Monday, March 31, 2014

Monday's Outcomes: SDRL

SDRL closed beyond it's 10-day price channel and I have removed it from the Watchlist. See my March 14 analysis "SDRL: A broken narrative" for details.

Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Changes in my exit rules

I've made some changes in my exit rules and updated my trading rules to conform. Read them in Google Docs format at "Private Trader: Rules for Shorter-term Stock & ETF Trades".

The major impact of the changes will be to tighten my stop/losses. This will produce more trading out of positions, adding to the commissions, but will limit losses.


The stop/loss on my current positions will be continued if the price has already moved beyond the new exit-signal levels. Otherwise, I'll apply the new rules immediately.


I've bold-faced the changes, including a section with strike-throughs that I've eliminated.

Here is what has changed:
  • The 10-day price channel is no longer my exit signal.
  • For an exit signal, I'll be using twice the average true range ("2N" in Turtle Trading parlance) as a floating stop/loss adjusted daily based on the close.
  • Exit signals will still require next-day confirmation by the symbol closing beyond the exit-signal level.
  • I've eliminated the "Additions" section, which I'm no longer using.
  • Removal of symbols from the Roll List remain unchanged, based on the 10-day price channel.
  • I've added a section on the Watchlist with removal rules that also use the 10-day price channel.
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.

Monday's Prospects: Round 2

Only two symbols that survived my first round of analysis, SCSC with a bear signal and ACGBY with a bull signal. Neither made it through the second round.

SCSC is trading within its 20-day price channel and so failed to confirm the bear signal.

ACGBY is retracing upward within a downtrend and also is quite illiquid and so fails as a bull play on two counts.

I don't intend to trade off of the "Monday's Prospects" list, although trades from my current holdings, the Watchlist and the Roll Shelf remain possible.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Sunday, March 30, 2014

The Week Ahead: Jobs, manufacturing, international trade, Yellen

The monthly employment report, including the headline unemployment rate, will dominate the week in economics reporting. The report itself will be released on Friday at 8:30 a.m. New York time, with a sneak preview on Wednesday at 8:15 a.m. in the form of the ADP employment report produced by a leading payroll services company.

Other reports during the week with market-moving potential are the Institute of Supply Managers manufacturing index on Tuesday at 10 a.m. and the international trade report at 8:30 a.m. on Thursday.

Federal Reserve Chair Janet Yellen addresses the National Interagency Community Reinvestment Conference in Chicago at 9:55 a.m. Monday. Her topic is "Strengthening Communities".

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The average hourly workweek in manufacturing from the employment report, at 8:30 a.m. Friday.

Manufacturers' new orders for consumer goods and materials from the factory orders report, at 10 a.m. Wednesday.

Vendor performance, or the deliveries times index, from the ISM manufacturing survey, at 10 a.m. Tuesday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday. 

Manufacturers' new orders for nondefense capital goods from the factory orders report, at 10 a.m. Wednesday.

Other reports of interest:

Monday: The Chicago Purchasing Managers index at 9:45 a.m. and the Dallas Federal Reserve Bank manufacturing survey at 10:30 a.m.

Tuesday:  Motor vehicle sales throughout the day, the PMI manufacturing index at 9:45 a.m. and construction spending at 10 a.m.

Wednesday: Factory orders at 10 a.m. and petroleum inventories at 10:30 a.m.

Thursday:  The Institute of Supply Management non-manufacturing index at 10 a.m. and the Federal Reserve money supply report at 4:30 p.m.

I also keep an eye on the Baltic Dry Index, updated daily.

Fedsters

In addition to Yellen's speech on Monday, two of the Federal Reserve glitterati will be making public appearances during the week, both on Wednesday. They are an alternate on the Federal Open Market Committee, Atlanta Fed Pres. Dennis Lockhart, and one other, St. Louis Fed Pres. James Bullard, who has no role on the FOMC this year.

Analytical universe

This week I shall be analyzing new bull and bear signals among 3,861 small-cap and larger stocks and exchange-traded funds.

Trading calendar

By my rules, I'm trading May options for the short legs of vertical, diagonal and calendar spreads and covered calls, and for all legs of butterfly spreads and iron condors. I'm trading July options for single calls and puts as well as straddles. Shares, of course, are good at any time.

Good trading.

