Tuesday, April 15, 2014

SBGL: The rest of the story

Sibanye Gold Ltd. (SBGL) is on the final leg of a rise that began in late June. The South African company began trading in New York as American depository receipts on Feb. 21, 2013.

The chart shows a strong uptrend from that June low, but a comparison with the price of gold allows us to see the rest of the story. The chapters that came before SBGL began trading shows that the symbol's bullish uptrend is in fact an upward correction within a downtrend.

The Chart

Gold is one of the few markets where it is possible to see a strong correlation between a company and a commodity, allowing the analyst to infer a history that won't show on a new symbol's chart.

In the charts below, I show the exchange-traded fund GLD, which tracks the price of gold, to the left, and SBGL, the gold miner, to the right.

Click on chart to enlarge.
GLD 2 years 2-day bars (left), SBGL 2 years daily bars (right)
I've marked the dates of the SBGL reversals to the upside on both charts in red: June 26 and Dec. 19, 2013, and March 27 of the current year.

They match almost exactly, and I have no doubt that had SBGL been trading, it would have declined from GLD's peak on Sept. 6, 2011.

But now, with the Elliott wave analysis, it gets fun, because the two charts diverge in their behavior within the rise from June.

SBGL, in the right-hand chart, clearly counts five waves, a classic trend. Looking at the count only, it could indeed be an uptrend, or it could be the internal count of an A- or C-wave formation within an upside correction.

In SBGL, wave 3 moves up to a new high on March 13 before reversing, and is in fact is so far the strongest of the waves moving in the direction of the trend. GLD also reverses on March 13 but fails to set a new high.

I'm not entirely sure what to make of GLD. I think it counts best as a triangle in the process of being formed, which would mean five touches of the boundaries, labeled "a" through "e", with wave "d" presently underway to the downside.

In terms of the morphology, wave "a" in GLD equates to wave 1 on the SBGL chart, "b" with 2, "c" with 3 and the future "d" with -- well, we don't know yet, but presumably it will be something after SBGL's wave 5 to the upside is complete.

That's a long way of saying that this is an extremely troubling chart, filled with ambiguities. The company's website promises full exposure to the gold price, without hedging, which makes the disparities even more puzzling.

What is clear for SBGL is that under the Elliott wave rules, wave 5 has completed its minimum requirements and could reverse at any time without invalidating the analysis. But there is no obligation for it to do so, and it could continue to rise some distance before reversing.

Odds and Yields

SBGL has completed three bull signals since the present uptrend began in June. Two of them succeeded, on average yielding 43% (not a typo) over 43 days (also not a typo). The one unsuccessful trade lost 4.8% over 21 days. The resulting 38.2% win/lose yield spread is quite remarkable.

The Company

Sibanye Gold, headquartered in Westonaria, South Africa, mines gold in that country. It estimates that it has at least 16 years of production yet.

Often with foreign companies my standard suite of financial information is difficult to obtain. So it is with Sibanye, and since I set little store by the financials, I'll leave it unaddressed and note only that Zacks gives the company a bullish rating.

The stock is selling at a premium to sales. It takes $2.54 in shares to control a dollar in sales.

Institutions own 24% of shares.

SBGL next publishes earnings on May 12. The stock goes ex-dividend in September for a semi-annual payout of 28 cents per share, or an annualized yield at today's prices of 5.58%.

Liquidity and Volatility

SBGL on average trades 649,000 shares a day, sufficient to support a moderate selection of option strike prices spaced $2.50 apart. The front-month at-the-money bid/ask spread on calls is quite wide, at 17%, compared to 0.3% for the exchange-traded fund SPY, the most traded symbol on the U.S. markets.

Open interest stands at three digits near the money, but the spread is too wide for me to trade. So any position I would take in SBGL would be as long shares.

Implied volatility stands at 44% and has been tracking sideways in wide zig-zags for nearly a year. Volatility of the S&P 500, by contrast, stands at 17%.

SBGL's volatility is in the 24th percentile of the annual range, a level that supports a long options position is more likely to succeed.

However, the extremes were set nearly a year ago. Volatility is in the 44th percentile of the six-month range, a neutral level implying that long shares are the best bet.

Options are pricing in confidence that 68.2% of trades will fall between $8.71 and $11.27 over the next month, for a potential gain or loss of 12.8%, and between $9.38 and $10.60 over the next week.

Contracts are trading quite slowly today, with both calls and puts at about 10% of their five-day average volume.

Decision for My Account

I don't plan to take this trade, for two reasons.

First, I can't explain the discrepancy between the behavior of gold's price and SGBL's. I don't like to trade mysteries.

Second, SBGL is in a 5th wave that has met its minimum requirements, and moreover has reversed from its peak today. There's no way to know for sure, but there is a good chance in my view that the uptrend may have reached an end.

I would be more willing to take the trade if SBGL were in the midst of a 3rd wave, implying more life left in the uptrend.


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.

No comments:

Post a Comment