Saturday, May 31, 2014

Monday's Prospects

On Friday, May 30:

Of 3,816 stocks and exchange-traded funds in my analytical universe, 53 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 36 to the upside and 17 to the downside.

Sixteen major-exchange small-cap symbols broke out, eight in either direction.

Six over-the-counter symbols broke out, five to the upside and one to the downside.

Fourteen mid- or large-cap symbols traded on the major exchanges survived my initial screening, 12 having broken out to the upside and two to the downside. In descending order by average gain, the upside breakouts are WFT, DVA, CSRE, ADM, ERF, CL, VNO, EE, WM, IP, DVY and CHD. The downside breakouts are CIG and GES.

Three small-cap major-exchange symbols survived initial screening, two having broken out to the upside and one, LINC, to the downside. The upside breakouts are AGEN and CGI.

One symbol traded over the counter survived my initial screening, BKNIY, having broken out to the upside.

One large-cap symbol, VALE, survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds.

I shall do further analysis of the surviving symbols on Monday, June 2.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

-- Tim Bovee, Portland, Oregon, May 31, 2013

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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 decision decisions for his or her own account, and take responsibility for the consequences.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.T

Friday, May 30, 2014

Friday's Outcomes: AAL, FC, IMAX, HA

I opened two positions from the Watchlist. See my analyses:
I closed my bearish position on IMAX for a loss. See details in the update to my analysis, "IMAX: Bearish on big screens".

I analyzed HA but declined to take the trade today when the stock lost upward momentum, instead moving it to the Watchlist. See my analysis, "HA: Island hopper or long haul?".

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.


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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

HA: Island hopper or long haul?

Update 5/30/2014: HA lost momentum, declining from the opening bell, although it did stage an afternoon recovery of sorts that at least brought the price back above the 20-day price channel, preserving the bull signal.

I've movfed HA to the Watchlist and shall consider it for later entry if it moves above today's high, $15.87.

Hawaiian Holdings Inc. (HA), a small-cap company that is sole owner of Hawaiian Airlines, has a dual nature.

It is an island hopper in the middle of the Pacific, ensuring that locals from the Big Island or Kaua'i can easily pop over to O'ahu for a glorious day of shopping.

It is also a long-haul airline carrying tourists and business people between the islands and the U.S. mainland and Asia.

HA as a potential trade shows the same duality:

It has so far escaped the downward hook that many uptrending shares have suffered and so is still in an indisputable uptrend.

That makes it an excellent trade under my shorter-term rules. But the chart and the financials also promise more growth ahead, making it a fine trade under my longer-term rules.

Do I play HA as an island hopper or as a long haul? I'll begin, as always, with ...

The Chart

Elliott wave analysis shows HA in the final wave, 5 {+1}, of an uptrend, wave 3 {+2} that began April 24, 2013 from $5.18. The rise has more than tripled the price.

That rate of rise alone ought to give any trader pause. How much more money can there be out there waiting to pile in?

Yet the wave count clearly places HA in a series of middle waves going up three degrees from the ending wave, which began April 15 from $12.35.

Even with a correction, HA has room to run.

Click on chart to enlarge.
HA 12 years weekly bars (left), 1 year 5 months daily bars (right)
The 2nd wave in the {+2} degree was a sideways correction, of the sort called a Flat in Elliott. Corrective waves tend to alternate, and if this holds true here, the wave 4 {+2} correction following the end of the present wave will be a Zig-Zag, a variety that tends to fall deeper.

Corrective waves also tend to terminate at one of the Fibonacci retracement levels. This is a tendency, not a requirement.

There is no way to estimate where wave 3 {+2} will peak. If today's  high (so far) of $15.87 turns out to be the peak, then a major correction could carry HA down to the 61.8% retracement level, at $8.33.

Again, I'm talking tendencies and possibilities here, with a lot of guesswork. It is one of many possible scenarios for the correction.

The correction itself, however, will happen according to the Elliott wave rules.

Odds and Yields

HA has completed five bull signals since wave 3 {+2} began in April 2013. Three were successful, on average gaining 18.1% over 44 days. The two unsuccessful plays lost 2.8% over 19 days, on average.

The 60% success rate suggests that HA is averse to whipsaws, at the 15.3% win/lose yield spread means that when it does have a successful bull signal, it provides an outsized reward.

The Company

Hawaiian Airlines, headquartered in Honolulu, Hawaii, serves both local routes, between the Hawaiian islands, and long-range flights to the U.S. mainland and East Asia. It is the eighth largest commercial airlines in the United States.

I'll add that among the many airlines I've taken on my regular trips between the U.S. and Japan, I found Hawaiian to be by far the most pleasant of the U.S. carriers. (The Japanese carrier ANA is number one in my book.)

