Tim Bovee, Private Trader: 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.