Wednesday, April 30, 2014

Wednesday's Outcomes: None

There were neither trades nor analyses to spice up the day. My earlier post, "Wednesday's Prospects: Round 2", gives specific reasons why nothing met my criteria.

More broadly, I see two reasons for the lack of activity. First, we are in earnings season and nearly all of the possibilities for trading identified in my first-round analysis fall within the 30-day earnings exclusion period. Once symbols near to an earnings release are eliminated, there are very few left over as potential trades.

Arguably, earnings have a major negative impact on my trading pool for as many as six months out of the year. 

Secondly, the markets broadly seem to be in the process of slowing in the uptrend that has been underway for the past couple of years. That doesn't mean that the party is over, only that it has reached that awkward silent moment in the middle of the evening when everyone glances at everyone else and realizes they have nothing else to say. 

Arguably, slowdowns like the present one have a negative impact on my results.

The earnings season problem and the slowdown problem combined mean that my trading funds are, for the most part, in cash. That's a problem. It is a core principal of trading that idle money loses value.

My rules are geared toward the short term, with positions lasting a few months at best. Those rules are doing their job by keeping me out of trades that seem likely to produce a surprise or a loss over the nearer term. Those rules aren't the problem.

However, exclusive reliance on the short term means that I'm missing out on the tax and dividend opportunities that come from holding shares for more than a year. The opportunities, I think, lie in diversifying my approach by adding a longer term component that will allow me to put idle funds to work.

I don't for a moment propose scrapping or weakening my present short-term plan. But I am looking at how to create a rule set that will allow me to supplement that plan with longer term positions geared both to growth and income.

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

Wednesday's Prospects: Round 2

Four symbols survived my first round of analysis. (See "Wednesday's Prospects".)

One, MILL, is a potential bear play. However, its options are insufficiently liquid to allow me to construct a bear position.

The three remaining symbols, all potential bull plays, confirmed their breakouts by trading still higher this morning, although SWHC on the small-cap list flirted with non-confirmation, breaking back into its 20-day price channel before rising again.

An initial assessment of the CCL and TSS charts tells me that each is, most likely, within a downtrend. The bull signals they gave are retracements to the upside as the stocks zig-zag lower. I much prefer to trade with the trend, not against it.

SWHC is in an uptrend, although in a late stage. It lacks liquid options and so presents no opportunity for leverage.

Only CCL out of the bunch has options that I could trade.

Bottom line: I don't like any of these enough to do a full work-up, so I'm failing them on the second round of analysis.

No symbols survived the first round on the supplemental list of large-cap bear signals, no there's no joy there.

I won't be writing any analysis today from the new prospects lists.

NGG, which has been on the Watchlist since April 16 as a potential bull play, is on track to confirm a fresh breakout today that meets my chart criteria for trading. However, the company publishes earnings on May 15, which brings NGG within the 30-day earnings exclusion period, so I can't take the trade.

NGG will remain on the Watchlist and I'll do a fresh assessment post-earnings. See my initial analysis, "NGG: Whipsaw candidate".

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.


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, April 29:

Of 3,901 stocks and exchange-traded funds in this week's analytical universe, 37 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 22 to the upside and 15 to the downside.

Thirty-six major-exchange small-cap symbols broke out, 11 to the upside and 25 to the downside.

Ten over-the-counter symbols broke out, seven to the upside and three to the downside.

Two mid- or large-cap symbols traded on the major exchanges survived my initial screening, both having broken out to the upside. In descending order by average yield, they are TSS and CCL.

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

No symbols traded over the counter survived my initial screening.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds.

I shall do further analysis of the surviving symbols on Wednesday, April 30.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

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 greater than 50%, 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 because of the presence of options.

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, April 29, 2014

Tuesday's Outcomes: VOD

I've removed VOD from the Roll Shelf, where it was a potential bear play, and have updated my April 14 analysis with results and details, including a chart update. See "VOD: Not quite free fall".

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

Tuesday's Prospects: Round 2

There are a paucity of prospects from the main lists today. Only one symbol survived the first round of analysis on the large-/mid-cap list, ASPS, a potential bear play. There were no survivors from the small-cap and over-the-counter lists.