Analysts are rather unenthusiastic about Hawaiian's prospects, collectively coming down with a negative 14% enthusiasm rating.

The  company reports return on equity of 18% but with a high level of debt that is double the amount of equity.

The earnings yield is 7.6%, compared to 2.48% for the 10-year U.S. Treasury note. The company pays no dividend.

Earnings tend to peak in the 3rd quarter, covering the summer vacation season. That quarter's earnings were up in 2011 and 2012 compared to the year-ago quarter but were down in the most recent summer report, the 3rd quarter of 2013.

The other quarters tend to be fairly dismal by comparison, with a loss in the 1st quarter of 2013 and again in 2014 marring the chart.

Earnings have surprised to the downside four times in the the last three years, with the others surprising to the upside.

Earnings growth estimates imply that a "fair" price for HA would be $27.14 a share, which would mean that the stock is undervalued by 42%.

The stock is selling for 13 times earnings but at a steep discount to sales. It takes only 38 cents in shares to control a dollar in sales.

Options are pricing in confidence that 68.2% of trades will fall between $13.78 and $16.94 over the next month, for a potential gain or loss of 10.3%, and between $14.60 and $16.12 over the next week. The implied range for the next year is between $9.89 and $20.83, for a potential gain or loss of 35.6%.

I've marked the month's range on the right-hand chart in blue.

Institutions own 92% of shares.

Hawaiian next publishes earnings on July 21.

Liquidity and Volatility

HA on average trades 769,000 shares a day and supports a wide range of option strike prices spaced a dollar apart, with open interest running from two to four figures near the money.

The front-month at-the-money bid/ask spread on calls is 16.7%, compared to 0.8% for the most-traded symbol on the U.S, markets, the exchange-traded fund SPY.

Implied volatility stands at 36% and has been been working its way lower from 52% since April 9. By comparison, volatility on the S&P 500 index is 12%.

Volatility is at the 28th percentile of its one-year range, meaning that long option spreads bought with a debit and expiring in October would have the best chance of success. However, the bid/ask spread on options is wider than I like and for my account, I would structure any trade as long shares.

Decision for My Account

I like this stock as a bull play, and given the wide bid/ask spread on the options, I'm inclined to structure the trade as shares under my longer-term rules. The chart is bullish, and the financials are good, except for the debt. Certainly, by most measures, it is a bargain at current prices.

I intend to open a bull position under my long-term rules today if HA is showing upward momentum in the half hour before the closing bell. If

As I finish writing, HA has in fact fallen below the breakout level, negating the bull signal. If it reverses and again shows upward momentum in the half hour before the closing bell, then I'll open the position. If momentum continues to falter, then I'll add HA to my Watchlist for future consideration.

-- Tim Bovee, Portland, Oregon, May 30, 2014

References

My shorter-term trading rules can be read here. My longer-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 shorter-term 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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Friday's Prospects: Round 2

Eight of the 25 symbols that survived my first round of analysis failed confirmation in the second round because their prices moved back within their 20-day price channels. Six more failed because their charts weren't aligned with the trading signals, showing faltering prices despite the bull signals. One, TRQ, had insufficient open interest on its options to support a bear play and in fact it slipped through the first round of analysis in error.

(See "Friday's Prospects") for details of my first round of analysis.)

That left 10 contenders, all with bull signals and all with bullish or near-bullish charts: TSN, CE, M, PKG and AMSG from the mid-/large-cap list, IG, REI and HA from the small-cap list, and HYPMY and CHEUY from the over-the-counter list.

My next stop was Zacks Investment Research, where I learned that of the 10, only one symbol had a bullish rating.

That one symbol is HA, and I shall write an analysis of it today as a potential bull play under my shorter-term rules, posting it prior to the closing bell.

-- Tim Bovee, Portland, Oregon, May 30, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.


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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Friday's Prospects

On Thursday, May 29:

Of 3,816 stocks and exchange-traded funds in this week's analytical universe, 53 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 42 to the upside and 11 to the downside.

Forty-one major-exchange small-cap symbols broke out, 38 to the upside and three to the downside.

Eleven over-the-counter symbols broke out, 10 to the upside and one to the downside.

Sixteen mid- or large-cap symbols traded on the major exchanges survived my initial screening, 15 having broken out to the upside and one, TRQ, having broken out to the downside. In descending order by average gain, the upside breakouts are TSN, NJ, KND, UA, CE, YY, M, VMW, CAH, YELP, SN, PKG, EOG, AMSG and HTLD.

Eight small-cap major-exchange symbols survived initial screening, seven having broken out to the upside and one, STON, to the downside. The upside breakouts are IG, USEG, REI, HA, PPHM, UUUU and KFX.

