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.