Tim Bovee, Private Trader: Wednesday's Prospects: Round 2

Wednesday, July 30, 2014

Wednesday's Prospects: Round 2

Half of the 10 symbols that survived my first round of analysis failed confirmation in the second round by moving back within their 20-day price channels. They are UTIW, WYNN, MSTR, TNXP and KMTUY.

(See "Wednesday's Prospects" for a full description of my first round of analysis.)

In addition, two potential bear plays, MW and ADC, have insufficient open interest on options to allow for creation of a bear position, so they were struck from the list.

That left three possibilities, bear signals from BBRY and the exchange-traded fund XLP and a bull signal from GILD, all from the mid-/large-cap list. All have charts that reflect the direction of breakout, making them reasonable plays.

BBRY, a bear signal, has a bullish rating from Zacks Investment Research, the service I use to short-cut fundamental analysis. I prefer that Zacks and the signal be aligned, so I removed BBRY from contention.

Both GILD and XLP have neutral ratings from Zacks. GILD has more profit-making potential, with implied volatility at 28%. XLP has less, with implied volatility of 13%, about the same as that of the S&P 500.

GILD is a single company in the pharmaceutical sector. XLP is an exchange-traded fund that tracks 41 companies in the consumer staples sector.

That left me with a classic choice: Bull or bear? GILD or XLP? Single company or fund? Higher volatility or lower?

XLP is attractive because of the diversification it brings.

I like GILD for the higher volatility. It is a truism in trading that volatility is the father of risk, and risk is the mother of profit. (Which would make profit the grandchild of volatility? It never pays to examine clichés too closely.)

A quick estimate of the chart suggests that, in Elliott wave terms, XLP on July 11 began the C wave of a downward correction. C waves are quite dynamic, so it is a very bearish chart.

GILD is in a stack of 5th waves of increasing degree, with the longest term that I counted beginning in 2010 at $15.87, one-sixth of the current price. It's a bullish chart, but one that is quite advanced in its rise.

With a chart like GILD's, my bias is toward concluding that the end of the rise is near, and the ensuing correction will be very significant in its magnitude.

I'm going with a possible bear play on XLP under my shorter-term trading rules. I shall post a full analysis prior to the closing bell.

-- Tim Bovee, Portland, Oregon, July 30, 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.

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.

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.