Wednesday, April 16, 2014

NGG: Whipsaw candidate

Update 5/19/2014: NGG renewed its bull signal on May 16 and confirmed it today. However, I'm not taking the trade. The options are too illiquid for a hedged position, and given the negatives I identifed about NGG, I don't want to risk an unhedged position. I'm removing NGG from my Watchlist.
Update 4/23/2014: I had set $70.07 as the level above which I would consider a trade in NGG, and the symbol indeed broke above that level on Tuesday. However, it failed to confirm the breakout and dropped back to within the price channel. The "Whipsaw candidate" moniker in the title has proven to be quite appropriate.

Under my rules, NGG stays on the Watchlist until it breaks below the 10-day price channel. The 20-day channel has moved above $70.07, NGG now comes under my normal Watchlist rules: I'll consider re-entry if it breaks above the current 20-day price channel.

National Grid Plc (NGG), a British electricity and gas utility headquartered in London, broke above its 20-day price channel on Tuesday and confirmed the bull signal today.

The chart shows that NGG is most likely near completion of an upside retracement within a downward correction, making the signal a fine candidate for a whipsaw.

I last analyzed NGG on Jan. 23. See "NGG: Distributing power".

The Chart

My Elliott wave count shows NGG completing wave 3 {-1} to the upside on Feb. 25, thereafter swinging into a decline that is tracing out the three-wave pattern typical of corrections. That decline is wave 4 {-1}.

Click on chart to enlarge.
NGG 1 year daily bars (left), 35 days hourly bars (right)
I count wave A {-2} to the downside as ending on March 24.

The bull signal came as part of wave B {-2} to the upside. Under the rules, that wave must remain below the wave 3 {-1} peak of $70.07. NGG opened this morning at $69.70, only half a percent below that peak.

If the present rise does exceed $70.07, then my present count is wrong, and the wave 4 {-1} correction ended on March 24 (where I have the A {-2} label) and wave 5 {-1} is underway.

The internal count of wave 4 {-1}, shown in detail in the right hand chart, is anything but a clean count. I find it easier to envision wave A {-2} as a five-wave decline and B {-2} as a three-wave rise, which is the pattern required in Elliott. That count would argue for the labeling that I've used in the charts.

However, the pattern is unclear enough that a case can be made against my labeling. Time will tell.

The question I must answer from this chart is how much ambiguity I'm willing to commit funds to.

Decision for My Account

I don't intend to take this trade, based on the chart. It's a no-brainer, really. If my count is right, then it's a counter-trend play, which goes against my rules. If my count is wrong, then I'll know in short order, since NGG is so close to the level of the wave 3 {-1} peak.

I'm adding NGG to my Watchlist as a potential bull play, but I won't consider it unless it pops above the $70.07 level.


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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