And ASPS, as it turns out during second-round analysis, has low open interest on its options, running mainly at none for most strikes in the front month, with the occasional single- and double-digit strike. I can't construct a bear play out of such illiquid options.

I then turned to the supplemental list of large-cap symbols that are potential bear plays. For this list, I don't screen for odds of success but I do eliminate symbols within 30 days of an earnings announcement.

I generate this list of breakouts to the downside because the markets have been in an uptrend for a very long time. Therefore, many symbols have no history of bear signals, a fact that distorts my ability to trade in downtrending markets. Also, bear plays require more liquidity than bull plays do, and restricting the list to large-cap stocks increases of chances finding something I can trade.

The list ensures that I get a more complete picture of potential practical bear plays, despite the factors that make trades in that direction more difficult to find.

The sole survivor of first-round analysis for the supplemental list was JNPR, and it has failed confirmation in the second round, rising back within the 20-day price channel.

I am bereft any symbol from Monday's markets to analyze and trade, so I shall turn my attention to other projects and hope that the morrow will bring more prospects my way.

One symbol from the Roll Shelf, the bear play VOD, broke above its 10-day price channel on Monday and appears to be likely to confirm the signal today. Confirmation, if it persists into the half hour before the closing bell, will require that I end the VOD bear series, remove it from the Roll Shelf, and calculate results.

See "Tuesday's Prospects" for a description of my first round of analysis.

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.


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, April 28:

Of 3,901 stocks and exchange-traded funds in this week's analytical universe, 56 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 36 to the downside.

Twenty-three major-exchange small-cap symbols broke out, four to the upside and 19 to the downside.

Four over-the-counter symbols broke out, three to the upside and one to the downside.

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

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

No symbols traded over the counter survived my initial screening.

One large-cap symbol survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds. It is JNPR.

I shall do further analysis of the surviving symbols on Tuesday, April 29.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

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 greater than 50%, 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 because of the presence of options.

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, April 28, 2014

Monday's Outcomes: IMAX

I've opened a bear position in IMAX. See today's analysis, "IMAX: Bearish on big screens", for details.

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

IMAX: Bearish on big screens

Update 5/30/2014: IMAX reversed its decline on May 15 and began to rise, triggering its stop/loss on May 29 and confirming it the next day. I've closed the position for a loss.

Over the 32 days I held the bear position, the shares rose by 1%, or 11.1% annualized. My leveraged option position produced a 15.3% loss on risk, or a loss of 174% annualized. The loss on debit was 22%, or 250.4% annualized.

I have no post-game assessment for this one. It was a normal reversal at the end of an Elliott wave. The loss was larger than expected because IMAX rose 3.3% intraday (low to high) on a 62% volume surge, something that's always a risk.

The sharp rise moved IMAX above the 10-day price channel, so under my rules it's a full close of the series, with no future rolls.

Update 4/26/2014: I've opened a bear position in IMAX, structuring it as bear put vertical spreads expiring in September, long the $26 put and short the $25 put. The position has 4.6:1 leverage and reaches maximum profit at expiration at $25.99. The long put as a 55% chance of expiring in the money

IMAX Corp. (IMAX) fell sharply on Thursday after missing its earnings estimates and traded still lower Friday and today, validating the bear signal.  under the special earnings confirmation rule.

The stock peaked last November at $31.23 and has been tracing a downward course since, with a break from early February for an upward retracement that ended in early April.

The chart is bearish and so are the financials, two special effects that combined make this big-screen production irresistible.

The Chart

IMAX trades like a tech stock. It fell like rock when the dot-com bubble burst in 2000, hitting its nadir of 55 cents a share in September 2001. From that point it has recovered, tracing three waves to the upside and peaking in June 2011 at $38.

Elliott wave analysis shows that if the 2011 peak is labeled wave 3 {+5}, then IMAX is working its way through a downward correction, wave 4 {+5}. That correction will take back a portion of the rise from $2.41 that began in November 2008, the Great Recession low.