Two symbols traded over the counter survived my initial screening, both having broken out to the upside. They are HYPMY and CHEUY.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds.

I shall do further analysis of the surviving symbols on Friday, May 30.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

-- Tim Bovee, Portland, Oregon, May 30, 2013

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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 decision decisions for his or her own account, and take responsibility for the consequences.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.T

Thursday, May 29, 2014

Thursday's Outcomes: DOW

DOW resumed upward momentum and I've opened a bull position under my shorter-term rules. See my analysis, "DOW: An ambiguous breakout".

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.


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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Thursday's Prospects: Round 2

None of the dozen symbols that survived the first-round of analysis made it past the second round. (See "Thursday's Prospects" for details of the first-round analysis.)

Three failed confirmation, moving back within their 20-day price channels: GPN, PPL and LIVE.

One, MRTX, has been trading for less than a year and so runs afoul of my rules requiring at least a year's worth of history on anything i trade.

The others, with three exceptions, had charts that I found to be unacceptably bearish, despite their having given bull signals.

The three exceptions are STN from the mid- and large-cap symbol list, CUR from the small-cap list, PNGAY from the over-the-counter list.

Two were easy rejects: CUR as it turns out has lost money every quarter for at least the last three years, and PNGAY has no earnings estimates available from Zacks and no return on equity or debt to equity numbers, leaving me effectively blind when it comes to the company financials.

STN, rated neutral by Zacks Investment Research, is a different case. It has good earnings and good financials, and a price that is about where it should be when growth estimates are taken into account.

But, despite being a mid-cap stock, it has low volume, averaging about 8,000 shares a day. That in turn gives it a 10-cent bid/ask spread on the stock, in a world where most stock spreads are one cent.

The stock has been on the rise since 2008, but it has gone into a shallow decline since December. Moreover, a quick Elliott-wave count suggests that it is in a downward correction and is in a B-wave which may well be nearing its end. I loathe B waves, which I find to be an occasion for whipsaws.

It's an interesting company with a great story, as related in a 2011 Globe and Mail story by Gordon Pitts.

I'm deciding against taking a closer look at STN, based on its low liquidity and also on a preliminary reading of the chart.

Click on chart to enlarge.
STN 20 years monthly bars (left), 3 years daily bars (right)

Therefore, I won't be writing any analyses today.

-- Tim Bovee, Portland, Oregon, May 29, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.


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.


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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Thursday's Prospects

On Wednesday, May 28:

Of 3,816 stocks and exchange-traded funds in this week's analytical universe, 43 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 28 to the upside and 15 to the downside.

Thirty-two major-exchange small-cap symbols broke out, 23 to the upside and nine to the downside.

Sixteen over-the-counter symbols broke out, five to the upside and 11 to the downside.

Five mid- or large-cap symbols traded on the major exchanges survived my initial screening, all having broken out to the upside. In descending order by average gain, they are STN, GOGO, LFC, GPN and PPL.

Six small-cap major-exchange symbols survived initial screening, all having broken out to the upside. They are TNXP, LIVE, MRTX, CUR, DARA and OXLC.

Three symbols traded over the counter survived my initial screening, all having broken out to the upside. They are PNGAY, EBKDY and CHOLY.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds.

I shall do further analysis of the surviving symbols on Thursday, May 29.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

-- Tim Bovee, Portland, Oregon, May 29, 2013

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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 decision decisions for his or her own account, and take responsibility for the consequences.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.T

Wednesday, May 28, 2014

Wednesday's Outcomes: GG

I've opened a bear position in GG under my shorter-term rules. See "GG: Gold keeps losing its glitter".

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.


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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

GG: Gold keeps losing its glitter

Update 6/11/2014: GG moved above its 10-day price channel and I've closed my bear position. Because the price channel was busted, the symbol won't be put on the Roll Shelf.

The chart shows GG to still be in a bearish wave within an upward correction.

Shares gained 3.3% during the 14 days I held the position, or 85.6% annualized.

My options spreads produced a 32.93% loss on debt, or -858.5% annualized.

Update 5/28/2014: I've opened a bear position in GG, structuring it as a bear put spread, bought with a debit and expiring in October. Leverage is 4:1.

Analyzing Goldcorp Inc. (GG) and other gold-mining companies is more an exercise in economics and monetary policy than in business. Sure, some companies are more efficient than others, but in the end, their success depends upon the precious metal they dig from the ground.

So when one falls, all fall, as indeed they have since peaking in September 2011. The only question a trader needs to ask under these circumstances is, "Where's the floor?"

The Chart

The answer to the question about gold's -- and GG's -- likely course likes back in 1968, when gold prices were partially removed from government regulation and the metal was permitted to trade on the open market.

