Whole Foods Market Inc. (
WFM) has had a powerful rise from November 2008, when it shot up from $3.52. It peaked last October at $75.59 and has since declined, having taken back a bit more than half of its rise from $40.70 beginning last April.
How much of a fall does it take before a trader can declare that the bull market in WFM has lost its freshness and taken on the odor of week-old rotting vegetables? There is no easy answer, but the chart hints at a severe limit to further downside potential.
The Chart
In Elliott wave analysis, the question posed above comes down to this: Has the decline from Oct. 28, 2013 made a credible correction to wave 5 {+3}, which began April 8, 2013? And what comes after?
The Fibonacci retracement grid shows that WFM touched the 50% retracement level on Jan. 9 and has since stalled. It has completed two forays down to the next major retracement level, 61.8%, but each time has failed to attain that goal and has bounced back up to its sideways trend around the 50% retracement.
Click on chart to enlarge.
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| WFM 2 years daily bars (left), 9 months 2-hour bars (right) |
The decline that began March 24 and Tuesday's break below the 20-day price channel appear to be a third collective attempt by sellers to drive the price down toward the 61.8% retracement.
The decline from last October can be counted as being in its 5th wave and final wave in the downward push. I've labeled it as being at the base level, the second degree below the wave 5 {+2} peak of last October, but that is arbitrary. It is too early to tell what degree that declining 5th represents.
Nor can I say with certainty where WFM stands one degree higher, at the {+1} degree. If 5 {+3} marks the end of the major uptrend that began in November 2008, which I labeled as wave 3 {+4} but it could just as easily be a 1st, 5th or C wave.
The present push from Oct. 28, 2013 can be thought of as wave A {+2} if the {+4} degree rise is still underway at some higher level, and as wave 1 {+4} if the rise from 2008 is complete.
WFM's chart presents a problem for Ellioticians because its early waves in a trend lack proportion because of the power of the rise. The 1st and 2nd waves tend to be stunted compared to the 3rd, 4th and 5th waves. This makes it difficult to assign a degree to a reversal with any great confidence.
Looking again at the nearer term....
Wave 5 must decline below the end of the preceding 3rd wave of the same degree, or $50.32. That gives WMT a downward target of at least 4.5% below today's opening price.
However, there is a limit on the length of wave 5. By my count, wave 3 is $8.33 in length, shorter than the wave 1 length of $10.72. The Elliott wave framing prohibits having a 3rd wave shorter than both the 1st and 5th waves of the same degree.
To achieve that goal, wave 5 must end at $47.57 or higher, giving a maximum of 9.7% below today's opening price.
Once wave 5 is complete, WFM will reverse and correct to the upside, taking back a portion of the decline from $65.59. A rise up to the $54-$56 range would be typical, although the correction could certainly go far higher, or stop short at a lower level.
A decline below $47.58 would invalidate my count, as would a rise above $65.59.
Odds and Yields
This is WFM's third bear signal since the downtrend began last October. The one successful bear signal yielded 0.4% over 22 days, and the failure lost 0.1% over 27 days. The win/lose yield spread is nearly breakeven, at negative 0.1%. The yields are so small as to barely be worth bothering with.
The Company
Whole Foods, headquartered in Austin, Texas, sells high quality natural and organic foods from 362 stores in the U.S., Canada and the U.K.
Full disclosure: There's a Whole Foods within 10 minutes walk of where I live and I shop there constantly. I love the freshness of the vegetables and fruits, and also the selection of grass-fed beef, not to mention the choice of wines, cheeses and chocolates, which some consider to be the major food groups necessary for health and happiness.
Given the runaway growth of the business, I'm obviously not alone in being a Whole Foods fan.
Analysts, clearly, have been eating their fresh veggies. Collectively, they come down at a 50% positive enthusiasm rating, which is on the high side.
On the books, Whole Foods reports return on equity of 15%, with debt quite low at 1% of equity.
The company's earnings tend to drop off in the 4th quarter each year, which covers the depths of winter.
Quarters 1 through 3 in 2013 each came in above their year-ago counterparts, as did the 1st quarter of this year, although it showed a downside earnings surprise, the only one in the past three years, which surprised to the upside except for one surprise-free quarter in 2012.
The earnings yield is 2.93%, lower than 76% of other grocers. The dividend yield is a bit less than a third of that, at 0.94%.
Stocks are selling 32 times earnings and also at a premium to sales. It takes $1.46 in shares to control a dollar in sales.
Institutions own 81% of shares.
Whole Foods next publishes earnings on May 5. It goes ex-dividend on April 9 for a quarterly payout of 12 cents per shares.
Liquidity and Volatility
WFM on average trades 3.2 million shares a day and supports a good selection of option strike prices, spaced $2.50 apart near the money with open interest in the three and four figures.
The front-month at-the-money bid/ask spread on pouts is 2.6%, about six times the comparable figures for the S&P 500 exchange-traded index fund SPY.
Implied volatility stands at 28%, compared to 15% for the S&P 500, and has been meandering sideways after falling from 40% on Feb. 12.
It is 3% above historic volatility and stands in the 48th percentile, a neutral position suggesting short shares or an equivalent would be the trade structure most likely to succeed.
Options are pricing in confidence that 68.2% of trades will fall between $47.14 and $55.40 over the next month, for a potential gain or loss of 8.1%, and between $49.29 and $53.25 over the next week.
Contracts are trading actively today, will calls running more than double their five-day average volume and puts at 28% above average.
Decision for My Account
I'll make it short and sweet: I don't like the WFM chart. By my count it is severely restricted in its downside potential and is facing a significant upside correction thereafter.
For that reason I'm declining to open a bear position in WFM.
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 decisions for his or her own account, and take responsibility for the consequences.