Monday's Prospects

On Friday, March 28:

Of 3,861 stocks and exchange-traded funds in this week's analytical universe, 44 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 20 to the upside and 24 to the downside.

Twenty-eight major-exchange small-cap symbols broke out, three to the upside and 25 to the downside.

Seventeen over-the-counter symbols broke out, 16 to the upside and one to the downside.

One mid- or large-cap symbol traded on the major exchanges, SCSC, survived my initial screening, having broken out to the downside.

No small-cap major-exchange symbols survived initial screening.

One symbol traded over the counter, ACGBY, survived my initial screening, having broken out to the upside.

No large-cap symbols with high volume are potential bear plays; having met the earnings exclusion test and have sufficient open interest on their options, regardless of historical odds. All four large-cap signals were bullish.

I shall do further analysis of the surviving symbols on Monday, March 31.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are 50% or greater, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade, either because of the presence of options, whatever their open interest, or sufficient volume to allow for the short sale of shares. Symbols that are too illiquid for a bear trade are removed from consideration.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Friday, March 28, 2014

Friday's Outcomes: VALE

I've closed my bear position in VALE for a loss. See my March 10 analysis "VALE: Downside potential, upward correction looms".

Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Friday's Prospects: Round 2

None of the symbols that survived my first round of analysis made it through the second round. (See "Friday's Prospects" for a list of the first-round survivors.

In the mid- and large-cap category, the lone first-round survivor, POST, has insufficient open interest for a bear play.

Three of the four small-cap symbols failed confirmation by moving back within their 20-day price channels. The fourth, FULL, has insufficient open interest for a bear play.

I next turned to my fall-back list of high volume symbols that have given bear signals. The list ignores low prior odds of success.

Of the five symbols on the fall-back list, four failed confirmation. The fifth, FOXA, has an overly wide bid/ask spread on front-month at-the-money puts that takes it out of contention as a bear play.

I won't be filing any full analyses or trading off of the "Friday's Prospects' lists. I'll be watching my existing positions as well as the Watchlist and Roll Shelf, which might produce trades.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Friday's Prospects

On Thursday, March 27:

Of 3,861 stocks and exchange-traded funds in this week's analytical universe, 95 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 15 to the upside and 80 to the downside.

Sixty-one major-exchange small-cap symbols broke out, four to the upside and 57 to the downside.

Seven over-the-counter symbols broke out, three to the upside and four to the downside.

One mid- or large-cap symbol traded on the major exchanges survived my initial screening, POST, having broken out to the downside.

Four small-cap major-exchange symbols survived initial screening, all having broken out to the downside. In descending order of average gain, they are MVIS, FULL, ADC and JIVE.

No symbols traded over the counter survived my initial screening.

Five large-cap symbols with high volume are potential bear plays; they met the earnings exclusion test and have sufficient open interest on their options, regardless of historical odds. They are HD, DIS, TWX, FOXA and HTZ.

I shall do further analysis of the surviving symbols on Friday, March 28.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are 50% or greater, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade, either because of the presence of options, whatever their open interest, or sufficient volume to allow for the short sale of shares. Symbols that are too illiquid for a bear trade are removed from consideration.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Thursday, March 27, 2014

Thursday's Outcomes: HUM, LYS, TAYC, WYNN

I've closed my bull position on HUM and have updated my initial analysis of March 20 with results and a chart talk. See "HUM: Bullish on health insurance".

I've removed LVS, TAYC and WYNN from my Roll Shelf as potential bull plays and updated my analyses with results. See:
Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

MNKD: A head fake in the making

My analysis of Mannkind Corp. (MNKD) will be far briefer than I had anticipated. Headquartered in Valencia, California, Mannkind is a development phase biophamaceutical company focusing on treatments for diabetes and cancer.

MNKD gave a bear signal on Wednesday and confirmed in in Thursday's trading, but the chart shows that the symbol is poised for a massive head fake that will carry the price at least 9% above today's opening, and perhaps much higher.

The Chart

MNKD has been in a downtrend for a very long time, since September 2004 when it peaked at $124.31.

The Elliott wave count shows that the decline has traded out five waves to the downside, ending with wave 5 {+4} at $1.57 on May 18, 2012.

The next act is an upward correction in three waves that will take back a portion of the entire decline from 2004.