Click on chart to enlarge.
IMAX 3 years daily bars (left), 8 months 2-hour bars (right)
I've counted wave B {+4}, the second leg of the three-leg correction, as ending Nov. 25, 2013. As always with the shorter-term analysis, the degree of analysis of the subsequent decline defies easy definition. I've counted the position within wave C {+4} as being wave 1 {+3}, and within that the middle wave, 3 {+1} of wave 1 {+2}.

Wave 3 {+1} began April 4 from $28.79 and, if it is proportional with the rest of the IMAX chart, it will take several months to work its way downward. Wave 3 {+1} today fulfilled one requirement under Elliott. It moved beyond the end of wave 1 {+1}, proving itself with a lower low to be a true downtrend.

Odds and Yields

IMAX has completed one bear signal since wave C {+4} to the downside began. It was successful, although barely so, yielding 0.5% over 37 days. Typically, 3rd waves are more robust, so perhaps the present signal will be more productive.

The Company

IMAX, headquartered in Mississauga, Ontario, operates 837 super-large screens that are found in movie theaters, museums and science centers in 57 countries. The high-resolution screen and top-of-the-line sound system provide an extremely immersive film experience.

Brokerage analysts collectively are unimpressed, giving IMAX a negative 9% enthusiasm rating.

IMAX reports return on equity of 15% with no long-term debt. The company has been profitable for years, with earnings hitting a three-year peak in the 4th quarter of 2013, accompanied by a significant upside earnings surprise.

However, the most recent report, which caused the present bear signal, declined sharply and produced a downside earnings surprise. The 1st quarter is typically the low earner each year and this is the third time earnings for that quarter have declined form the prior year.

The earnings yield is 2.48%, lower than 77% of other companies in the motion picture industry. The stock is selling at 40 times earnings and also at a large premium to sales. It takes $6.11 in shares to control a dollar in sales.

Institutions own 92% of shares.

IMAX next publishes earnings on July 28. The company pays no dividend.

Liquidity and Volatility

IMAX on average trades 733,000 shares a day and supports a wide selection of option strike prices spaced a dollar apart, with open interest running to five figures.

The bid/ask spread on front-month at-the-money puts is 7.1%, compared with 0.5% for SPY, the exchange-traded fund that is the most heavily traded symbol in the U.S. markets.

Implied volatility stands at 29%. It began to rise from 28% on April 24 after declining from 44% beginning Feb. 12. By contract, the S&P 500's volatility stands at 15%.

IMAX volatility is in the 21st percentile of the one-year range. This is relatively low, suggesting that the trade structure most likely to succeed would be a long vertical spread expiring in September, built out of puts and bought with a net debit.

Options are pricing in confidence that 68.2% of trades will fall between $23.24 and $27.56 over the next month, for a potential gain or loss of 8.5%, and between $24.36 and $26.44 over the next week.

Contracts are trading slowly today and are skewed toward puts, with are running at 60% of their five-day average volume, with calls at 31%.

Decision for My Account

I intend to open a bear position in IMAX if it continues to show downside momentum in the half hour before the closing bell. The chart analyzes as bearish, and that case is supported by the financials.

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 four survivors of my first round of analysis confirmed their signals in trading today.

See "Monday's Prospects" for a complete run-down of the first-wave analysis.

IMAX has the highest volume of the surviving symbols. It sent a bear signal on Friday. Its chart, however, is in an ambiguous uptrend following a sharp price decline in 2011. I say ambiguous because because it remains below the peak and so could be counted as either an uptrend or a downtrend, and nearer term it has yet to attain the lower low required to count it as a downtrend.

PGI's chart, a bull signal, shows an uptrend, but it is a lower liquidity stock that can be seen as nearing the end of an upward correction within a downtrend.

HWAY, a bull signal, has a bearish chart, and JMPLY, also a bull signal, lacks sufficient liquidity for me to trade.

The two survivors on the supplemental list of highly liquid bear signals, JCI and UAL, both are correcting within an uptrend. JCI is prone to whipsaws and UAL has no history of bear signals during the period analyzed.

Not great choices. I'm going to write a full analysis of IMAX. The chart is sufficiently ambiguous that a full analysis might well show it to be better than it seems. I'll post the write-up prior to the closing bell.

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.


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, April 27, 2014

The Week Ahead: Big fireworks, including jobs, GDP and the FOMC.

