Tim Bovee, Private Trader: WAB: End of the line, for now

Friday, July 25, 2014

WAB: End of the line, for now

Westinghouse Air Brake Technologies Corp. (WAB), also known as Wabtec, broke above its 20-day price channel after earnings were announced July 24 that beat analyst expectations. It opened the next day above its earnings-day high, confirming the bull signal.

The stock has had a great upward run over more than a decade. The chart, however, suggests that the bull market for the railroad equipment maker may be nearing the end of the line.

The Chart

WAB is nearing the end of its rise from $24.69 beginning Oct. 4, 2011, which Elliott wave analysis shows to be the middle wave, wave 3 {+3} of a larger scale rise from $11.57 beginning in October 2009, which is in turn the middle wave of the rise from $3.91 beginning in October 2000.

As bullish stocks goes, at this broad level, at least, WAB is a bull among the bulls.

It is only upon closer examination of wave 3 {+3} that the bullish case loses its power.

Click on chart to enlarge.

WAB 16 years 7 months monthly bars (left), 3 years 2-day bars (center), 3 months 20 days 2-hour bars (right)

Wave 3 {+3} is far advanced in its internal count. One degree lower, it is wave 5 {+2}, which in turn is in wave 5 {+1} internally.

WAB is very close to correcting a portion of the rise that began in 2000. Although it is technically a countertrend correction, at that magnitude it will feel like a major downturn. It will have its rises and falls lasting for years, but the next move will be a fall, and I'm unwilling to take the risk of encountering it.

At this point, I can make a trading decision and need go no further. First, a word about....

The Company

Westinghouse Air Brake Technologies, headquartered in Wilmerding, Pennsylvania, makes equipment and provides services primarily for rail. It was founded in 1869, making it one of the oldest of the existing American industrial companies.

The company, which has shortened its doing-business-as name to Wabtec, is a global player, with manufacturing plants and other facilities in North America, Europe, Asia and South America.

So the chart is a paradox, an old-line company with a chart like a infotech innovator, a global market and numbers that are close to making it a growth stock: Return on equity of 20% and debt at 27% of equity.

I find it to be a fascinating story stock, but I must not let myself get sidetracked from the chart.

Decision for My Account

The chart is overwhelming in its message: It's too late in the game to take advantage of WAB's bull trend. The next opportunity will come after the first wave down, A{+3} has ended. If it is proportionate with wave 1 {+3} of the prior uptrend, then that opportunity might well be two years away.

Also, WAB in trading this morning has pulled below the level that would have triggered a trade, $86.61 under my post-earnings reset day rule. That also takes it out of the running.

I won't be opening a bull position in WAB.

-- Tim Bovee, Portland, Oregon, July 25, 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.

From time to time 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.