Thursday, July 31, 2014

Thursday's Prospects: Round 2

Four out of the 11 symbols that survived my first round of analysis failed confirmation, all under the post-earnings "reset day" rule: TWTR, XPO, FARO and BBSI, all having given bull signals. (See "Thursday's Prospects" for a description of the first round of analysis.)

The reset day rule requires a symbol that breaks beyond the 20-day price channel on the first trading day after an earnings announcement to trade, the next day, at a price beyond the extreme of that first day. It's a way of guarding against the emotional overstretch that often accompanies trading immediately after earnings are announced.

Of the others, three have charts that are insufficiently bullish to support their upside breakouts: TYPE, KT and BAH.

Two bear signals have insufficient open interest on their options to support construction of  a bear position: O and WEC.

That left two bear signals, MO and NOV.

Both are liquid, with MO trading north of 7 million shares a day on average, compared to about 3 million for NOV.

Both are high dividend stocks. MO pay 4.67% annualized at today's prices, and NOV pays 2.25%.

Growth estimates imply that MO is going for 35% above its fair price, and NOV is trading for 4% below fair price.

Points in favor of MO are liquidity -- generally, higher volume trumps lower volume, and its over-valuation in terms of growth estimates. For a bear play, I want a stock to be overvalued.

But it is overvalued by only a bit, so it's not an impressive point in MO's favor.

The high dividends argue against both symbols. Dividends support the stock price; that's why companies pay them. For a bear play, the less support the better.

Zacks Investment Research, the service I use to short-cut my fundamental analysis, is neutral on MO and bearish on NOV.

Finally, to the charts. Each has hit a higher high in the past couple of weeks and then fallen. That charts are technically somewhat bearish, although neither on the daily chart has yet to produce the low/lower high/lower low combo that defines a full-bore downtrend.

Just a quick visual analysis of the charts suggests to me that they may well be in continuing uptrends and are likely to reverse back to the upside soon.

Bottom line: I don's like either of these plays, and I don't intend to post a full analysis of either.

By the way, this is a fine illustration of how mixed my methods are. I'm very technical and mathematical down to the end game, but in the final analysis, it really comes down to a feel for the chart and the data.

Good trading is instinct supported by facts and rules. An excellent pattern analyzer, situated between our ears, is the birthright of every human being. Everything I do in my analysis is intended to trigger that innate analyzer into doing its job.

I shall add MO and NOV to my Watchlist to see what happens. If one or both continue to fall, then I'll revisit my decision.

-- Tim Bovee, Portland, Oregon, July 31, 2014


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.

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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