The big fireworks of economics reporting shoot skyward this week. They are certain to give traders cause to look up from narrower concerns such as earnings to the farther horizons of the business cycle.

The gross domestic product provides a first look at 1st quarter growth, on Wednesday at 8:30 a.m. New York time, followed the same day at 2 p.m. by the Federal Open Market Committee announcement of money-policy decisions.

Personal income and outlays will be released on Thursday at 8:30 a.m., followed the same day at 10 a.m. by the Institute of Supply Management manufacturing index.

And on Friday at 8:30 a.m. comes the grand finale, the employment report, including the headline generating unemployment rate. It will be the subject of a sneak preview when the payroll-based ADP employment report is made public Wednesday at 8:15 a.m.

And Federal Reserve Chair Janet Yellen gives a speech on community bank supervision at Thursday at 8:30 a.m.

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. Friday.

Vendor performance, or the delivery times index from the Institute of Supply Management manufacturing index, at 10 a.m. Thursday.

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 non-defense capital goods, from the factory orders report, at 10 a.m. Friday.

Other reports of interest:

Monday: The pending home sales index at 10 a.m. and the Dallas Federal Reserve manufacturing survey at 10:30 a.m.

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

Wednesday: The employment cost index at 8:30 a.m., the Chicago Purchasing Managers index at 9:45 a.m. and petroleum inventories at 10:30 a.m.

Thursday:  Motor vehicle sales throughout the day, the Purchasing Managers Institute manufacturing index at 9:45 a.m., construction spending at 10 a.m. and the Federal Reserve money supply report at 4:30 p.m.

Friday: Factory orders at 10 a.m.

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

Fedsters

Yellen aside, the Federal Reserve glitterati are silent this week.

Analytical universe

This week I shall be analyzing new bull and bear signals among 3,901 small-cap and larger stocks and exchange-traded funds.

Trading calendar

By my rules, I'm trading June 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 August 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, April 25:

Of 3,901 stocks and exchange-traded funds in this week's analytical universe, 58 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 17 to the upside and 41 to the downside.

Forty-three major-exchange small-cap symbols broke out, eight to the upside and 35 to the downside.

Eighteen over-the-counter symbols broke out, three to the upside and 15 to the downside.

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

Two small-cap major-exchange symbols survived initial screening, both having broken out to the upside. Sorted in descending order by average yield, they are PGI and HWAY.

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

Two large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds. They are JCI and UAL.

I shall do further analysis of the surviving symbol on Monday, April 28.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

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 greater than 50%, 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 because of the presence of options.

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, April 25, 2014

GMK: Not confirmed under the earnings rule

GMK has failed confirmation under the special earnings rule, and I don't plan to do a full analysis, contrary to what I had anticipated earlier in the day. I've updated "Friday's Prospects: Round 2" with an explanation.

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.


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

Updated with non-confirmation and so no plans to do a full analysis of GMK.

GMK, the sole survivor of my first round of analysis, confirmed its bull signal today, continuing to trade above its breakout level. failed confirmation today.

GMK, as it turns out, broke above its 20-day price channel upon publishing earnings, and so comes under the special earnings confirmation rule.

Normally, confirmation means closing the next day beyond the breakout level. In the case of earnings, the symbol must do a double confirmation: Trade the next day, called "reset day", beyond the new 20-day price channel boundary produced by the breakout, and then confirm the day after by trading above the reset day breakout level.

I'm doing no further analysis today due to a scheduling conflict. but shall do a full work up on the symbol over the weekend.

See "Friday's Prospects" for my first-round results.

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.


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, April 24:

Of 3,914 stocks and exchange-traded funds in this week's analytical universe, 52 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 36 to the upside and 16 to the downside.

Twenty-three major-exchange small-cap symbols broke out, 11 to the upside and 12 to the downside.

Eleven over-the-counter symbols broke out, five to the upside and six to the downside.

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

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

No symbols traded over the counter survived my initial screening.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds. Four of the large-cap breakouts were bullish, and the one bearish breakout fell within the earnings exclusion period.

