Wednesday, February 26, 2014

DAL: The long ascent

Update 4/15/2014: DAL has  continued its descent after taking out the stop/loss on April 7, and on Monday it closed below its 20-day price channel, sending a signal to remove the symbol from the Roll Shelf. The signal was confirmed today.

I plan no further attempts to roll DAL forward into a new bull position.

During the time I held DAL the stock lost 2% over 41 days, or 1.3% annualized. The options spreads produced a 0.9% loss on risk, or -8% annualized.

Update 4/8/2014: DAL closed below its stop/loss level on April 7 and closed still lower the next day, signalling that the bull position must be closed.

The share price declined by 0.15% over the 41-day lifespan of the position, or -1.3% annualized. My bull call vertical options spread lost 2.7%, or 24.2% annualized.

This exit is a result of recent changes to my trading rules that tighten stop/loss levels across the board. The chart shows that the magnitude of the decline isn't all that great.

In terms of the Elliott wave analysis, there's nothing on the chart to indicate that wave 5 to the upside is complete at the $36.52 peak. And indeed, DAL remains above its initial breakout level of $32.31.

The price also remains within the 20-day price channel, and so DAL will go on on the Roll Shelf, from which a fresh confirmed break above the 20-day price channel will allow me to roll over into a new position.

Click on chart to enlarge.
DAL 3 years 3-day bars

Update 2/26.2014: I opened a bull position in DAL. It was up from the prior day's close and from the open, although down a bit from the day's high. I structured the trade as bull call spreads expiring in June, long the $32 strike and short the $35, with the long leg priced at a 54.8% chance of expiring in the money. The position provides 4:1 leverage.

Delta Air Lines Inc. (DAL) has been zig-zagging upward since Sept. 4, 2012, when it reversed from $8.42 following a major correction to the downside.

So a break above the 20-day price channel, such as Monday's above $32.31, is not exactly startling news for this stock. It has been trending upward for a very long time.

The immediate question posed by the chart is, "How high is up"? When has an uptrend expended its momentum?

The answer, in DAL's case at least, is not yet. The chart hasn't yet reached the end of its rise. However, when the reversal comes, perhaps within a few months, it will be a correction of major proportions.

The Chart

The Elliott wave count shows the rise from September 2012 to be a third wave of the variety that finds new life whenever it may seem to be reaching its end.

Some Elliotticians would label wave 3 {+2} as an extended third. I prefer to analyze such moves as repeated launchings of subwaves of lesser degree.

The shift down to smaller degrees is required to meet the Elliott rule that forbids third waves from being shorter than both the first and fifth waves of the same degree.

In either case, the result is a series of waves that are all of similar magnitude with labels that, in terms of degree, are more than a little arbitrary.

Click on chart to enlarge.
DAL 5 years 4-day bars (left), 2-years daily bars (right)
The large-scale rise on the DAL chart began March 6, 2009 from $3.51.

By my count, from that post-Recession low, DAL is in wave 5 of wave 3 {+1} of 3 {+2} of 3 {+3} to the upside.

The good news for bull trades is that the rise from 2009 won't end until wave 5 {+3} is complete, no doubt many months or perhaps years and lots of dollars in the future.

The bad news is that the completing of wave 5 will mark the start of a correction of the {+3} degree, or the rise from $3.51 in 2009.

Under Elliott, there is no way to say how high wave 5 might go. If today's high of $33.57 is the end point, then the most common Fibonacci retracement levels are these:


Typically, the reversal would be paced in a manner that would allow for an orderly exit. But that's not guaranteed either; the end of wave 5 could indeed cause DAL to drop like a rock.

Wave 3, of the same degree, lasted from June 24, 2013 to Jan. 23. Wave 1 lasted from April 5 to May 15, 2013. Wave 5 would typically be somewhere in between, but it could under the Elliott rules last for much longer or be much shorter.

So it goes with the Elliott wave framing of a chart. It gives a good indication of where things stand with price, but very little guidance when it comes to time.

Odds and Yields

DAL has completed seven bull signals since the present uptrend began in 2012. Five were successful, each yielding 11.8% over 40 days on average. The two unsuccessful trades on average lost 2.4% over 18 days.

The resulting 9.4% win/lose yield spread is quite impressive. DAL has had little tendency toward whipsaws and its winning trades have had sufficient power to produce a good return.

The Company

Delta Air Lines, headquartered in Atlanta, Georgia, is the world's largest airline in terms of scheduled passenger traffic.

About a third of Delta's market capitalization represents the company's domestic passenger business, and another third comes from cargo. About 20% results from international flights.

Analysts are optimistic about the company's prospects in its crowded and ultra-competitive sector, collectively coming down with a 64% enthusiasm rating.

Earnings tend to peak in the 3rd quarter, which covers the summer travel season. Delta's 3rd quarter earnings in 2013 came in higher than the year-ago comparable quarter, following two 3rd-quarter declines.

The company has had two losing quarters in the past three years, in 2012 and 2011. It has surprised to the downside four times in that period, the most recent being in 2012. Otherwise, it has surprised to the upside each quarter.

Delta's earnings yield is 36.71%, higher than 88% of other airline companies. The quarterly dividend works out to 0.72% annualized at today's prices.

The stock is selling at 2.7 times earnings, which is a low price/earnings ratio. Contrast it with Delta's competitor, United Continental Holdings Inc. (UAL), which runs United Air Lines, whose stock sells at 32.3 times earnings.

The price is also at a discount to sales. It takes just 75 cents in stock to control a dollar in sales.

Institutions own 84% of shares.

Delta next reports earnings on April 23. It goes ex-dividend in May for a quarterly payout of 6 cents per shares.

Liquidity and Volatility

DAL on average trades 10.6 million shares per day, sufficient to support a wide selection of option strike prices spaced a dollar apart, with open interest running to four and five figures near the money.

The front-month at-the-money bid/ask spread on calls is 3.7%, about eight times the spread on the S&P 500 fund SPY.

Implied volatility stands at 36% and has been falling since Feb. 3, when it was at 47%.

The 36% level is 6% above historical volatility and is in the 31st percentile of the annual range, suggesting that any trade would be best structured as a long options vertical spread, such as a bull calls spread, sold for credit and expiring in June or later.

Options are pricing in confidence that 68.2% of trades over the next month will fall between $29.94 and $36.98, for a potential gain or loss of 10.5%, and between $31.77 and $35.15 over the next week.

Contracts today are trading near their five day average volume, just 3.4% above average for calls and 8.8% below for puts.

Decision for My Account

The key to my decision on trading DAL is my expectation of how long wave 5 will last. The preceding third wave of the same degree took half a year of work, and the first wave took a couple of months. That suggests that wave 5 has sufficient time to produce a reasonable profit.

I intend to open a bull position on DAL if upside momentum continues today, structuring it as a bull call options spread.


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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