Like any free market, that for gold can be analyzed using the Elliott wave frame, and that analysis gives some sense of the nature of the uptrending wave that ended in 2011 at $1,920.

At the {+4} degree I've called it a 5th wave. Given the magnitude of the decline since then I think that labeling is beyond dispute.

But one degree higher, what wave came to an end? A long-term gold chart published last year by Business Insider gives a view of gold prices back to 1792, shows the price taking off in a rapid rise beginning in 1970, a year and a half before the United States turned the dollar into a fiat currency by severing its link with the precious metal.

The chart has monthly bars so a lot of detail is hidden. I think the best count shows five waves in the uptrend, making the 2011 peak the end of wave 5 {+5} and the ensuing decline the beginning of a correction to the downside, call it wave 2 {+6}, perhaps.

That correction could in theory go all the way down to $35 per ounce.

But, I could also count the chart as three waves, with the end of wave 1 {+5} in 1980, which would make the 2011 peak a short wave 3 {+5}. If this is in fact where gold stands, then it suggests gold is in a correction within 3 {+5} and must stop short of $252.

In both cases I've named the worst-case scenario as the floor, but it could be less. in any case, the alternate count far less bearish than is my principle count.

That brings us back to GG, whose chart appears below. I've labeled both counts to match my analysis of gold, with the less bearish alternative marked with the prefix "alt:" where it differes from the principle count.

Click on chart to enlarge.
GG 3 years daily bars
The degrees since the 2011 peak are guesswork, although they seem reasonable given the waves' durations. They may, however, be of lower degree. There's no way to tell for sure at this point.

I've marked the Dec. 19, 2013 low of $20.54 as the end of wave 1 {+4}, or A {+4} in the alternate count. This is far from certain. The wave might well be correcting at a lower degree and have more potential to the downside.

Other the other hand, the March 14 peak at $29.27 might well be the beginning of B wave in a 2nd wave correction that, in its entirely, will be to the upside. I don't like to trade B waves, finding to be fickle friends that all too often have struck me with a whipsaw.

A cautious trader would wait for a break below the Dec. 19, 2013 low, $20.54, before entering. My inclination, as a shorter-term trader, is to take the risk but hedge it and rely on strict exit rules to limit the damage if I'm wrong.

The Company

Goldcorp, headquartered in Vancouver, British Columbia, explores for gold and develops and operates mines in Canada, the United States and Latin America.

Amazingly, given the 47% decline from the 2011 peak, analysts are only slightly bearish on GG, collecitvely coming down with a negative 6% enthusiasm rating.

Goldcorp reports return on equity of 3%, a very low return, and with low debt amounting to only 8% of equity.

Earnings have been sliding since at least 2012 and the decline accelerated in 2013.

The trailing 12 earnings per share is negative and so there is no yield on earnings. The company pays a dividend yielding 2.6% annualized at current prices. 10-year Treasury notes, by comparison, yield 2.54% a month.

Projected earnings and growth suggest a "fair" price of $11.59, when the dividend is accounted for, meaning that GG is overpriced by 99%.

Options are pricing in confidence that 68.2% of trades will fall between $21.16 and $24.80 over the next month, for a potential gain or loss of 7.9%, and between $22.11 and $23.85 over the next week.

Goldcorp is priced at a steep premium to sales; it takes $5.29 in shares to control a dollar in sales.

Institutions own 57% of shares.

The company next publishes earnings on July 21. The dividend is paid month, presently at 5 cents per share.

Liquidity and Volatility

GG on average tradees 3.2 million shares a day, sufficient to support a wide selection of option strike prices spaced a dollar apart. The front-month at-the-money bid/ask spread on puts is 3.2%, compared to 0.3% for the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 27% and has been falling from 57% since June 24, 2013. It hit a low of 24% a few days ago and has bounced back up a little.

Volatility stands in the 9th percentile, suggesting that the most successful trades will be structured as long option spreads bought with debits and expiring in October.

Contracts today are heavily skewed towrad calls, which are running at four times their five-day average volume. Puts are running at 42% above average.

Decision for My Account

I intend to open a bear position on GG today if it shows downward momentum in the half hour before the closing bell. If momentum falters, then I'll add the symbol to my Watchlist for later consideration.

The chart is bearish, the fundamentals are nothing to cheer about and even with the alternate count, there's downside left.

-- Tim Bovee, Portland, Oregon, May 28, 2014

References

My shorter-term trading rules can be read here. My longer-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 shorter-term 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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Wednesday's Prospects: Round 2

Fifty-four symbols survived my first round of analysis, a fairly massive pile to paw through in the second round. (See "Wednesday's Prospects" for details of the first round of analysis.)