Click on chart to enlarge.
MNKD 10 years weekly bars (left), 2 years daily bars (right)
So far MNKD has been acting as though an upward correction is underway, having completed the 1st and possibly the 2nd subwaves of an A wave to the upside.

By that count, wave 3 {+3} must move higher than the end of wave 1 {+3}, which was $8.70 on Aug. 14, 2013, a level 9.2% above today's opening price.

Wave 2 has retraced 50% of the rise from May 2012. That's not an uncommon end point for 2nd waves. The next major stopping point in the Fibonacci retracement schema is the 61.8% level, or $4.29, which is 20.6% below today's opening price.

MNKD's price been stalled at the 50% level since October 2013, with two forays down that came close to or touched the 61.8% retracement, suggesting that the 50% level is likely to hold and the next move will be wave 3 {+3} to the upside.

The most recent prior reversal level -- support -- is at $4.86 and a break below that would suggest that MNKD is making another attempt at 61.8%, with no guarantee that it would succeed.

 The chart favors a somewhat bullish view of MNKD's prospects, although some further downside work may be required before wave 3 {+3} makes its move.

By sending a bear signal in chart that is bullish, although not obviously so, MNKD has executed a classic head fake and a potential whipsaw. As a student of charts, I find it to be quite beautiful.

Decision for My Account

I don't intend to open a bear position in MNKD.

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.

Thursday's Prospects: Round 2

Most of the survivors from my first round of analysis were knocked out of the second round because their options are too illiquid to use in constructing a bear play. This is not unusual on heavily bearish days. (See "Thursday's Prospects" for the full list of first-round survivors.)

Two symbols got past the second round: MNKD and IYR. I've chosen to look closely at MNKD -- Mannkind Corp. -- as the slightly more bearish chart and will post a full analyze prior to the closing bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Thursday's Prospects

On Wednesday, March 26:

Of 3,861 stocks and exchange-traded funds in this week's analytical universe, 157 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 13 to the upside and 144 to the downside.

Eighty-nine major-exchange small-cap symbols broke out, one to the upside and 88 to the downside.

Twelve over-the-counter symbols broke out, eight to the upside and four to the downside.

Seven mid- or large-cap symbols traded on the major exchanges survived my initial screening, one, PBA, having broken out to the upside and six to the downside. In descending order of average yield, the downside breakouts are BVN, MCP, DXPE, MNKD, CATM and IYR.

Eleven small-cap major-exchange symbols survived initial screening, all having broken out to the downside. They are CCXI, SSRI, FWM, AKG, ASTI, PZG, FORM, CRDC, RSE, DXLG and MITT.

No symbols traded over the counter survived my initial screening.

Three large-cap symbols with high volume are potential bear plays; they met the earnings exclusion test and have sufficient open interest on their options, regardless of historical odds. They are TJX, EBAY  and WMB.

I shall do further analysis of the surviving symbols on Thursday, March 27.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are 50% or greater, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade, either because of the presence of options, whatever their open interest, or sufficient volume to allow for the short sale of shares. Symbols that are too illiquid for a bear trade are removed from consideration.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Wednesday, March 26, 2014

Wednesday's Outcomes: ADEP, KAR, WFM, XLV, YHOO

I closed my bull positions in ADEP and KAR after each gave an exit signal. See:


I analyzed WFM today as a potential bear play but declined to take the trade. See "WFM: Healthy eating for bears?".

I've removed XLV and YHOO from the Roll Shelf as potential bull plays and updated my analyses with results. See:
Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

WFM: Healthy eating for bears?

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.
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.

Wednesday's Prospects: Round 2

The final stages of my second round of screening were a tight contest. I even had to resort to tossing out signals whose trends were at odds with the Zacks forecast, such as a bull signal with a bearish Zacks rating, in order to pry the closely matched symbols apart.

In the end, it came down to three symbols, all with bear signals and ambiguous charts. I chose to look more closely at Whole Foods Market Inc. (WFM), which ranks second in liquidity and which has a bearish Zacks rating. The other two, IDIX and EMR, are rated neutral by Zacks.

I'll post a full analysis of WFM prior to the closing bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Wednesday's Prospects

On Tuesday, March 25:

Of 3,861 stocks and exchange-traded funds in this week's analytical universe, 65 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 25 to the upside and 40 to the downside.

