EBAY: Bull play, shorter-term rules

The online auction house eBay Inc. (EBAY), headquartered in San Jose, California, broke above its 20-day price channel on Thursday and confirmed the bull signal on Friday by continuing to trade above the channel boundary.

[EBAY in Wikipedia]

EBAY

Direction

EBAY has been going nowhere for the past two years, running a sideways pattern bouncing between the mid $40s and the high $50s. There is money to be made in the playing the swings within such a pattern, but it is a matter of short trades.

EBAY took back all of a large upward lurch following the most recent earnings publication on Jan. 22, and then moved again to the upside to regain it all and then some.

The next turning point -- resistance -- is at $57.94, a high set in December, and beyond that is the peak of the entire sideways pattern, $59.70, set in March 2014.

Click on chart to enlarge.

EBAY 2-1/2 years daily bars (left), 30 days hourly bars (right_

Volatility

The chart dictates a need for a trade lasting a month or less. That means a short options spread, sold for a credit and expiring within weeks.

That options structure in turn requires a relatively high implied volatility.

EBAY's implied volatility stands at 23%, in the 11th percentile of the most recent rise, to low to support a short options spread.

Moreover, absent a decisive break above $59.70, I must conclude that EBAY's next move will be a retreat to the downside, in the next swing of the sidewinder. That argues for a bear play, not a bull play as suggested by the trading signal.

Decision for My Account

At this point I can conclude the analysis. The implied volatility won't allow me to create a trade that fulfills the short-term swings on the chart, and the next move appears likely to be to the downside.

I'm passing on the trade and won't be opening a position in EBAY today.

-- Tim Bovee, Portland, Oregon, Feb. 20, 2015

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

The directional score is calculated as the sum of the following:

• Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
• Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
• Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
• Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
• 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
• One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.

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.


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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.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.