Many symbols came to my rescue by moving back within their 20-day price channels, thereby failing confirmation, and I tossed them aside without a second thought.

My next step was to run the charts and to select out those that were in line with the direction of the breakout.

As I noted in an essay over the weekend, "A Tale of Three Charts", the markets are in a highly stereotyped period, with only two patterns, both bearish, dominating what I see on the charts.

Most the symbols that were confirmed sent bull signals occurring within the pattern I called the Corrective Hook, an uptrend with a downtrend on the end that's not so deep as to invalidate the uptrend, but is deep enough to be worth avoiding until the price moves up to a higher high.

Admittedly, there's a subjective element to this judgement, but the birthright of humankind includes an awesome pattern recognition system built into our brains, and I'm willing to employ it in for screening charts in my second-wave analysis.

Six symbols made it through the chart screening.

I next checked out the Zacks ratings -- no help there; they're all neutral.

Three of the six symbols are on the list as bear signals, all involved in precious metals. They are the companies GOLD and GG, and the gold-miners exchange-traded fund GDX, the most liquid symbol among the six. GDX and GG have options with sufficient open interest for me to work with.

The three bull signals among the six symbols are MMC, SPA and MRTN. None has options sufficientlty liquid for me to work with, so any trade would be unleveraged and unhedged.

So the choice comes down to this: Do I go bearish on gold? It's an astounding outcome, given the fact that only 11% of the 198 breakouts from Tuesday were bearish. It was a day for the bulls, but not one of especially high quality.

Which do I choose? GDX is further along that GG in its decline, both have neutral ratings from Zacks, GDX is more liquid but the options of either have a similar bid/ask spread, and GDX has higher volatility, which increases the chance for profit, and loss as well. Also, the first-round odds analysis is identical for both, as is the average yield from bull signals.

I'm inclined at this point to go with GG, because of the higher volatility, but it is possible that I'll switch to GDX once I get into the details of the charts.

In either case, I intend to post an analysis before the closing bell.

-- Tim Bovee, Portland, Oregon, May 28, 2014

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.


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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

Wednesday's Prospects

On Tuesday, May 27:

Of 3,816 stocks and exchange-traded funds in this week's analytical universe, 118 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 101 to the upside and 17 to the downside.

Sixty-eight major-exchange small-cap symbols broke out, 65 to the upside and three to the downside.

Twelve over-the-counter symbols broke out, seven to the upside and five to the downside.

Thirty-three mid- or large-cap symbols traded on the major exchanges survived my initial screening, 29 having broken out to the upside and four to the downside. In descending order by average gain, the upside breakouts are GDP, PCRX, AYI, DXCM, ALXN, PEGI, FB, BNCL, EFII, FFIV, FCFS, BKS, GBCI, MA, CRM, EDU, PCLN, SEIC, ASML, BLX, RE, REGN, CPHD, HCSG, BT, KLAC, MMC, N and NWN. The downside breakouts are GOLD, GDX, GG and TZA.

Nineteen small-cap major-exchange symbols survived initial screening, all having broken out to the upside. They are NBS, ARWR, BCRX, GSVC, BNFT, WLB, CCM, VLCCF, SPA, GABC, MRTN, BUSE, GNMK, AFH, QADA, AIMC, ADNC, CUNB and SAMG.

Two symbols traded over the counter survived my initial screening, both having broken out to the upside. They are CTTAY and PUBGY.

Two large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds. They are BBD and GG.

I shall do further analysis of the surviving symbols on Wednesday, May 28.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:
  • mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
  • small-cap stocks on major exchanges,
  • mid- and large-cap over-the-counter stocks.
The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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 decision decisions for his or her own account, and take responsibility for the consequences.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.T

Tuesday, May 27, 2014

Tuesday's Outcomes: ADBE, NTAP, DOW, AAL, JBL

I've closed two positions, ADBE and NTAP, and have updated their analyses with results.


I analyzed two symbols as potential bull plays, DOW under my shorter-term rules and AAL under the longer-term rules. However, both failed to show upward momentum today and I've put them on the Watchlist. See "DOW: An ambiguous breakout" and "AAL: A longer-term play".

I removed JBL from the Roll Shelf and calculated results. See "JBL: On the chart, many best days are behind it".

References

My shorter-term trading rules can be read here. My longer-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.


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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

AAL: A longer-term play

Update 2/9/2015: I've closed my position in AAL and calculated combined results for the shares and the hedges. 

The shares gained 15.3% over the 264-day lifespan of the position, or a +21% annual rate. The shares and option hedges that made up my positions together produced a +11.1% yield on debit, for a +160% annual rate.