Sixteen major-exchange small-cap symbols broke out, five to the upside and 11 to the downside.

Eight over-the-counter symbols broke out, seven to the upside and one to the downside.

Eleven mid- or large-cap symbols traded on the major exchanges survived my initial screening, five having broken out to the upside and six to the downside. In descending order of average yield, the upside breakouts are PBR.A, EOC, ASH, NCR and EMR. The downside breakouts are GPS, RL, IDIX, WWWW, BWA and WFM.

Two small-cap major-exchange symbols survived initial screening, one having broken out in either direction, ITG to the upside and RBCN to the downside.

No symbols traded over the counter survived my initial screening.

Three large-cap symbols with high volume are potential bear plays; they met the earnings exclusion test and have sufficient open interest on their options, regardless of historical odds. They are MA, GPS and WFM .

I shall do further analysis of the surviving symbols on Wednesday, March 26.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are 50% or greater, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade, either because of the presence of options, whatever their open interest, or sufficient volume to allow for the short sale of shares. Symbols that are too illiquid for a bear trade are removed from consideration.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Tuesday, March 25, 2014

Tuesday's Outcomes: XLY

I've removed XLY from the Watchlist and updated my Feb. 26 analysis with results and a chart discussion. See "XLY: Correction over?"

Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday's Prospects: Round 2

None of the survivors from my first round of analysis have made it past the second round. (See "Tuesday's Prospects" for a list of first-round survivors.)

The symbols that were confirmed, most of them potential bear plays, had charts that were ambiguous perhaps in a trend but not clearly so.

The two finalists in round 2 were QLIK and GG.

In the end I turned away from QLIK because of its tendency toward shallow corrections and sideways movements since it began trading in 2010. It simply doesn't tend to trend.

I rejected GG for extrinsic reasons: It is a bear play on gold, which would be fine under normal circumstances, but the uncertainties regarding Russia's actions in Ukraine make a bear play on gold especially risky in my opinion; a military surprise could send gold soaring.

I don't plan a full analysis of any symbol from Tuesday's list of potential trades, nor will I be opening any new position from that list. As always, it is possible that I'll close positions or open new positions off of the Watchlist or Roll Shelf.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Tuesday's Prospects

On Monday, March 24:

Of 3,861 stocks and exchange-traded funds in this week's analytical universe, 139 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 13 to the upside and 126 to the downside.

Sixty-three major-exchange small-cap symbols broke out, three to the upside and 60 to the downside.

Nine over-the-counter symbols broke out, three to the upside and six to the downside.

Fourteen mid- or large-cap symbols traded on the major exchanges survived my initial screening, one, PZE, having broken out to the upside and 13 to the downside. The downside breakouts are SRPT, QLIK, IAG, PAAS, CTRP, BIN, GOLD, TSO, NBIX, EIGI, GG, OCIP and ICPT.

Four small-cap major-exchange symbols survived initial screening, one, NKA, having broken out to the upside and three to the downside. The downside breakouts are RNA, BIOD and FTEK.

No symbols traded over the counter survived my initial screening.

Seven large-cap symbols with high volume broke out to the downside, met the earnings exclusion test and had sufficient liquidity for a bear play, regardless of historical odds analysis. They are GG, DG, ADBE, CBS, FB, LVS and MYL.

I shall do further analysis of the surviving symbols on Tuesday, March 25.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are 50% or greater, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade, either because of the presence of options, whatever their open interest, or sufficient volume to allow for the short sale of shares. Symbols that are too illiquid for a bear trade are removed from consideration.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Monday, March 24, 2014

Monday's Outcomes: NKE, HIMX

I've opened a bear positioned in NKE. See today's analysis, "NKE: Bearish on athletic shoes".

I've closed my bull position in HIMX and updated my entry analysis with results and a fresh chart. See "HIMX: High volatility in a mature uptrend".

Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

NKE: Bearish on athletic shoes

Update 5/13/2014: I've removed NKE from the Roll Shelf after it closed above its 10-day price channel, signalling an end to the series.

I only had the one bear position in NKE. The stock lost 1.5% over 28 days, or 19.1% annualized. My bearish options produced a 48.1% yield on risk, or 626.4% annualized. Calculating the results another way, the options showed a 91.7% yield on the debit.

