Monday, April 14, 2014

VOD: Not quite free fall.

Update 4/29/2014: VOD closed above its 10-day price channel on April 28 and confirmed it on April 29. In the confirmation it closed above its 20-day price channel, sending a bull signal that will show up on the next day's analysis.

I've removed VOD from the Roll Shelf, ending the series, which was only one position lasting eight days. The reversal to the upside came the day after I entered a bear position. During the time I held the position the stock price rose by 3.2%, or 147.5% annualized.

My options spreads, being bearish, produced a 22.3% loss on risk, or 1,017.1% annualized.

The chart continues to show that it was a reasonable trade on the basis of Elliott wave analysis. What happened is that wave 1 {+1} simply ended. As I wrote in the initial analysis, below, the wave "could be complete as it stands or have much further to fall".

The other open issue was whether wave 5 {+1} within 5 {+2} is indeed complete. It would have taken a decline below $34.31 to confirm that it was indeed complete, and wave 1 {+1} ended above that level. That doesn't demand that 5{  {+1} still be in effect, but it leaves the question still open.

At any rate, I could VOD as being in wave A of 2 {+1} to the upside, a correction of the decline from $42.14 to $35.01. As of this writing it stands just below the 38.2% Fibonacci retracement level, a common reversal point for shallow corrections, although 50% ($38.58) and 61.8% ($38.42) are quite common.

Click on chart to enlarge.
VOD 90 days 2-hour bars

Update 4/22/2014: VOD closed above its stop/loss level on April 21 and confirmed the signal by trading still higher the next day. However, it remains within its 10-day price channel and so I'm rolling out of the position rather than exiting the VOD series. I won't calculate results or consider myself to have exited the VOD series of bear trades unless (until) it closes above the 10-day price channel and confirms by trading above that level the next day. 

Update 4/14/2014: I've opened some bear call spreads on VOD, short the $36 calls and long the $38 calls, sold for credit and expiring in May.

Vodafone Group Plc (VOD) reached a peak in late February and has fallen ever since, retracing about 80% of the final leg of that rise. The magnitude of the retracement, not quite free fall but close to it, persuades me that the rise that began a year earlier is complete and VOD is in a downtrend.

The price broke below its 20-day price channel on Friday and confirmed the bear signal on Monday by continuing to trade below the breakout level, although with a rise intra-day. The markets generally last week had a strong bias to the downside.

VOD is a tech stock. It peaked in 2000 at $64.38 and has been in a large-scale downtrend ever since. The chart shows VOD at the beginning of the middle leg of that downtrend, a movement that promises to carry the price down below levels not seen since 2002.

The Chart

Elliott wave analysis marks the high of $42.14 on Feb. 24 as the peak of the 2nd wave of the post-Tech Bubble correction, labeled as wave 2 {+4} on the chart. The final push to the top was wave 5 {+2}, beginning Feb. 21, 2013 from $24.42.

The decline from Feb. 24 has move below the 78.2% Fibonacci retracement level, a huge retracement in proportion to the final leg up, wave 5 {+1} beginning Feb. 5 from $34.31.

Click on chart to enlarge.
VOD 2 years daily bars (left), 7 months 2-hour bars (right)
Under the Elliott wave rules, I won't be able to say for a certainty that wave 5 {+1} to the upside is complete until the price below below $34.31. However, the magnitude of the retracement makes completion of wave 5 the most likely conclusion.

The Feb. 24 peak marked the end of wave 2 {+4} to the upside in the big-structure analysis, and the subsequent decline will eventually carry the price below the end of wave 1 {+4} at $12.10 in July 2002.

VOD, then, will have a bearish bias for a long time to come, although there will be plenty of upside corrections within the general downtrend to trip up the unwary trader.

At a smaller scale, the present wave 1 {+1} has no downward minimum under Elliott. It could be complete as it stands or have much further to fall.

I've used the base degree (waves 1, 2, ...) for the count within wave 1 {+1}, but as with any new trend, it is impossible to say with a certainty that that degree is correct. The base degree may well be a smaller degree (waves 1 {-1}, 2 {-2}...), increasing the downside potential before a significant upside correction begins.

Odds and Yields

VOD has completed four bear signals since the rise from Feb. 21, 2013 began. Of those, only one was successful, yielding 1.2% over 21 days. The three unsuccessful signals lost on average 3.4% over 17 days.

The three losers came prior to the February 2014 peak, during the uptrend. The one winner came after the peak, presenting yet another piece of evidence for the case that last February really was the end of the line for the uptrend.

The Company

Vodafone Group, headquartered in London, is a British mobile communications company of global reach that also provides cloud and backup services. It is the world's second largest mobile telcom company and operates in 30 countries.

It trades primarily on theLondon exchange. The charts and prices in this analysis are for the American depository receipts listing in New York. Vodafone is listed as VOD in both exchanges.

Analysts collectively have a negative view of Vodafone's futures prospects, coming down with a negative 67% enthusiasm rating.

The company reports return on equity of 24%, with debt amounting to 41% of equity. To call it a growth stock, I would need to see debt/equity no higher than 10%.

The company is profitable and beginning at the end of 2012 saw earnings begin a steady rise.

The earnings yield is 31.79%, higher than 92% of other communications services companies. the stock is selling at 3.2 times earnings and also at a slight premium to sales. It takes $1.36 in shares to control a dollar in sales.

The dividend yield is 1.86%, which is quite low, at less than 6% of the earnings yield.

Institutions own 13% of shares.

Vodafone next publishes earnings on May 23. The stock goes ex-dividend in May for a semi-annual payout of 33 cents a share.

Liquidity and Volatility

VOD on average trades 8 million shares a day and supports a wide selection of option strike prices spaced a dollar apart. The front-month at-the-money bid/ask spread on puts is a bit on the wide side, at 7.4%. That compares to 0.3% for the exchange-traded fund SPY, which tracks the S&P 500.

Implied volatility stands at 26%, compared to 17% for the S&P 500, and has been declining since reversing at 33% on March 10.

Volatility stands at the 66th percentile, suggesting as short option spreads sold for credit and expiring in May would have the best chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $32.78 and $38.12 over the next month, for a potential gain or loss of 7.5%, and between $34.17 and $36.73 over the next week.

Contracts are trading slowly today, with calls running at 66% of five-day average volume at puts at 53%.

Decision for My Account

My primary reservation about opening a position is the bid/ask spread, which is a bit higher than I like.

If upside momentum continues in the half hour before the closing bell, then I'll see if I can construct a workable bear call spread.

If the spread works but momentum falters, then I'll move VOD to the Watchlist as a potential future trade.


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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