Tim Bovee, Private Trader: SINA: Drive the wolf from the door

Update 9/12/2014: SINA is closing above its 10-day price channel without ever having dropped to my $42.40 entry level. Under my rules, symbols on the Watchlist are removed when then close beyond the 10-day channel opposite the direction of the proposed trade, and so I'm removing SINA from the Watchlist. I'll consider it again as a trade if it closes beyond the 20-day price channel in one direction or the other.

Sina Corp. (SINA) has the sort of chart that gives me an "a-ha!" moment. It looked bearish at first glance, but digging in, my count shows that the bear beginning in May drove the wolf from the door. The beast may lurk in the neighborhood but seems unlikely to make a dramatic return.

SINA broke below its 20-day price channel on Wednesday and confirmed the bear signal today. However, I see little room for decline on the chart.

The Chart

SINA peaked in May 2011 at $147.12, wave 1 {+2} in Elliott wave analysis, and then began tracing the wave 2 {+2} correction to the downside.

Click on chart to enlarge.

SINA 15 years monthly bars (right), 1 year daily bars (center), 6 months 2-hour bars (right)

The key question in assessing this chart is whether wave 2 {+2} has run its course.

The longer-term chart (left) shows a clear three-wave decline from the peak, although the C {+1} wave seems a bit truncated if the pattern is to be a Zig-Zag.

There is, of course, no rule that requires the correction to be a Zig-Zag. It could well be a Flat, or even a Triangle. In the last two patterns, the vertical decline would be shallower than in the first instance.

Has wave C {+1} come to an end? There is a clear five waves down, arguing that it has. The 4th wave, wave 4 at the base degree, also has five waves internally, although they are less clearly differentiated than in the parent wave.

The price since the May 23 end of wave C {+1} has traced a 1st wave to the upside and is working on a 2nd wave to the downside. The 2nd wave, which I've called wave 2 {-1}, can be expected to remain above the wave 1 {-1} starting point, $42.40. A fall below that level will invalidate my count.

Odds and Yields

Wave C {+1} to the downside, from its beginning in October 2013, has completed three bear signals, two of which were successful. The winners on average yeilded 15.4% over 44 days. The loser declined by 3.6% over 22 days.

The win/lose yield spread is quite high, at 11.4%.

The Company

Sina, headquartered in Shanghai, China, is China's Twitter. Also, China's Google and Yahoo! And China's Tumblr.

It has stretched out wide to serve the world's largest market. Like all things in that outsized piece of the global economy, Sina is seen as having huge potential for profit, and also a significant chance of running afoul of the still autocratic government.

Analysts collectively give it a 17% positive enthusiasm rating

The company reports a modest return on equity of 3.3% with debt amounting to 35% of equity.

The earnings yield is 0.78%, compared to 2.33% on 10-year U.S. Treasury notes.

Earnings over the last three years peaked in the 4th quarter of 2013 and then fell, recovering only slightly in the most recent quarter.

Sina has been consistently profitable since the 2nd quarter of 2012. It has produced two negative earnings surprises in the last three years, most recently in the 1st quarter of the current year.

Growth and earnings estimates imply a "fair" price for SINA of $5.18 per share. That would mean that SINA is overpriced nearly eight times over. I've marked that price on the left-hand chart in purple.

The stock is selling at a steep premium to sales. It takes $4.25 in shares to control a dollar in sales.

Institutions own 51% of shares.

Sina next publishes earnings on Nov. 10. The company pays no dividend.

Liquidity and Volatility

SINA on average trades 2.2 million shares per day and supports an extremely wide selection of option strike prices spaced $50 cents apart near the money, with open interest running to three figures.

The front-month at-the-money bid/ask spread on puts is 4.2%, compared to a 1.6% spread on the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Volatility stands at 72% and has been falling since early August, having bounced slightly after reaching its low for the past year a few days ago. By comparison, volatility on the S&P 500 index is 12%.

SINA's volatility stands at the 2nd percentile of the 1-year range, suggesting that the most successful trades will be structured as long option spreads bought with a debit, such as a bear put vertical spread.

Options are pricing in confidence that 68.2% of trades will fall between $40.76 and $50.80 over the next month, for a potential gain or loss of 11%, and between $43.37 and $48.19 over the next week. I've marked the month range on the center chart.

Contracts today are skewed toward puts, which are running 16% above their five-day average volume. Calls are running 26% below average volume.

Decision for My Account

I would open a bear position if SINA were to close below $42.40 and confirm it by trading lower the next day. Without that decline, I consider SINA to be in an uptrend that began May 23, with the decline from July 2 being a counter-trend correction of the {-1} degree that is nearing its end.

I.e., I don't see that much downside potential.

So I'm not opening a bear position today. I will add SINA to my Watchlist with an entry signal below $42.40.

-- Tim Bovee, Portland, Oregon, Aug. 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.

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.