The yield on risk is a bit tricky with synthetic short futures spreads like this one. I wrote up my method for calculating it in a post last March, "Options: Calculating results".

Update 4/21/2014: I've rolled out my bull position after NKE hit its stop/loss point. The symbol remains on the roll shelf and I won't calculate results unless it moves above its 10-day price channel.

Update 3/24/2014: I've opened a bear position in NKE, structuring it as synthetic short futures, long the $75 put and short the $75 call, both expiring July 18.

Nike Inc. (NKE) is working its way down from its December peak in what appears to be the start of a correction that will eventually take back a portion of the rise from June 2012. The uptrend carried the price from $42.55 to the $80.26 peak.

NKE showed that it had downside momentum behind it as it broke below its 20-day price channel on Friday and confirmed the bear signal by trading still lower today.

The Chart

I've hedged my conclusion with "what appears to be" because it is too early to be certain what degree or magnitude of movement my analysis of the decline represents.

NKE was on the rise for 20 years and on Dec. 9, 2013 completed the trend with wave 5 {+4}.

If that peak is not the end of the massive uptrend that began decades past, then NKE is taking the first steps in wave A {+4} to the downside, the beginning of a three-wave correction. If the uptrend is over, then  the present wave is 1 {+4}.

In either case, at one degree smaller the count is the same: A five-wave downtrend at  the {+3} degree.

Click on chart to enlarge.
NKE 2 years daily bars (left), 20 days 15-minute bars (right)
For my chart analysis, I've chosen to assume that the uptrend is still underway, based on the fact that the broader market averages have yet to move into a clear downtrend.

I've labeled the beginnings of the correction at the base degree (1, 2, 3 ...), but that's an arbitrary choice. I don't know the degree yet and won't until the correction has worked its way forward to a significant extent.

Within the correction, NKE is in the middle leg, wave 3, and within the middle subwave, wave 3 {-1}.

Wave 3 must exceed the end of the preceding wave 1 of the same degree, which was $69.85 on Feb. 5. That gives NKE at a minimum 7.5% of downside potential from today's open, and possibly much more.

Internally, wave 3 {-1} has already satisfied its minimum requirement, having moved well beyond the end of wave 1 {-1} at $78.03 on March 12. That means that Wave 3 {-1} could end and be followed by a short-term correction to the upside at any time, taking back a portion of the decline from $80.08 on March 18, the wave 2 {-1} peak. If it does, the degree suggests that we're looking at a correction lasting a week or so at the longest.

A reversal above $59.85 that moves above $80.09 would invalidate my analysis and would mean that waves 5 {+3} and 5 {+4} have not yet ended. For that to happen, NKE would have to rise 6.1% above today's open.

Odds and Yields

NKE clearly hasn't experienced much in the way of downtrends, and the historical odds reflect that fact. In a word, they're awful.

The rise since wave 5 {+4} began produced seven completed bear signals. One succeeded, yielding 2.6% over 43 days. Six were failures, losing 5.1% over 15 days. The resulting win/lose yield spread is a negative 2.5%.

Nearer in time, since the start of wave 5 {+3} NKE has had two bear signals, one successful for a 2.6% yield over 43 days, and the other unsuccessful, losing 5.9% over nine days.

The winning signal came within the correction after the Dec. 9, 2013 peak.

The Company

Nike, headquartered in Beaverton, Oregon, is the world's largest supplier of athletic shoes and apparel. The company's products, branded with the famous Nike Swoosh, are mainly manufactured outside of the United States.

About half of its market capitalization comes from footwear, and about a quarter from shirts, shorts and other apparel.

Analysts on average come down with a negative 14% enthusiasm rating

Return on equity is 24% with debt amounting to 11% of equity. The combination puts NKE in growth-stock territory by my definition.

Nike's earnings tend to peak in the northern-hemisphere summer. The summer quarter of 2013 was higher than its 2012 counterpart, ending a string of at least two declines in corresponding quarters. The peak summer quarter earnings of the last four years were recorded in 2011.

Earnings have surprised to the upside 11 times in the past three years. The one downside surprise came back in 2012.

The earnings yield is 3.96%, lower than 75% of other footwear companies, and the dividend yields 1.28% annualized at current prices. The dividend yield is about a third of the earnings yield.

The stock is priced at 25 times earnings and also sells at a premium to sales. It takes 2.46 in shares to control a dollar in sales.