I shall do further analysis of the surviving symbol on Friday, April 25. However, I shall defer any full write-ups until the weekends because of a scheduling conflict.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

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, April 24, 2014

Thursday's Outcomes: MTB

I analyzed MTB but declined to take the trade. See "MTB: A regional bank bull play".

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

MTB: A regional bank bull play

Update 4/24/2014: MTB closed above its breakout level, confirming the bull signal. It moved back above the breakout level in the last three minutes of trading. For the reasons state in the "Decision" section, I don't intend to take the trade.

As M&T Bank Corp. (MTB) is approaching its pre-recession high set in 2007, the chart suggests that the major resistance at that level will be overcome, positioning the symbol for a continued rise. The chart, however, says nothing about how difficult it will be to scale that rampart.

MTB at today's opening stood 0.9% below the 2007 high of $125.13, a day after it broke above the 20-day price channel, sending a bull signal.

However, as I was writing this analysis, MTB slipped below the breakout level and again entered the boundaries of the 20-day price channel. If it closes back in the channel, then the bull signal is void and no trade will be possible.

The Chart

Elliott wave analysis shows MTB is in the middle portion of its rise from March 2009, in the depths of the Great Recession.

That middle portion, wave 3 {+3} began in October 2011 from $66.40. The first wave one degree lower, wave 1 {+2}, peaked July 18, 2013 at $119.54 and was followed by an extremely shallow correction that failed to attain even the 23.6% Fibonacci retracement.

Click on chart to enlarge.
MTB 13 years weekly bars (left), 1 year daily bars (right)
There's nothing in the Elliott rules that forbids such a shallow correction but it does raise a red flag. I went over the count at deeper degrees and am convinced that I've gotten it right. If I got it wrong, the error would be on the side of even greater upside potential, so it would be a winning error.

My count places MTB in wave 3 of wave 1 {+1} of 3 {+2} of 3 {+3}.

Odds and Yields

MTB has had an even chance of producing a whipsaw in the wave 5 {+1} rise that began a year ago, with four bull signals, two winners and two losers. Successful trades had the edge, however, on average yielding 6.2% over 35 days, compared to a loss of 1.3% over 27 days for the unsuccessful trades.

Longer term, the rise has produced 11 bull signals. The seven successful plays yielded 5.5% over 41 days on average, compared to a loss of 3.7% over 19 days on average for the failures. The win/lose yield spread over this longer period is only 1.8%, not terrible but nothing to cheer about.

The Company

M&T Bank, headquartered in Buffalo, New York, is a regional bank-holding company with two subsidiaries, M&T Bank and Wilmington Trust and the National Association (Wilmington Trust N.A.). It operates more than 750 branches in eight eastern states and the District of Columbia.

Analysts are far from sanguine about M&T Bank's future, collectively coming down with a 63% negative enthusiasm rating.

The company reports return on equity of 11% and debt amounting to 59% of equity.

It has been profitable for at least the last three years, with earnings having peaked for that period in the 2nd quarter of last year and having dropped steadily thereafter.

It has surprised to the upside seven times and to the downside four times.

The earnings yield is 6.35%, comparable to other regional banks. The company also pays a dividend yielding 2.28% annualized at today's prices. The dividend yield is 36% of the earnings yield.

The stock is selling at 16 times earnings and at a high premium to sales. It takes $3.53 in shares to control a dollar in sales.

Institutions own 84% of shares.

M&T Bank goes ex-dividend in May for a quarter payout of 70 cents per share.

Liquidity and Volatility

MTB on average trades 862,000 shares a day and supports a moderate selection of option strike prices spaced $5 apart. Open interest is mainly non-existent.

The front-month at-the-money bid/ask spread on calls is huge, at 36%. By comparison, the most heavily traded symbol on the markets, the exchange-traded fund SPY, which tracks the S&P 500, has a spread of 0.8%.

MTB's options are too illiquid and the spread too wide for me to trade. Any position I open will be as long shares.

Implied volatility stands at 16% and has been trending sideways since November. Volatility stands in the 57th percentile of the one-year range and is only slightly higher than volatility on the S&P 500, which is 14%.

Historic volatility is also 14%.

