Thursday, January 22, 2015

HAL: Shorter-term bull play

Update 6/4/2015: I've closed my bull position in HAL for a profit. In the original analysis below, I interpreted the Elliott wave pattern to mean that HAL was due for a counter-trend correct to the upside.

So it proved to be. The correction ended at $50.20 on May 5, and then began to pull back as the downtrend resumed.

Shares rose by 10.2% over 133 days, or a +28% annual rate. The options position produced a 42.0% yield on debit, for a +114% annual rate.

Update 5/19/2015: HAL has reversed from the uptrend it has been on since December 2014. Has the uptrend that led me to open a bull position reversed, or is it merely another step in the long climb to the top?

My updated Elliott wave analysis of the chart suggests the latter. I call it as a 4th wave decline that will fall short of the wave 2 {-1} end, perhaps well short, and then will resume the rise as wave 5 {-1} within an uptrending wave A within a wave 4 {+1} upward countertrend correction.

My options spread is profitable all the way down to $40, so that leaves a shortfall in coverage of a mere six cents, well worth the risk.

I shall continue to the hold the position, which doesn't expire until July, giving it a fair amount of life ahead of it before time decay begins to take its toll.

Click on chart to enlarge.
HAL, 180 days 4-hour bars

Update 1/22/2016: I opened a bull position in HAL, as described below.

Halliburton Co. (HAL) closed above its 20-day price channel on Wednesday and confirmed the bull signal by trading still higher today.

As a major player in the petroleum industry, HAL's prospects as a trade are intimately linked to the story of crude.

I analyzed HAL last week as a potential volatility play timed to coincide with the publication of earnings, but ultimately declined to take the trade because of the difficulty of deciding on the direction. The analysis can be read here.

This analysis, with a broader perspective, may allow for a more measured analysis of the trend.

The Chart

HAL has been on the rise since June 2012, when it hit a low of $20.28, within a broader uptrend dating back decades.

The peak, $74.33, occurred on July 23, 2014. The ensuing decline brought the price down by 49.9% to $37.21, very close to the 78.6% Fibonacci retracement of the rise from 2012. The precise Fibonacci level of that magnitude is $36.56.

Click on chart to enlarge.
HAL 1 year daily bars (left), 30 days hourly bars (right)
Elliott wave analysis shows that the decline has taken the form of a three waves, suggesting that there is a counter-trend correction under way that will be followed by even more downside potential that will carry the price below the end of wave 3 {+1}, at $37.21.

A correction typically will take the form of thee waves, or combinations of three waves. There is so much variability in the form that it is nearly impossible to describe them properly except in retrospect, after they are complete.

What I've described as a C wave rise within a 4th wave correction of an A wave to the downside (or possibly a higher degree 1st save to the downside could be described in several other ways. What they have in common is the observation that HAL is presently in an uptrend that could have significant upside potential, but which could also be truncated. Also, whatever the description, they hold in common under Elliott that the rise will be followed by a large-magnitude decline.

Odds and Yields

HAL has completed no breakouts to the upside since the present 4th wave counter-trend correction began in December. At this level of analysis, there really are no meaningful historical odds for bullish breakouts.

The Company

Halliburton Co., headquartered in Houston, Texas, is one of the largest oil field services companies in the world, operating in more than 80 countries. Oil field services companies provide the technology and work that allows the majors to find crude and natural gas, get it out of the ground and to the refinery. Halliburton plays a role in all stages of the process, from exploration to building the refineries.

Analysts are optimistic about HAL's prospects, coming down collectively at a 23.1% enthusiasm rating.

The company reports return on equity of 23%, with debt running at 50% of equity.

Earnings have been profitable in all of the past 12 quarters, trending upward in ear;y 2014 before stalling late in the year.

All but one quarter have produced upside surprises. The most recent of the downside surprise was the 2nd quarter of 2014.

The earnings yield is 9.51%, compared to a 1.88% yield on 10-year U.S. Treasury notes. The dividend yield is 1.77% annualized at today’s prices.

The "fair" price implied by earnings growth estimates is $60.29 per share, compared to the market price of $40.77 per share. The market premium is 32% below the implied price.

The stock is selling at 11 times earnings and also at near parity to sales. It takes $1.09 in shares to control a dollar in sales.

Institutions own 78% of shares.

HAL next publishes earnings on April 20. The stock goes ex-dividend in March for a quarterly payout of $0.18 per share.

Liquidity and Volatility

HAL on average trades 22.8 million shares a day and supports a wide selection of option strike prices spaced 50 cents apart., with open interest running from three to five figures.

The front-month at-the-money bid/ask spread on calls is 9.7%, compared to 0.8% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 34%, compared to 17% for the S&P 500 index, and has been falling since Jan. 14. HAL's volatility is in the lowest percentile of its rise to a high of 59% attained on Jan. 14.

That level of volatility implies that the most profitable trades will be structured as long option spreads, bought with a credit and expiring July 17.

Options are pricing in confidence that 68.2% of trades will fall between $31.57 and $50.31 over the 176 days until the July options expire, for a potential gain or loss of 22.9%, and that 95% will fall between $22.21 and $59.67.

Options are trading on the slowly today -- no surprise, just after earnings -- with calls running at 37% of their five-day average volume and puts at 53% of average.

Decision for My Account

I intend to structure the position as long the $40 calls and short the $42.50 calls, sold for a credit and expiring in July. The position has a 47.6% probability of expiring in the money for maximum profit.

The risk/reward ratio is nearly even, 22:25, given a slight bias to the reward side, as is common in long spreads.

Despite the longer-term risks, I consider this to be a trade worth taking. I'll open the position in the half hour prior to the closing bell if no intraday downtrend develops. If it does, then I'll put HAL on the Watchlist for later consideration.

-- Tim Bovee, Portland, Oregon,  Jan. 22, 2015


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.

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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