Friday, April 11, 2014

ROST: A downtrend begins

Update 8/11/2014: ROST closed above its 20-day price channel on Aug. 8 and confirmed the signal the next trading day. I've removed the symbol from the Roll Shelf as an ongoing bear position series and calculated results.

The position series came in three parts. In the 20 days total in which they were active, ROST's share price declined by 0.9%, or 15.9% annualized. The options spreads I used to construct the trade produced a 6.8% yield on debit, or 125.7% annualized.

ROST, to put it mildly, was a whipsaw that in the end found redemption. The first two parts of the series lost money, but the third part made enough to more than make up for the losses. 

Referring to the chart below in the original analysis:

ROST has completed wave 5 to the downside, which in turn completes wave 1 {+1}. It is now in the the beginning states of a wave 2 {+1} counter-trend rally to the upside that would typically end below the $81.99 peak of Nov. 20, 2013, but that could engage in an exhaustion move above the peak that would exceed that level.

Update 7/24/2014: ROST closed above its stop/loss level and I've closed my bear position, moving the symbol to the Roll Shelf. 

My assessment of the chart hasn't changed; ROST remains in a bear trend. Under my rules, I'll reopen a bear position in ROST if it closes below the 10-day price channel boundary, now at $61.83, and will remove it from the Roll Shelf if it closes above the 10-day channel boundary, now at $66.65.

As is my practice, I won't calculate profit or loss until ROST has been removed from the Roll Shelf and the roll series has ended.

Update 6/26/2014: ROST closed below its 20-day price channel on June 25 and confirmed the re-entry signal today. I've taken the symbol from the Roll Shelf and opened a new bear position, structuring it as a long vertical spread, bought with a debit and expiring in November. The spread is long the $67.50 puts and short the $65 puts, with 6:1 leverage.

Update 5/13/2014: ROST, a bear play, moved above its stop/loss point on May 12 and confirmed it the next day. I've sold my position and moved ROST to the Roll Shelf. I'll calculate results once the roll series has ended.

Update 4/11/2014: I've opened a bear position in ROST, structuring it as bear put spreads, bought with a debit and expiring in August, short the $67.50 puts and long the $70 puts.

Ross Stores Inc. (ROST) began a downtrend in November, and the decline has accelerated in the last few days, keeping company with the rest of the market and producing a bear signal on Thursday that was confirmed in trading on Friday.

The trend is new enough that it can also be interpreted on the chart as a downside correction within an uptrend. However, given the breadth of the recent market reversal, I'm inclined in ROST's case toward the bear side.

The Chart

ROST peaked at $81.99 on Nov. 18, 2013, ending a huge rise that began nine years ago this month from 59 cents.

The rise has clearly traced out the five-wave pattern defined as trends in Elliott wave theory. The subsequent reversal suggests that the peak marks the end of the five wave from 1995 and begins a downtrend that will correct a significant portion of the rise.

Click on chart to enlarge.
ROST 10 years 3-day bars (left), 2 years daily bars (right)
The final wave of the uptrend, wave 5 {+3} took nearly a year to complete. Although Elliott wave theory says nothing about how long a wave must take, wave of the same degree are often proportional to one another.

The decline since last November has so far completed four waves and is in its fifth. I've arbitrarily counted those waves as being of the base degree, although they could be of greater or lesser degrees in relation to the large-scale rise from 1995, which in its totality is of the {+5} degree relative to the base by my count.

With the present downtrend, a reversal to the upside at a point above the end of wave 3,$65.15, would throw my analysis into doubt. A rise above the beginning of wave 1, $81.99, would mean that the wave 5 {+3} uptrend is not yet complete and that the downtrend has not yet begun.

Odds and Yields

ROST has completed two bear signals since the downtrend began in November. Both were successful, producing a 3.4% profit on average over 16 days.

The Company

Ross Stores Inc., headquartered in Dublin, California, sells off-price clothing at 1,091 locations in 33 U.S. states and two territories. The present slogan on its web site gives the flavor of Ross' approach: "The top brands at unbeatable savings off department store prices".

Analysts in aggregate come down dead neutral on Ross' prospects, neither optimistic nor pessimistic.

Certainly the company's financials give credence to the optimistic view: Return on equity of 43% with long-term debt at only 7% of equity.

Earnings in the peak quarters, covering the Christmas shopping season and the winter months,  have tended to come in higher than their year-ago counterparts, at least until the most recent quarter, covering Christmas 2013, when earnings were slightly lower.

Ross has surprised to the downside only once in the past three years, in the 3rd quarter of 2013, and has surprised to to the upside seven times, including the most recent quarter, the 4th of 2013.

The company has a 5.61% earnings yield, comparable with that of other apparel retailers. The dividend yield of 1.16% annualized at today's prices works ot to be about 21% of the earnings yield.

The stock is selling at nearly 18 times earnings, and also at a slight premium to sales. It takes $1.45 in shares to control a dollar in sales.

Institutions own 88% of shares. Ross next publishes earnings on May 22. The stock goes ex-dividend in June for an expected quarterly payout of 20 cents.

Liquidity and Volatility

ROST on average trades 1.4 million shares a day, sufficient to support a wide selection of option strike prices spaced $2.50 apart near the money. The front-month at-the-money bid/ask spread on puts is 4/6%, compared to 0.3% for SPY, the exchange-traded fund that tracks the S&P 500.

Implied volatility stands at 22%, placing it in the 28th percentile, and has been rising since April 3 from 19%. The S&P 500's volatility, by contrast, is 17%. The 28th percentile in in the low range, suggesting that long options spreads, such as bear put spreads, bought through debits and expiring in August or afterward, are the most likely to succeed.

Options are pricing in confidence that 68.2% of trades will fall between $64.68 and $73.40 over the next month, for a potential maximum gain or loss of 6.3%, and between $66.95 and $71.13 over the next week.

Contracts are trading heavily on the put side today, at nearly three times the five-day average volume. Calls are running at only 40% of average volume.

Decision for My Account

I intend to open a bear position in ROST if downward momentum continues in the half hour before the closing bell. I'll add ROST to my Watchlist for a later trade if momentum falters.


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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