Monday, May 5, 2014

FLT: Like an Escher print

FleetCor Technologies Inc. (FLT) sent a bull signal after closing twice above its 20-day price channel. A closer look at the chart, however, suggests that the breakout to the upside is a rise within a downtrend, a classic head-fake in the making.

The Chart

As I applied Elliott wave analysis to the FLT chart, my first reaction was to scratch my head and mutter, "What a mess".

A 17-month third wave set between a 11-month first wave and a one-month fifth wave offends my sense of proportion. Yet it adheres to the Elliott rule set.

Click on chart to enlarge.
FLT 3 years 3-day bars (left), 6 weeks hourly bars (right)
I counted the peak of Feb. 27, at $132.22, as the end of the fifth wave out of the same sense of proportionality. The decline that followed was of a similar magnitude to the second and fourth waves.

Aesthetics are everything in FLT chart, and its aesthetics give me the same uneasy sense of vertigo as does an M.C. Escher print.

Yet under the Elliott rules, the decline from Feb. 27 to April 28 can be considered a wave 2 {+1} internal to wave 5 {+2}. If that is the case, then the uptrend is continuing. The truth of the matter will become apparent only if the rise from mid-May exceeds $132.22, which lies 11.2% above today's opening price.

If wave 5 {+2} has concluded, then FLT is correcting the rise from $24.28 that began in August 2011. In that case using the {+2} degree for the A-wave that ended April 28 seems far to high a degree. It's disproportionate to the work of correction that must be done. Yet, again, it breaks none of the Elliott rules.

The case for a downtrending FLT can be confirmed only by the price dropping below the end of wave A {+2}, or $106.13, which is 12.9% below today's opening price.

The FLT chart stands in a position of extreme ambiguity.

Liquidity and Volatility

This is FLT's first bull signal since the downturn began on Feb. 27.

This is the stock's 10th bull signal since the broad uptrend began in August 2011. Six of thecompleted trades were successful, on average gaining 21.4% over 71 days. The three unsuccessful trades on average lost 6.2% over nine days.

The Company

FleetCor, headquartered in Norcross, Georgia, provides fuel-card charging services for companies in eight countries: The U.S., Canada, the UK, Brazil, the Czech Republic, Russia, Mexico and Australia. Customers of FleetCor are service stations run by Shell, BP, Chevron and other big names seen above gas stations around the world.

The small number of analysts covering FleetCor collectively come down with a negative 33% enthusiasm rating.

The company is extremely productive, reporting return on equity of 29%. Long-term debt stands at 38% of equity.

Profits have crept up steadily each quarter since the 1st quarter of 2012. All 12 quarters of the past three years have produced upside earnings surprises.

The earnings yield is 2.81%, lower than 76% of other business services companies and slightly higher than the 2.61% yield on 10-year Treasury notes. The company pays no dividend.

The stock is selling at 36 times earnings and also at a large premium compared to sales. It takes $10.46 in shares to control a dollar in sales.

Institutions own 80% of shares.

Fleetcor next publishes earnings on July 28.

Liquidity and Volatility

FLT on average trades 913,000 shares a day. It supports a moderate selection of option strike prices spaced $5 apart. The front-month at-the-money bid/ask spread is 8.9%, compared to 0.3% for the most-traded symbol on the U.S. exchanges, the fund SPY.

Open interest runs in the double digits near the money. That is too low for my trading preferences, so any position I open in FLT will be structured as long shares.

Implied volatility stands at 31% and has been declining from a 47% peak since April 14. The S&P 500, by contrast, has volatility of 13%. FLT's implied volatility is at the 22nd percentile of the one-year range. A position that low suggests that a long position, bought with debits, will have the best chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $112.83 and $134.71 over the next month, for a potential gain or loss of 8.8%, and between $118.52 and $129.02 over the next week.

Contracts are trading slowly today, with calls running at 39% of their five-day average volume and puts at 23%.

Decision for My Account

This chart has too many ambiguities to provide me with a sufficiently high comfort level. I would be more willing to play it if I could structure a hedged position with options, such as a vertical spread, but with such low open interest, that is not possible.

I won't be opening a position in FLT.


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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