Tuesday, March 11, 2014

HIMX: High volatility in a mature uptrend

Update 3/24/2014: I've closed my bull position in HIMX. It began a decline on March 13, the day after I entered the position, and hit the exit level, the initial stop/loss point set twice the average true range below the entry price, on March 21. It traded still lower today, confirming the exit signal.

Looking at the Elliott wave analysis...

Today's decline put HIMX below the beginning of wave 5 {+1} to the upside, which means that wave 5 {+1} has ended and a correction is under way.

HIMX shares declined 13.4% over the 12-day life of the position, or 408.6% annualized. The options spreads produced a -14.6% loss on risk, or -445.3% annualized.

Click on chart to enlarge.
HIMX 6 months daily bars

Update 3/12/2014: I've opened a bull position on HIMX after it showed a bit of upside momentum, structuring it as bull call spreads expiring in June, long the $15 call and short the $18 call, bought for a net debit. 

Himax Technologies Inc . (HIMX) has more than tripled in price during the final leg alone of its rise from penny stock status.

The Taiwanese company hit bottom at 97 cents in 2011 after it began trading on the U.S. NASDAQ exchange more than five years earlier at $9.12.

It has more than recovered from the decline. The price ended a correction in June 2013 by beginning another leg up which is under way today. The price moved above its 20-day price channel today, ending a quarter-long sideways correction that began last December, marking the resumption of its upward course.

However, all uptrends must eventually reach an end. Once this final upward push is over, HIMX will enter a decline that will threaten to wreak havoc upon traders harboring bullish aspirations for this stock.

More than most symbols, HIMX invokes the classic twins that motivate the human race: Greed and Fear.

The Chart

The rise from 97 cents, which began Oct. 19, 2011, is in its 5th and final wave, according to Elliott wave theory.

Wave 5 {+3} began June 24, 2013 from $4.76, and its final wave, 5 {+2}, began Nov. 8, 2013. And, in turn, the final wave of the push from November began March 3 from $13.25.

The HIMX uptrend is quite mature, and the ensuing correction of the rise from 2011 will be of major proportions. 

Click on chart to enlarge.
HIMX 3 years 3 months 3-day bars (left), 5 months daily bars (right)
If today's high (so far) of $16.08 were to be the peak, then the major stopping points to the downside would be $10.31, $8.52 or $6.74, although the correction could be shallower or deeper. In any case, it would be a decline of a magnitude unseen since 2011.

However, in Elliott there is no upper limit to wave 5 {+1} and its 5th wave companions of higher degree. The 5th waves could move much higher, or they could end today. 

At the same {+1} degree, the 3rd wave lasted a couple of months and the 1st wave by my count lasted less than a month, so if the 5th wave is proportional, its end come in March or April.

Odds and Yields

HIMX so far has completed eight bull signals in its rise from Oct. 19, 2011. Seven were successful, on average yielding 31.3% over 40 days, compared to a 4% loss over 13 days for the unsuccessful trade.

Most of those gains came in the earlier phase of the rise. There has been only one bull signal completed since wave 5 {+2} began on Nov. 8, 2013. It yielded 17.4% over 26 days.

The odds and yields show that the HIMX uptrend is a high performer, but one that is showing signs of age as momentum slows.

The Company

Himax, headquartered in Tainan, Taiwan, makes silicon chips and modules that are used as advanced display drivers. A subsidiary makes chips that help power Google Glass.

The company is followed by only a handful of analysts, but most are optimistic about the company's prospects. 

Himax reports return on equity of 15% with no long-term debt. Earnings have been drifting higher, with each quarter in 2013 exceeding its year-ago counterpart. The company has surprised to the downside six times in the past three years, most recently in the three most recent quarters. It has surprised to the upside four times.

The earnings yield is 2.17%, lower than 78% of other semi-conductor companies. The annual dividend yields 1.58% at today's prices.

The stock is selling at 46 times earnings, and also at a high premium to sales. It takes $3.46 in shares to control a dollar in sales.

Institutions own 24% of shares. The stock goes ex-dividend in July for an annual payout of 25 cents per share.

 Liquidity and Volatility

HIMX on average trades 6.9 million shares a today and supports a moderate selection of options strike prices spaced a dollar apart, with open interest near the money running to three and four figures.

The front-month at-the-money bid/ask spread on calls is 3.7%, compared to 0.4% for the S&P 500 exchange-traded fund SPY.

Implied volatility stands at 66% and began rising last week after falling from 79%. Volatility is in the 20th percentile but is 19% higher than historical volatility.

Volatility in the low end of the annual range suggests that long options vertical spreads, as as bull call spreads bought for a debit, will have the best chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $12.29 and $18.05 over the next month, for a potential gain or loss of 19%, and between $13.79 and $16.55 over the next week.

Options are trading actively today, with calls running 65% above their five-day average volume and puts at more than double the average.

Decision for My Account

Greed and fear. Greed and fear. The two great motivators in life are certainly at war in this symbol. On the greed side, the high volatility means that the potential for profit is quite high. On the fear side, the Elliott wave count concludes that a correction may begin within a month or two, and that it will be a big one.

I intend to open a bull position in HMIX, structuring it as a bull call spread if I can get a decent fill. Failing that, then I'll go with shares.

I'll place the trade if HIMX shows upward momentum int he last half hour of trading. If momentum falters, then I'll add it to my Watchlist.


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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