Institutions own 81% of shares.

The company next publishes earnings on June 23. The stock goes ex-dividend in May for a quarterly payout of 24 cents per share.

Liquidity and Volatility

NKE on average trades 5 million shares a day and supports a wide selection of option strike prices spaced $2.50 apart near the money. The front-month at-the-money bid/ask spread on puts is 1.4%, about double that of the S&P 500 exchange-traded fund SPY.

Implied volatility stands at 21% and has taken a sharp tumble from a near-term peak of 29% on March 17, bringing it in line with historical volatility, which stands at 20%.

NKE's volatility is higher than that of SPY, which is 15%, and stands in the 45th percentile. This is neutral territory, where a short shares position or its equivalent has the best chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $70.28 and $79.24 over the next month, for a potential gain or loss of 6%, and between $72.61 and $76.91 for the next week.

Contracts are trading actively today, with puts running at more than double their five-day average volume and calls at 56% above average.

Decision for My Account

I see NKE as being eligible for a bear play, despite the fact that the downtrend is still in early days. The chart count suggests that the downtrend really has begun.

The financials are aggressively bullish, which runs contrary to my chart analysis, but that's a normal relationship early in a decline. The markets anticipate the financials every time.

I intend to open a bear position today if NKE continues to show downward momentum in the last half hour of trading. I'll structure it as a short-shares equivalent known as a synthetic short future, long the puts and short the calls at or near the money, with both legs having the same strike price and expiration.

If momentum falters, then I'll add NKE to my Watchlist as a potential future trade.

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.

Monday's Prospects: Round 2

All of my first-round survivors failed to survive the second round, either through non-confirmation or insufficient open interest on their options to support a bear play. (See "Monday's Prospects".)

I next turned to my secondary selection of potential trades, a subset of the large caps that are highly liquid, have given bear signals and haven't been screened for their historic odds and yields.

I've selected the sports shoe company Nike Inc. (NKE) for a full analysis today as a potential bear play and will post the write-up prior to the market's closing bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Sunday, March 23, 2014

The Week Ahead: GDP and personal income

Two reports lead the economic week as potential market movers. The final estimate of gross domestic product for the 4th quarter of 2013 will be released on Thursday, followed by personal income and outlays on Friday, both at 8:30 a.m. New York time.

Both get down to the fundamentals -- how much are we producing and how much do we have to spend as a result of our work. From those two starting points springs the entirety of the economy.

Two other reports, new home sales on Tuesday at 10 a.m. and durable goods orders on Wednesday at 8:30 a.m., also sometimes have market impact.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday. 

Index of consumer expectations from the Reuters/University of Michigan consumer sentiment report, at 9:55 a.m. Friday.

Other reports of interest:

Monday: The Purchasing Managers Institute manufacturing index flash report at 9:45 a.m.

Tuesday: The S&P Case-Shiller home price index of 20 metro areas at 9 a.m. and consumer confidence at 10 a.m.

Wednesday: Petroleum inventories at 10:30 a.m.

Thursday:  The pending home sales index of house sales that have been contracted but not closed at 10 a.m. and the Federal Reserve money supply report at 4:30 p.m.

Friday: The Reuters/University of Michigan consumer sentiment report at 9:55 a.m.

I also keep an eye on the Baltic Dry Index, updated daily.

Fedsters

Four Federal Open Market Committee members have scheduled public appearances during the week: Fed Gov. Jeremy Stein and Dallas Fed Pres. Richard Fisher on Monday, Philadelphia Fed Pres. Charles Plosser on Tuesday and Cleveland Fed Pres. Sandra Pianalto on Thursday.

One FOMC alternate takes to the podium: Atlanta Fed Pres. Dennis Lockhart on Tuesday.

And three others from among the Fed glitterati will speak: St. Louis Fed Pres. James Bullard on Wednesday, Chicago Fed Pres. Charles Evans on Thursday and Kansas City Fed Pres. Esther George on Friday.

Analytical universe

This week I shall be analyzing new bull and bear signals among 3,861 small-cap and larger stocks and exchange-traded funds.

Trading calendar

By my rules, I'm trading April options for the short legs of vertical, diagonal and calendar spreads and covered calls, and for all legs of butterfly spreads and iron condors. I'm trading July options for single calls and puts as well as straddles. Shares, of course, are good at any time.

