EOG: A longer term trade

EOG Resources Inc. (EOG) has been on the rise since 1998. It began its most recent leg up in December, 2013, from $78.01 and as of today's high, $106.50, had risen 36.5%.

I'm considering EOG as a trade under my long-term rules, which require that the position be held for at least a year, with downturns hedged by options.

"Those who hesitate are lost!" is maximum held dear by speculators all over the world. The EOG chart, however, brings to mind another old saying, "Good things come to those who wait". The chart suggests a correction will begin soon, setting up an opportunity to buy more cheaply in the fall or next winter.

The Chart

Elliott wave analysis shows EOG is in the final leg of its rise from June 2012, and the middle leg of the rise from October 2011.

I've labeled the final leg as wave 5 {+1}, beginning Dec. 11, 2013 from $78.01. There is no limit to its rise under the Elliott rules. It has, however, met its minimum requirements.

Click on chart to enlarge.

EOG 20 years monthly bars (left), 3 years daily bars (right)

The waves of the {+1} degree have tended to last about eight months each. EOG is also in the final leg of wave 5 {+1}, which I've labeled as wave 5.

There is no way to say for certain how deep the correction will follow the end of wave 5 {+1}. If the wave were to end at today's high, then Fibonacci retracement levels that might mark the end of the correction are $81.57 (38.2%), $73.87 (50%) and $66.17 (61.8%).

Options are pricing in confidence that 68.2% of trades will fall between $77.44 and $128.16 over the next year, for a potential gain or loss of $24.7%.

I've marked those range levels on the right-hand chart in blue. The lower boundary of the range is just below the start of wave 5 {+1} to the upside.

The Company

EOG Resources, headquartered in Houston, Texas, develops, produces and markets crude oil and natural gas. It's main areas of production are the U.S., Canada, Trindad and Tobago and the UK.

Analysts are optimistic about the company's prospects, coming down in aggregate with a 42% positive enthusiasm rating.

The company reports return on equity of 17%, with long-term debt running to 37% of equity. Sales have grown by 22% over the past year, and earnings  by 56%.

Quarterly earnings have been trending upward, with a few down quarters, since the 2nd quarter of 2012. All 12 quarters have produced upside earnings surprises.

The earnings yield is 3.92%, lower than 65% of other oil and gas operations companies and about 50% above the 2.61% yield on 10-year Treasury notes. The proportion paid to shareholders as dividends, as 12% of the earnings yield.

The stock is selling at 25 times earnings, as also at a premium to sales. It takes $3.91 in shares to ontrol a dollar in sales.

Institutions own 89% of shares.

EOG Resources next publishes earnings on Aug. 4. The stock goes ex-dividend on July 15 for a quarterly payout of 12.5 cents per share.

Liquidity and Volatility

EOG on average trades 5.5 million shares a day and supports a wide range of option strike prices, spaced $2.50 apart near the money. Open interest runs to three and four figures.

The front-month at-the-money bid/ask spread on calls is 4.3%, compared to 0.3% for the most-traded symbol on the markets, the exchange-traded fund SPY.

Implied volatility stands at 25% and has been in a shallow decline over the past year, structured as a series of wide swings. Volatility stands in the 15th percentile of the one-year range.

The S&P 500, by comparison, has implied volatility of 13%.

Decision for My Account

Under the rules for my longer-term trades, I'll need to stick with EOG for at least a year. The final leg of wave 5 {+1} is already nearly two months old and appears to me in its own middle leg, wave 5 to the upside. The waves at the base degree, like wave 5, have each lasted about a couple of months.

I'll be able to buy EOG for a better price, perhaps 30% or so better, if I wait for the correction. Rather than open a bull position now, I'm adding EOG to the Watchlist. I'll keep a close count once the correction begins, and reconsider a bull position after the new uptrend, which will be wave 5 {+2}, has begun.

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 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.