Monday, February 9, 2015

WFC: Bull play, shorter-term rules

The banking company Wells Fargo & Co. (WFC), headquartered in San Francisco, California, broke beyond its 20-day price channel on Friday. It confirmed the bull signal today by continuing to trade above the breakout level. However, it has remained below Friday's high and appears headed toward an inside day, confined by the prior day's extremes, which is often a sign that the trend is pausing or perhaps looking to reverse.

[WFC in Wikipedia]


Click on chart to enlarge.
WFC 10 years weekly bars (left), 30 days hourly bars (right)
The Dec. 29 peak of $55.95 marks the most recent peak in the claw back from the depths of the 2009 recession.

The subsequent correction to the downside is in early days. Given the internal three-wave structure of the first down and the second wave up, I've labeled the movement as a counter-trend correction uder Elliott wave analysis, suggesting that wave 3 {+3} to the upside is still under way.

WFC is in a longer-term uptrend but in a downward correction for the the shorter term.


Implied volatility stands at 21%, in the 45th percentile of the most recent rise.

That percentile puts WFC in the "take a vacation" category in so far as options trading goes. Volatility is neither high enough nor low enough to contribute to the success of the trade.

At this point I can cut short the analysis and go directly to the decision.

Decision for My Account

I'm passing on the trade. The price gave its bull signal during an upward swing within a downward correction, and so there is a mismatch. Moreover, the level of the implied is such that I cannot construct an options trade, with the accompanying leverage and hedging capacities that are so important to my trading.

-- Tim Bovee, Portland, Oregon, Feb. 9, 2015


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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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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