Good trading.

Monday's Prospects

On Friday, March 21:

Of 3,861 stocks and exchange-traded funds in this week's analytical universe, 81 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 26 to the upside and 55 to the downside.

Forty-six major-exchange small-cap symbols broke out, 13 to the upside and 33 to the downside.

Six over-the-counter symbols broke out, three in either direction.

Four mid- or large-cap symbols traded on the major exchanges survived my initial screening, all having broken out to the upside. They are XEC, CWT, EIX and DPM.

Six small-cap major-exchange symbols survived initial screening, two having broken out to the upside and four to the downside. The upside breakouts are AKS and PCTI. The downside breakouts are VGZ, DSCI, ENT and CYNO.

No symbols traded over the counter survived my initial screening.

Five large-cap symbols with high volume broke out to the downside, met the earnings exclusion test and had sufficient liquidity for a bear play, regardless of historical odds analysis. They are NKE, LLY, MRK, DTV and BMY.

I shall do further analysis of the surviving symbols on Monday, March 24.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are 50% or greater, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade, either because of the presence of options, whatever their open interest, or sufficient volume to allow for the short sale of shares. Symbols that are too illiquid for a bear trade are removed from consideration.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Friday, March 21, 2014

Options: Calculating results

Calculating the results for positions made up of shares of stock is a no brainer. Take the buy price, take the sell price, and calculate the percentage change. The same works for individual long options.

Options spreads are more complex. Often, a spread is opened for a credit, not a debit, even for a long position. It can be a very miniscule amount compared to the share equivalent of the spread. How much money, then, do I have in the game?

I use the concept of yield on risk in calculating results for option spreads. Vertical option spreads have a defined maximum loss, and also maximum gain. So I calculate my result as a percentage of the maximum loss, which is also the maximum risk.

This tells me how how the position performed based on what I really had at stake in the trade, how much I could lose.

That system, however, falls apart with synthetic futures, a structure composed of a calls and puts, one type of contract long and the other short, each leg having the same strike price and expiration date.

Synthetic futures, unlike vertical spreads, are unhedged. Risk is unlimited to the upside for a short future, and limited to the downside only by zero for a long future. The effect of synthetic futures on buying power reflects the high degree of risk.

But synthetics don't go to infinity, nor to the drop to zero, except under the most extraordinary circumstances.

In my prior calculations on such positions, I've used the same method in calculating a maximum loss by subtracting strike prices and adding in the debit/credit. Since both strike prices are the same, however, the calculation really has nothing to do with yield on risk. It's a straight buy/sell percentage change calculation based on the premiums.

I'm changing my method by calculating a pseudo-vertical spread with the strike price of the two legs being one element and the actual share price at the time of entry or exit being the other element, and then adjusting as I do with verticals by the entry and exits debits/credits.

For synthetic long futures built from calls, the long "strike" will be the actual strike price adjusted by any debits/credits, and the short exit "strike" will be the share price at exit.

Synthetic short futures built from puts will reverse the two. The short "strike" will be the adjusted actual strike and the long "strike" will be the price of the shares at exit, adjusted by the exit debit or credit.

In practice, the change in method can make a huge difference and produce numbers that, frankly, seem to be of a more rational magnitude, given the actual dollar impact on my account.

I've had one pure synthetic future series since I started using the structure, XLP, a short future that I exited on Jan. 24.

My new yield (loss) on risk for the XLP short synthetic futures is -81% over 49 days, compared to the old calculation of -306.4%.

I've exited three synthetic future positions since I began using the structure and have updated the results reported in updates to my analyses to reflect the new method of calculation. They are:
Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Friday's Outcomes: SLV, CHL, TRIB

I've opened a bear position in SLV. See "SLV: Silver bears" for a fresh chart analysis and discussion.

My bear position in CHL has moved to within 10 cents of its maximum possible gain and I've exited the options spreads, which expire in June, and will put the symbol on my Roll Shelf with an eye toward opening new spreads next week. See my initial analysis, "CHL: How free is the market?". I won't update results or the entry analysis until I re-enter or end the roll sequence.

I've removed TRIB from my Roll List and calculated results. See the updated analysis from January, "TRIB: Bullish on diagnostic tests".

Reference

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.