Thursday, February 27, 2014

TCBI: On the rise, with ambiguity

Update 4/7/2014: I've closed my bull position in TCBI. It closed below its stop/loss level on April 4 and confirmed the exit signal on April 7 by closing below the exit level.

The position, structured as long shares, declined by 1.9% over its 39-day lifespan, or 17.3% annualized.

The $67.08 peak of March 21 ends the rise that began from $6.55 on March 6, 2009 and signals the beginning of a downward move of major proportions. 

In terms of Elliott, the $67.08 peak ends wave 5 {+2} of wave 5 {+3} of wave 5 {+4} in an upward move. I've labeled the downward move that has only just begun as wave A {+4}, a correction within a larger uptrend of {+5} degree. It could just as well be labelled 1 {+4}, the beginning of a new downtrend.

TCBI has also moved below its 10-day price channel, and so I don't intend to add TCBI to the Roll Shelf.

Click on chart to enlarge.
TCBI 1 years daily bars

Update 2/27/2014: I've opened a bull position in TCBI, structured as long shares. The price 30 minutes prior to the closing bell was off the high for the day but well above the open.

Texas Capital Bancshares Inc. (TCBI) has a bullish chart, with a strong rise from $43.43 beginning Sept. 3, 2013 still underway.

TCBI gave a powerful bull signal on Wednesday, breaking above its 20-day price channel at $60.64 and trading still higher on Thursday.

The question is whether the bull signal is the start of the final leg of the rise from last September, or a head fake within a correction that still has a significant decline in its future. My analysis concludes that the correction has ended and the TCBI has resumed its rise.

The Chart

By the Elliott wave count, TCBI in late January completed wave 3 {+2}, the middle part of the rise from September, which is wave 3 {+3}.

The rise from September is in turn the middle part of wave 5 {+4}, which began April 25, 2013 from $36.75 and which is in turn the last part of the rise from the Great Recession low of $6.55 on March 6, 2009.

The problem lies with the decline from the Jan. 22 peak of $63.99, the terminus of wave 3 {+2}. It began as wave 4 {+2}, a downside correction that will precede a push to higher highs upon its completion.

Click on chart to enlarge.
TCBI 8 years 9 months weekly bars (left), 1 year daily bars (center), 30 days hourly bars (right)
In Elliott, a fourth wave is composed of three waves, labelled A, B and C. The A wave is composed of five waves, the B of three and the C of five.

The problem is the decline from Jan. 22 to Feb. 4. If the correction is still underway, then this decline is an A wave. However, internally, it breaks down to three waves, not five. That forces me to the conclusion that the three-wave decline is the entirety of wave 4 {+2}.

By that analysis it is a fairly shallow correction, coming in just shy of a 38.2% Fibonacci retracement. But the Elliott rules don't require that it go any deeper, and 38.2% is a typical retracement level, so I have no quarrel with the magnitude of the decline.

My count will be invalid if TCBI reverses below $64.69 and subsequently moves below $56.45. It will be confirmed if TCBI moves above $64.69.

Odds and Yields

TCBI has a paltry record of bull signals in its rise from last September. It has completed only two, one a winner and the other a loser. However, the winner was so big that it clearly engulfed a number of potential bull signals that would have been generated in a more measured rise.

The successful signal yielded 27.5% over 70 days, and its unsuccessful sibling lost 5.6% over 10 days. The resulting 21.9% win/lose yield spread is quite high.

But honestly, I think these numbers are a bit meaningless, given the sparse data. That TCBI had a lot of momentum is clear, but there are too few data points to reach a conclusion about any tendency toward whipsaws.

The Company

Texas Capital Bancshares, headquartered in Dallas, Texas, runs Texas Capital Bank, a regional financial institution with locations in dozen locations around the state.

The analysts following it, a bit more than a handful, collectively come down with a resounding "Meh!", giving it a negative 14% enthusiasm index.

The company reports return on equity of 13%, with long-term debt 14% greater than equity.

Looking at the last three years, the company showed consistently higher earnings quarter over quarter until the 3rd quarter of 2012. From that peak earnings became choppy and never again equaled that level.

The surprises tell the story. Earnings surprised to the downside only once from the 1st quarter of 2011 to the 3rd of 2012. The rest all surprised to the upside. All five quarter since then have surprised to the downside.

The earnings yield is 4.39%, lower than 84% of other regional banks. The company pays no dividends.

Stocks are priced at 22.8 times earnings, and shares are also priced at a premium to sales. It takes $5.70 in shares to control a dollar in sales.

Whatever analysts might say, the market is pricing in expectations for future earnings.

Institutions own 98% of shares.

Texas Capital next publishes earnings on April 21.

Liquidity and Volatility

TCBI on average trades 415,000 shares a day and supports a moderate selection of options strike prices spaced $5 apart, with open interest near the money running to single and double digits.

The front-month at-the-money bid/ask spread on calls is 48.8%, more than 100 times the 0.4% spread on the S&P 500 exchange-traded fund SPY.

Implied volatility stands at 24%. It rose on Thursday after declining from 28% after Jan. 13.

Options are pricing in confidence that 68.2% of trades will fall between $57.84 and $66.52 over the next month, for a potential gain or loss of 7%, and between $60.10 and $64.26 over the next week.

Contracts are trading very slowly. Calls are at 15% of their five-day average volume and puts at 17%.

Decision for My Account

My quandary is whether to wait for a higher high, nearly 3% above the present level, or to get in now. I have enough confidence in my count that I'm willing to take a risk. Also, the options are too illiquid for my standards, so I'll structure the trade as long shares. That means no leverage and easier fills if I need to get out fast.

I intend to open a bull position in TCBI if upside momentum continues at the end of trading today, structuring the position as long shares.


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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