Wednesday, March 19, 2014

ADEP: Bullish on robots

Update 3/26/2014: ADEP hit is stop/loss on March 25 and confirmed by closing below that point the next day. I've closed my bull position for a heavy loss.

Shares declined by 16.2% over the six days I held the position, or negative 987.2% annualized.

ADEP hit a peak of $21.90 on March 21, the day after I opened my bull position, and headed south thereafter. The magnitude of the correction is as yet unclear. 

If ADEP stays above $15.33, then wave 5 {+1} is still working its way upward and it will be a shallow correction. 

If ADEP falls below $15.33, then it means that 5 {+1} and its parent, wave 3 {+2} are complete, and ADEP will correct a portion of the rise from $3.11 beginning Aug. 23, 2013, a movement that could produce a significant decline.

Click on chart to enlarge.
ADEP 9 months daily bars

Update 3/20/2013: In my initial analysis I identified $20.22 and $20.27 as two potential signals for entry. ADEP move through both, and I've opened a bull position, structuring it as long shares.

Adept Technology Inc. (ADEP) is in the middle portion of a rise that began March 7. A bull signal on Tuesday came in the midst of that uptrend, which has carried the price from $15.33 to Tuesday's high of $20.27, a rise of 32.2%.

The chart analysis shows that ADEP continues to have much upside potential once it completes a very short-term correction that began on Tuesday.

The Chart

ADEP's history is typical of tech stocks. It peaked in 2000 at $290.94, rode down to 70 cents in 2002 after the bubble burst, and has since been working its way painfully higher in a normal Elliott wave pattern.

Wave 1 {+2} in the recovery from the tech crash peaked at $23 in November 2005, and the present rise, wave 3 {+2}, is again bringing ADEP within reach of that peak.

Click on chart to enlarge.
ADEP 9 months daily bars (left), 10 days 5-minute bars (right)
ADEP is presently within wave 5 {+1}, the final wave of the rise from $15.33 beginning March 7, and is in wave 3, the middle wave, of that rise.

Wave 3 carried up to a peak of $20.27 on Tuesday at 1:45 p.m. New York time, and then swung into what appears to be a sideways correction within wave 3, which I've labeled wave 4 {-1}.

Once wave 4 {-1} is complete, wave 5 {-1} will complete wave 3, leading to a correction of a portion of the rise from $15.33 to whatever the wave 3 peak turns out to be.

There's no way to set a target for wave 5 {-1}. Fifth waves can turn out to be stunted creatures unworthy of respect, but often extend their rise into structures of impressive proportion.

The enclosing wave of higher degree, wave 3 {+2}, must eventually move higher than the $23 wave 1 {+1} peak, but wave 3 has no such requirement, and neither does its parent, wave 5 {+1}. The upward push above that level might well end up being the work of a future wave 5.

In any case, simple support and resistance analysis suggests that ADEP will face some struggle to push above the $23 level. That is 14.1% above today's opening price, giving a lot of room for profit.

Odds and Yields

This is ADEP's second bull signal since wave 3 {+1} began in August 2013. The first bull signal gained 301.9% over 123 days and was a wonder to behold.

The Company

Adept Technology, headquartered in Pleasanton, California, makes industrial robots for manufacturing, packaging and factory automation, as well as robot control devices and software. It has offices in the EU and Singapore.

Its financials are less than stellar, with a return on equity of negative 17%. Debt, however, is low, at 2% of equity.

The company isn't followed by enough analysts to calculate an enthusiasm index, but they are for the most part positive about its future prospects.

The company has reported losses for six of the last eight quarters. The most recent quarter showed a small profit.

The 12-month earnings yield is a negative 1.12%. Adept pays no dividend.

Even so, the stock are selling at a steep premium to sales. It takes $4.93 in shares to control a dollar in sales.

Institutions own 53% of shares. Adept next publishes earnings on May 7.

Liquidity and Volatility

ADEP on average trades 464,000 shares a day and supports a moderate selection of option strike prices spaced $2.50 apart, with open interest mainly in the double digits near the money. The front-month at-the-money bid/ask spread on calls is 20.8%, compared to 0.9% for the S&P 500 exchange-traded fund SPY.

Implied volatility stands at 75% and tends to swing wildly, as is typical of many small-cap stocks. Big picture, it has been stairstepping lower since October 2013. Near term, it fell sharply from 85% on March 14 to 68% on March 17, and then swung up to the present level.

Volatility stands at the 17th percentile of the one-year range, meaning long options spreads bought with a debit are likely to have the best chance of success. However, ADEP's options are too illiquid for me trade, so any position I open will be structured as long shares.

Contracts are trading actively today, with puts running 78% above their five-day average volume and calls at 93% of average.

Decision for My Account

I intend to open a bull position in ADEP, structuring it as long shares. However, my chart analysis shows ADEP to be in a near-term bearish correction, wave 4 {-1}.

I'll add ADEP to my Watchlist and open a position when the correction is over. A push above $20.27 would be a clear signal to enter, but the chart might well suggest an earlier entry. A correction high of $20.22, hit Wednesday morning in the first hour of trading provides another signalling point for entry.


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 decisions for his or her own account, and take responsibility for the consequences.

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