Options are pricing in confidence that 68.2% of trades will fall between $117.04 and $128.44 over the next month, for a potential gain or loss of 4.6%, and between $120 and $125.48 over the next week.

Contracts today are heavily tilted toward puts, which are running at 2-1/2 times their five-day average volume. Calls are running at 29% of average.

Decision for My Account

The decline below the breakout level in afternoon trading calls the bull signal into question. I handle this as I do any bull play: If the symbol shows momentum to the upside in the half hour before the closing bell, then I can place the trade.

I've purposely left "momentum" undefined, allowing me to adapt to the specific situation. My subconscious assessment for the feel of the chart comes into play, and I'm comfortable with that. I've viewed a lot of charts.

"Momentum" for me could mean a rise in the last half hour that still remains below the opening price, it could mean a close above the opening price, and in this case, it definitely means a close above the upper boundary of the 20-day price channel, at $122.86.

Non-confirmation aside, there are things I don't like about MTB. The low volatility, nearly as low as the VIX, limits my profit in return for risk. The odds suggest a significant likelihood of whipsaws, and the low win/lose yield spread on the rise since 2011 suggests that it's not a risk worth taking.

I'll update this post with where MTB closed in relation to the breakout level, but even if the bull signal is confirmed, I don't intend to trade this symbol.


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

The four survivors of my first round of analysis all were confirmed this morning, as they continued to trade beyond the breakout level that produced their bull signals.

I rejected the most liquid of batch, COST, based on the chart. It appears likely that the symbol began a correction to the downside in November. Although at that level there's certainly room to profit, I see nothing that persuades me that there is indeed a great deal of momentum to the upside.

CSTM last year went from having no value to more than $13 a share in a single day. Obviously, there was some sort of change in what the symbol represents. For me, it means that I lack a reasonable span of history to understand the stock's evolution.

MTB has followed the general pattern for stocks -- uptrend beginning in 2009 from the depths of the Great Recession, correction into 2010, and then a resumption of the uptrend in 2011. It's a late-stage uptrend, clearly, and is approaching the pre-recession top, 9% 0.9% above today's opening price.

The over-the-counter survivor, ASBFY, is also in a late-stage uptrend. It's a British company, traded in New York as American depository receipts, with all the disadvantages of such instruments: Relatively low volume and a large bid/ask on shares.

MTB is my best choice of the batch. I dislike its close proximity to major resistance, but 9% isn't a deal killer. I intend to write a full analysis of MTB and shall post it before the closing bell today.

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.


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, April 23:

Of 3,914 stocks and exchange-traded funds in this week's analytical universe, 39 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 28 to the upside and 11 to the downside.

Thirteen major-exchange small-cap symbols broke out, six to the upside and seven to the downside.

Eleven over-the-counter symbols broke out, six to the upside and five to the downside.

Three mid- or large-cap symbols traded on the major exchanges survived my initial screening, all having broken out to the upside. In descending order of average yield, they are CSTM, MTB and COST.

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

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

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds. All five large-cap breakouts were bullish.

I shall do further analysis of the surviving symbols on Thursday, April 24.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

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, April 23, 2014

SPY: Off the Roll Shelf

A heads up. I've updated today's Outcomes posting with a late update to my SPY bear series. I've taken SPY off of the Roll Shelf and tossed this particular fish back in the water.

I've updated the initial entry posting, on Jan. 27, with results (losses), a fresh chart and an updated count, including a thought on the nature of Elliott wave analysis, which I'll reproduce here:
The chart is a textbook example of why Elliott wave analysis should be considered to be a frame, an artificial method of trying to understand a chart, rather than unquestioned truth. The ambiguities on the chart at this relatively small degree are legion.
That's a roundabout way of saying that although I find Elliott to be an immensely useful and supple tool, I've found it to be a fickle companion on many occasions. That's why I've begun keeping such tight stop/losses and attempt to hedge my directional plays whenever possible.

The links:
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.


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.
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 Outcomes: FC, SPY, NGG

FC failed to show upside momentum in the half hour before trading and I've added it to the Watchlist. See the update to today's analysis, "FC: Bullish on effectiveness".

SPY moved above its 10-day price channel and I've removed it from the Roll Shelf, updating the entry posting with results and an extensive chart talk. See "The Market: Has the apocalypse arrived yet?"

