backed up by the implied volatility analysis. Options are pricing in a 3.5% potential gain, at best, over the next month. With the low liquidity shutting out options, there's no way to boost the return with leverage.
I'm passing on NGG. I won't open a bull position at this time.
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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