Update 11/3/2014: I've closed my bearish hedge after the price of the underlying stock closed the month above its 12-month moving average. As is my practice, I'll put off calculating profit and loss until after the entire position is unwound.
---
Update 7/9/2014: I've opened a bearish hedge on AAL after the price closed below its 55-day price channel. With implied volatility standing at a relatively high level compared to its recent history, I've structure the hedge as a bear call spread, sold for credit, short the $34 calls and long the $35 calls, and expiring Nov. 21. I'll keep rolling the position forward in whatever form makes sense at the time until hedging conditions no longer obtain.

Update 8/15/2014: I've exited my bearish hedge on AAL as the price traded above its stop/loss level and confirmed the signal the next day. As is my practice with position series, I won't calculate profit and loss until the series is complete.

I complied with the signal under strict construction of my trading rules. However, the chart suggests that the downtrend continues, marking the present rise is a head fake in the making.

This isn't the first time I've seen chart truth run contrary to requirements under my longer-term trading rules. I'm considering the issue and may decide to change the rules.

The chart below shows in detail a continuation of the decline from June 23, framed according to the rules of Elliott wave analysis. My use of the base degree in the count is somewhat arbitrary; the actual degree may well be somewhat lower.

Click on chart to enlarge.
AAL 30 days hourly bars

Update 8/6/2014: AAL closed below its 20-day price channel on Aug. 5 and confirmed the signal by trading below that level the next day. I've opened a bearish hedge under my longer-term trading rules, structuring it as as a bear call spread expiring Sept. 19, short the $38 calls and long the $39 calls, sold for a credit and expiring Sept. 19. The leverage is 5:1.

The chart suggests that if wave 5 {+3} was indeed completed at $44.88 on June 23, a correction has begun that will eventually take back part of the rise that began from $3.96 on Nov. 23, 2011. 

An alternate view sees the decline from late June as an internal correction with an ongoing wave 5 {+1}.

Click on chart to enlarge.
AAL 11 months daily bars
If a major decline has indeed begun, it will mark the first major test of my longer-term rule set, posing the question, How to handle a larger-degree correction within the hold-and-hedge strategy I've adopted.

Update 5/30/2014: AAL resumed its upward momentum and I've opened a bull position, structured as long shares under my longer-term rules, intending to hold the position through May 30, 2015.

Update 5/27/2014: AAL failed to show upside momentum in the half hour before the closing bell and indeed has dropped below its prior high. I've moved it to the Watchlist and will consider it upon a break above today's new high, $39.93.

American Airlines Group Inc. (AAL) is recovering bankruptcy and has moved up to a new high. The charts are bullish. But what do you with a stock that has no fundamental record to go on and that is, in fact, an occasion for an act of faith. As a rational trader, I take the risk, at least as long as I can hedge my bet.

The Company

American Airlines, headquartered in Fort Worth, Texas, is recovering from the Chapter 11 bankruptcy it filed in 2011, through cost-cutting, including layoffs, rebranding and a merger proposal accepted last year with US Airways Group.

Any long-term position in AAL is a bet on a corporate comeback. The company isn't profitable. Earnings per share for the past year are negative $6.30.

Any interest in AAL relies on hope for the future.

Analysts in aggregate are a hopeful bunch, collectively coming down with a positive 27% enthusiasm rating.

Certainly, low prices alone might well justify enthusiasm for AAL. They fly more than 600 plans to about 160 destinations on four continents. That ought to be worth something.

Earnings and growth estimates imply a "fair" price of $155.57 per shares, suggesting that AA is underpriced by 75%.

The company pays no dividend.

Losing companies, or companies emerging from loss, really don't give me much to go on when it comes to the fundamentals. I can't calculate a return on equity. Debt is running 14 times equity, a crushing load.

Institutional ownership is on the low side, at 56% of shares.

And yet Zacks Investment Research, the service I rely on to give me a shortcut in assessing the fundamentals, gives American Airlines its most bullish rating.

My take away is that AAL is a risky play, but there's nothing about longer-term positions that need exclude risk.

The Chart

AAL came to my attention because today it broke above its high of March 10, $39.88. That suggests that the stock is resuming its upward course after a brief correction

Elliott wave analysis suggests that AAL is completing an A wave correction to the upside that began in July 2008, at the Great Recession low. From that level down, every degree is in its 5th and final wave.

Click on chart to enlarge.
AAL 20 years monthly bars (left), 3 years 3-day bars (right)
However, AAL in emerging from bankruptcy may not be the stock it was. It began trading under a new symbol on Dec. 9, 2013, migrating from a symbol that traded on the Pink Slips.

Although my charts merge together the pre-bankruptcy, in-bankrutpcy and new charts, I think it's at least arguable that the day AAL began trading marks a new record, a new chart, representing a new series of counts using Elliott wave analysis.