NGG, a potential bull play on the Watchlist, gave an entry signal on Tuesday but failed to confirm it today. I've updated my analysis from April 16, "NGG: Whipsaw candidate".

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

FC: Bullish on effectiveness

Update 6/23/2014: FC closed below the 10-day price channel on June 22 and confirmed the signal the next day. I've removed FC from the Roll Shelf. The position, structured as long shares, lost -2.7% over 19 days, or -51.9% annualized.

Update 6/18/2014: FC closed below its stop/loss level on June 17 and confirmed the exit signal the next day. The symbol will go on the Roll List until it closes and confirms below the 10-day price channel. Otherwise, it will be eligible for re-entry under my roll rules.

My practice is to defer calculation of profit or loss until the symbol is no longer eligible to be rolled forward.

In terms of the Elliott wave analysis:

The bearish analysis goes like this. The peak of $22.75 on June 6, which marked the reversal point into the present decline, can be seen as the conclusion of wave 3 {+2}, which began Nov. 2, 2009. The present decline,  by the count, can be seen as the beginning of a correction that will take back a portion of the rise from $4.76, a significant decline indeed.

Click on chart to enlarge.
FC 8 months daily bars
Alternately, there is a bullish analysis. The decline could be a move of lower degree that signifies yet another 5th-wave extension in a stock that is prone to such patterns.

At any rate, my exit rules have quite properly gotten me out of the position for a small loss, and if the bullish count proves to be correct, then it will get me back in when the price again closes above the 20-day price channel and confirms the breakout.

The peak at $22.50 on March 4 is the numb of the problem. It can't be the end of wave 5 {-1}, which cascades up to wave 3 {+2}, because of the higher high set on June 6.

If it is instead a subdivision, wave 1 {-1} within wave 5 {-1}, then the wave 3 {-1} rise implies a long 5th wave after a brief correction because if the 3rd wave is shorter than the 1st, then the 5th wave must be the longest of all. Since is a fundamental rule of Elliott wave analysis.

I've marked that alternate count in red.

\Another possible count wold see the March 4 peak as the end of wave 3 {+2}, and the ensuing high on June 6 as simply an overshoot within a Flat, the Elliott term for a sideways correction.

I've chosen the bearish count as my primary analysis because the roll series is bullish, and therefore a decline is the most harmful outcome. In trading, I've found, it pays to give greater credence to the worst case scenario.

Update 5/30/2014: FC regained its upward momentum and I've opened a bull position under my shorter-term rules, structured as long shares.

Update 4/23/2014: FC failed to show upside momentum near the closing bell and I've decided not to take the trade today. I've added FC to my Watchlist for future consideration as a bull play.

The rules are these: A close above the current 20-day price channel triggers a potential entry signal, which must be confirmed by FC closing above that signal level the next day. A close below the 10-day price channel would trigger removal from the Watchlist.

Franklin Covey Co. (FC), in breaking above its 20-day price channel on Tuesday, continued a strong uptrend that has nearly quadrupled the price since September 2011.

FC has shown a bullish face for more than two years, but a detailed look at the chart for the past 90 days suggests that the stock is undertaking a correction before pushing on to fresh highs. The correction may, in fact, be over already, but it will take a rise of nearly 5% to confirm that assessment.

The Chart

Elliott wave analysis places FC in the third wave up of a rise that began in 2003 from 65 cents and carried the price to a high last March of $22.50. That high represented the end of the first wave to the upside of a rise that began Feb. 3, 2014 from $17.95.

By my count, that correction ended April 11 at $18.29 and the third wave to the upside has begun. It will carry the price  beyond $22.50 into new territory.

Click on chart to enlarge.
FC 3 years daily bars (left), 4 months hourly bars (right)
In terms of my chart terminology, I count FC as being in wave 1 {-3} of wave 3 {-2} of wave 5 {-1} of wave 5 of wave 5 {+1} of wave 3 {+2} of wave 3 {+3}. The left-hand chart above shows the rise from wave 5 {+1}, and the right-hand chart, the rise from wave 5 {-1}.

