Monday, May 19, 2014

INTC: A bear signal on semiconductors

Update 5/19/2014: INTC failed to show upside momentum and closed back within its 20-day price channel, thereby failing to confirm the bear signal. I won't be opening a position in INTC and since the signal wasn't confirmed, I won't be putting the symbol on my Watchlist.

Intel Corp. (INTC) has completed another upward twist of a sideways correction that has been underway since 2002. It is now beginning a decline that will stay largely above the lower boundary of the correction range, which is $12.05.

Intel is in a downward correction, but rather than a dive, it may well turn out to be a sideways stroll along the chart.

The Chart

INTC is a symbol that represents a dominant, well established tech company whose stock performance largely follows the contours of the market as a whole and indeed, of the American economy.

It correlates well, if imperfectly, with the S&P 500 chart, and my count for that index has informed my interpretation of the higher degrees in my Elliott wave analysis of the INTC chart.

From its peak in 2000, INTC has been tracing out a correction that has so far tracked sideways in large measure. The Great Recession low in 2009 marked the end of the A {+4} wave of that bearish correction, and INTC is presently working its way through wave B {+4}, a counter-trend rally within the correction.

Click on chart to enlarge.
INTC 20 years monthly bars (left), 2 years daily bars (right)
The B{4} wave has turned out to be a Double, consisting of two connected correction sequences . The first, a zigzag, was completed in May 2012. The downward connecting X {+3} wave ended in November 2012, and INTC a month ago completed the first wave, A {+3}, of the second correction pattern in the double.

It is impossible to say at this point what pattern the second correction sequence will prove to be. It could be a zigzag, with greater downside potential, or a triangle or another flat, either of which would tend to move sideways, increasing the likelihood of a whipsaw.

With the nature of the correction being uncertain, it is impossible to determine how much downside potential INTC has. It's a declining B wave at a fairly high degree, so certainly there is some potential for bearish profit. How much I cannot say.

Options are pricing in confidence that 68.2% of trades will fall between $24.85 and $27.21 over the next month, for a potential gain or loss of 4.6%, and between $25.46 and $26.60 over the next week. I've marked those prices on the right-hand chart in blue.

Earnings, adjusted by growth to produce a Price-Earnings-Growth ratio known as the PEG, imply a price of $16.47 per share. I've marked that price in purple on the left-hand chart.

Odds and Yields

INTC has completed five bear signals since wave A {+3} to the upside began Nov. 21, 2012. Two were successful, on average yielding 2.2% over 35 days. Three were unsuccessful, losing 5.3% over 14 days, on average.

The numbers tell me that INTC is more likely to produce a whipsaw than not, and the rewards of success are less than half the losses.

The win/lose yield spread over that period is negative 3.1%, which is not a good bet.

There have been no completed bear signals since wave B {+3} to the downside began.

The Company

Intel, headquartered in Santa Clara, California, is one of the largest semiconductor chip makers in the world and is the dominant supplier of microprocessors for PCs. It has recently come under some pressure as manufacturers turned to other sources for the new mobile platforms, with their low-power requirements.

Perhaps it is the changes mobile computing have brought to the marketplace that have led analysts, in aggregate, toward a somewhat negative view of Intel's prospects. Their opinions come down to a negative 24% enthusiasm rating.

Return on equity stands at 17%, and debt amounts to 23% of equity. These aren't bearish numbers by any means, although they fall a bit short of what I would call growth-stock territory.

Intel's earnings yield is 7.15%, higher than 82% of other semiconductor companies. The company pays a dividend yield 3.46% annualized at current prices, an improvement over the 2.52% yield on 10-year U.S. Treasury notes.

The dividend payout amounts to 48.3% of earnings per share.

Year-over-year earnings have tended to be down each quarter since a peak in the 3rd quarter of 2011, giving the earnings chart overall a down-trending pitch. INTC has surprised to the downside three times in the past three years, most recently in the 4th quarter of 2013, and to the upside nine times.

The stock is selling at 14 times earnings and at a premium to sales, as well. It takes $2.43 in sharees to control a dollar in sales.

Overall, my impression of the finances is that the company's shares are selling as though earnings were on the upswing and analysts were optimistic, when in fact earnings have been declining and analysts are unenthusiastic. Taken together, I consider it to be a bearish picture.

Institutions own 62% of shares.

Intel next publishes earnings on July 15. The stock goes ex-dividend in August for a quarterly payout of 22.5 cents per share.

Liquidity and Volatility

INTC on average trades 23.5 million shares per day and supports a moderate selection of option strike prices spaced a dollar apart. The front-month at-the-money bid/ask spread on puts is 7.7%, compared to 1.4% for the most traded symbol on the U.S markets, the exchange-traded fund SPY.

Implied volatility stands at 16%, which is at the 13th percentile of the one-year range. Volatility hit its low point of 13% on May 8 and has since risen some.

The low volatility implies that the most successful positions will be structured as long options spreads, bought with a debit and expiring in August.

Contracts are trading slowly today, with puts at 92% of their five-day average volume and calls at 73% of average.

Decision for My Account

Even in a sideways correction, I see sufficient downside potential to construct a profitable bear position on INTC.

The odds of success give me pause, and indeed INTC is creating a whipsaw even as this is written. It has moved back within its 20-day price channel in early afternoon trading New York time. If it closes there, then it will mean that the bear signal has failed confirmation.

Nevertheless, I intend to open a bear position under my shorter-term trading rules if the symbol shows downward momentum in the half hour before the closing bell. If momentum falters, then I'll add INTC to my Watchlist for later consideration.

The lack of downward momentum will be my tip-off that the trade is no good. I'll post an update at the close.


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.

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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