If that's the case, then AAL is still beginning a 5th wave, but I know longer know the degree. On the chart below I've used the base degree, but it could be something lower, with much upside potential.

Or not.

Click on chart to enlarge.
AAL since Dec. 9, 2013, 180 days 2-hour bars
Liquidity and Volatility

AAL on average trades 7.8 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 9.1%, compared to 0.3% for the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

For a longer-term position, this means that the options are liquid enough that I can use them for hedging in the event of a downturn.

Implied volatility stands at 33%, compared to 12% for the S&P 500 index. Options are pricing in confidence that 68.2% of trades will fall between $26.57 and $53.29 over the next year, for a potential gain or loss of 33.5%.

Why longer term?

I think AAL will recover, but I can't say how quickly. A longer-term position in shares gives me the luxury of waiting out any bad times, and perhaps even profiting from hedges, and then regaining my paper losses and more when the upward move resumes. In addition, of course, I get a lower tax rate on capital gains from positions held for more than a year.

Options positions don't really give me that luxury. They need to be rolled over every few months, and that generates a lot of transaction costs.

Decision for My Account

I intend to open a bull position in AAL under my longer-term rules. I'll open it today if the price shows momentum to the upside. Otherwise, I'll wait for an opportunity.

-- Tim Bovee, Portland, Oregon, May 27, 2014

References

My shorter-term trading rules can be read here. My longer-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 shorter-term 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.
License

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

DOW: An ambiguous breakout

Update 6/30/2014: DOW broke below the 10-day price channel on June 27 and confirmed the exit signal the next trading day. The same crossing also broke below the 10-day channel, meaning DOW won't go on the Roll Shelf.

The share price declined by 1.1% over the 32-day life of the position, or negative 12.4% annualized. My options position produced a 15.2% loss, or negative 172.7% annualized.

DOW's price peaked on June 24 at $53.35, ending the rise, wave 3 {+1}, that began April 17, 2013 from $29.81. The wave 4 {+1} correction is now underway.

Although there is no way to forecast for certain how deep the correction will be, Fibonacci retracement levels give us some likely scenarios.

Shallow correction, typical of a 4th wave, might well stop at the 23.6% retracement level, or $47.79. Deeper stopping points are 38.2% ($44.36), 50% ($41.58), and 61.8% ($38.80). 

To avoid getting too lost in the Fibonacci weeds, I think of it as meaning that DOW will spend some time down in the $40s, and perhaps even the $30s.

The duration of the correction is also impossible to predict. At the {+1} degree, the 1st wave lasted 2-1/2 months and the 3rd endured for 14 months.

Click on chart to enlarge.
DOW 30 days hourly bars

Update 5/29/2014: DOW has resumed upward momentum and I've opened a bull position, structuring it as a bull call spread, long the $50 calls and short the $55 calls and expiring in September. The leverage is 7:1, with a potential maximum yield on risk of 100%.

Update 5/27/2014: DOW failed to show upward momentum at the end of the day, failing to challenge the high it set in morning trading of $39.93. I'll move it to the Watchlist for further consideration.

The Dow Chemical Co. (DOW) has broken to a new high, but not all new highs are good news. DOW's rise from April 15 is filled with ambiguities, and what appears to be happy days for the bulls may in fact be an occasion that will satisfy the bears.

The Chart

DOW's break above its 20-day price channel on Friday also carried the price above its previous high of $50.96, attained on March 25. Today's confirmation suggests that the uptrend that began April 17, 2013 from $29.81 remains in force.

Using Elliott wave analysis, I've labeled the rise of the past year as wave 3 {+1}, the middle portion of a rise that began in November 2012, wave 3 {+2}. In fact, the Elliott wave framing shows DOW to be in 3rd waves at all degrees from {+1} up to {+4}, which be in March 2009 from $5.89. Wave 3 {+4} began in July 2010 from $22.42.

From the March 25 high, DOW faltered a bit, declining to $46.56 on April 15 before rising again.

The question this chart must answer is the nature of the rise from April 15: Is it a downside correction that showed an excess of enthusiasm in an upside retracement, or is it indeed the beginning of a new rise, wave 5 {-1}, the last leg of the last leg of wave 3 {+1}?

Double click on chart to enlarge.
DOW 2 years daily bars (left), 30 days hourly bars (right)
The right-hand chart gives a detailed count of what I've labeled wave 5 {-1} to the upside. My analysis concludes that April 15 was indeed the end of wave 4 {-1}, and the labeling reflects that conclusion. The churning following the April 23 peak of $50.64 is a 2nd wave correction, wave 2 {-2}

Wave 2 {-2} is a flat, the sort of structure within Elliott that I find to be extremely ambiguous.