The end of wave 5 {+1}, which began in 2011, will signal the start of a major correction to the downside. The prior rising wave at the {+1} degree took a year to run its course, so wave 5 {+1} is already disproportionate to its degree.

Fifth waves in Elliott, however, have a tendency to extend, so that atypical time span is not atypical of fifth waves.

Also, it is not yet certain that the wave 2 {-2} short-term correction is over. It will take a rise above $22.50, which is 4.9% above today's opening price, to confirm that wave 3 {-2} has indeed begun.

Odds and Yields

However bullish the chart might look, FC's results have been on the dismal side when it comes to bull signals.

The stock has produced 12 bull signals since wave 5 {+1} began in September 2011. Only four of those produced a profit, with an average yield of 10.3% over 47 days. The eight unsuccessful trades lost 6% over 27 days on average.

The results 4.3% win/lose yield  spread isn't awful, but the numbers tell me that FC is prone to whipsaws. It is, after all, a small-cap stock with low trading volume. Such symbols can be disproportionately influenced by short-term speculations.

The present wave 5 {-1}, which began in February, has completed only one bull signals, which yielded 0.2% over 24 days. That's very little yield for the risk.

The Company

Franklin Covey, headquartered in Salt Lake City, Utah, is a consulting company whose business is helping other companies work better. It does for the post-modern service, psychology and tech era what Frederick Winslow Taylor did in the age of vast assembly lines and scientific management.

The company's website states describes Franklin Covey as "a global company specializing in performance improvements. We help organizations achieve results that require a change in human behavior."

The "Covey" part of the company name comes from the late Stephen R. Covey, author of the wildly popular self-help book, The 7 Habits of Highly Effective People. The "Franklin" part is from the Franklin Planner, a popular time-management system.

If return on equity is, a measure of management effectiveness, then Franklin Covey is effective but not highly so. Return on equity is 13%, well below the 20% minimum I require for growth stocks. Debt is 24% of equity, a bit higher than I like.

Earnings tend to peak in the 4th quarter, and each 4th quarter has come in higher than its year-ago counterpart for at least the past three years. The 4th quarter of 2013, especially, saw a spike that carried it to 2-1/2 times its year-ago quarter.

Earnings have surprised to the upside 10 times in the last three years, and to the downside twice, most recently in the quarter before last.

The earnings yield is 3.8%, lower than 67% in the Services:Schools industry. Stocks are selling at 26 times earnings and are priced at a premium to sales. It takes $1.83 in shares to control a dollar in sales. The company pays no dividend.

Institutions own 51% of shares.

Franklin Covey next publishes earnings on July 3.

Liquidity and Volatility

FC on average trades 40,000 shares a day. It has no stock options. Any bull play will need to be structured as long shares.

Without options, no implied volatility calculations are possible. Historical volatility stands at 31% and has been declining since reversing course at 33% in early February. The S&P 500 exchange-traded fund SPY, the most widely traded symbol in the markets, has historic volatility of 12%.

FC's historic volatility is in the 62nd percentile of the one-year range, which puts it on the high side.

Taking historic volatility as an analog for implied volatility, I can calculate that volatility implies that 68.2% of trades will fall between $19.35 and $23.15 over the next month, for a potential gain or loss of 8.9%, and between $20.34 and $22.16 over the next week.

However, the "historic" part means that the calculation is looking backward. Implied volatility looks forward and so produces numbers that I consider to be more accurate.

Decision for My Account

I intend to open a bull position in FC, structuring it as long shares, if it shows upside momentum in the half hour before the closing bell. If momentum has faltered, then I'll put FC on the Watchlist for later consideration.

A more cautious approach would be to wait for FC to beak above $22.50, the level that confirms the correction is over and also the boundary of the 55-day price channel. However, since the trade is unleveraged, I feel comfortable relying on my stop/loss rules to get me out should the correction still be underway.

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

Two of the three symbols that survived my first round of analysis failed confirmation, moving back within their 20-day price channels. (See "Wednesday's Prospects" for the first-round analysis.)

That left a small-cap bull signal from FC as the sole survivor of the second round. I intend to write a full analysis of FC and shall post it prior to the closing bell.

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.


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.