Therefore, an alternate reading is also allowed under the Elliott wave rules. It would see Friday's higher high is the beginning of a continued sideways correction, a continued wave 4 {-1}. A decline below $50.64 would suggest that the bearish alternate reading is the correct one.

One argument in favor of the bearish case is that 2nd waves tend to be simple zigzags rather than flats. That's a tendency not a rule, however, and 2nd wave flats are certainly not unheard of.

At any rate, wave 5 {-1}, when complete, will also mark the end of wave 5 from Dec. 5, 2013 and will signal the beginning of the wave 4 {+1} correction, which will take back a portion of the 725 rise from April 2013.

Options are pricing in confidence that 68.2% of trades will fall between $47.95 and $53.83 over the next month, for a potential gain or loss of 5.8%. I've marked those levels on the right-hand chart in blue.

The 1st wave of the {-1} degree lasted about a month, so as a thought experiment lets assume $54 as the peak of wave 5 {-1}, using the range implied by options prices.

If DOW follows the tendency of corrections to end at Fibonacci retracement levels, then the 38.2% level, $44.76, would mark the end of a shallow correction, the 50% level, $41.91 of a steeper one and the 61.8% level, $39.05, a major downward correction.

Fibonacci retracement levels are a tendency, not a rule. In my experience, corrections will stop where they please.

Odds and Yields

DOW has completed five bull signals since wave 3 {+1} began in April 2013. Four were successful, on average yielding 4.6% over 33 days. Two were unsuccessful, losing 6.6% over 13 days. The magnitude of the losses creates a negative win/lose yield spread, -2% in this case, never a good thing.

However, arguably, DOW's tendency to avoid whipsaws, with its 80% success rate, goes far to overcome the negative spread.

The Company

Dow Chemical, headquartered in Midland, Michigan, is the second-largest chemical manufacturer in the world by revenue, which operations in 160 countries.

Half of its market capitalization comes from performance plastics, many of them destined for automotive and construction applications.

Analysts are less than optimistic about Dow Chemical's prospects. Collectively they come down with a negative 50% enthusiasm rating.

This is despite a respectable return on equity of 16%. Debt is a bit higher than I like, at 71% of equity.

Dow Chemical's earnings yield is 7.5%, compared to 2.53% on the 10-year U.S. Treasury notes. Its dividend yields 2.91%.

The 1st and 2nd quarters tend to be Dow Chemical's biggest earners. they dropped off in 2012 from the prior year's peak but recovered to higher levels in 2013 and the 1st quarter of 2014 has moved still higher.

Earnings have surprised to the downside five times in the last three years, most recently in the 3rd quarter of 2013. The seven other quarters in that period have surprised to the upside.

The stock is selling for 13 times earnings but at near parity to sales. It takes $1.05 in shares to control a dollar in sales.

The earnings growth rate, when adjusted for the dividend, implies a "fair" price of $37.27, suggesting that DOW is overpriced by 37%. I've marked the "fair" price on the left-hand chart in purple.

Institutions own 67% of shares.

Dow Chemical next publishes earnings on July 23. The stock goes ex-dividend on June 26 for a quarterly payout of 37 cents per share.

Liquidity and Volatility

DOW on average trades 1.2 million shares a day and supports a wide selection of option strike prices spaced a dollar apart at most levels, with open interest running mainly to three figures.

The front-month at-the-money bid/ask spread on calls is 2.9%, compared to 0.7% for the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 20% and has been on the decline from 29% since April 11. By comparison, the S&P 500 index has volatility of 12%.

DOW has just bounced slightly off of its low of the past year and stands in the 1st percentile of its one-year range. That low level implies that positions structured as long options spreads, bought with a debit and expiring in September will have the best chance of success.

Option contracts today are heavily skewed toward calls, which are running 43% above their five-day average volume. Puts are trading at 30% below average volume.

Decision for My Account

I intend to open a bull position in DOW under my shorter-term rules, structuring it as bull call spread. I'll make the trade if DOW shows upside momentum in the half hour before the closing bell.

True, the recent uptrend is ambiguous. This is overcome in part by DOW's excellent 80% success rate. It doesn't whipsaw often.

Moreover, DOW's options allow me to open a hedged position. That and strict adherence to my stop/loss rules will provide added protection.

As I write this, 2-1/2 hours before the bell, DOW has fallen off its peak of $1.28 set around 10:40 a.m. New York time. My entry rule requiring upside momentum before opening a position provides a third level of protection.

-- Tim Bovee, Portland, Oregon, May 27, 2014

References

My shorter-term trading rules can be read here. My longer-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 shorter-term 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.
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All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.