Shares declined by 11.0% over 66 das, or a -61% annual rate. The options position produced a 23.3% yield on debit, for a +129% annual rate.
The materials technology company Corning Inc. (GLW), headquartered in Corning, New York, and the oil and natural gas exploration company Apache Corp. (APA), headquartered in Houston, Texas, both broke below their 20-day price channels on Friday and confirmed the bear signals on the next trading day, Monday, by remaining below their breakout points.
My analysis coms under my rules for the price channel breakout strategy.
GLW
Direction
GLW resumed its rise in October 2014 after a deep correction. My Elliott wave framing counts the rise as being wave 3 {+1} -- the middle wave up from the Great Recession low in 2008. That counts means that after a counter-trend correction of significant magnitude, GLW will continue to rise to new highs.
Within wave 3 {+1} I count five waves of one lower degree. The tracing of three lower peaks since the $25.16 high in January suggests that wave 5 may indeed be complete, signaling the start of the correction. The break below the trend channel from 2014 also suggests that the uptrend, in the lower degree, ended in January.
Click on chart to enlarge.
 |
| GLW 10 years weekly bars (left), 180 days 4-hour bars (right) |
Implied volatility stands at 25%, in the 30th percentile of the most recent rise. This level, in the lower two quintiles, suggests that best strategy is to trade long options spreads, bought with a debit an expiring on Aug. 21, 163 days hence.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 27.78 | 31.71 | 25.16 |
| Lower | 19.92 | 15.99 | 17.03 |
| Gain/loss | 16.5% | 33.0% |
Odds and Yields
GLW has completed no breakouts to the downside since the Jan. 28 peak.
The Company
Analyst enthusiasm is negative, coming down collectively at a -29% enthusiasm rating.
The company reports return on equity of 11%, with debt running at 17% of equity.
Earnings have been profitable in each of the past 12 quarters.
Ten of those quarters have produced upside surprises. The most recent of the downside surprise was the 2nd quarter of 2004.
The earnings yield is 7.10%, compared to a 2.21% yield on 10-year U.S. Treasury notes. The dividend yield is 2.02% annualized at today’s prices.
The "fair" price implied by earnings growth estimates is $16.15 per share, compared to the market price of $23.82 per share. The market premium is 47.5% above the implied price.
The stock is selling at 14 times earnings and also at a premium to sales. It takes $3.14 in shares to control a dollar in sales.
Institutions own 75% of shares.
GLW next publishes earnings on April 27. The stock goes ex-dividend in May for a quarterly payout of 12 cents per share.
Liquidity
GLW on average trades 6.3 million shares a day and supports a wide selection of option strike prices spaced a dollar apart., with open interest running to three and four figures.
The front-month at-the-money bid/ask spread on calls is 4%, compared to 0.8% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.
Options are trading at a near normal pace today, with calls running at 96% of their five-day average volume and puts at 47% above average.
The Trade
The low implied volatility percentile suggests a long vertical spread as the best trade. Such spreads are normally traded at the money, for a nearly even risk/rewqard ratio.
I've offset the proposed trade below to create a profitable zone covering all of the chart range, so it will take a break above the January peak, $25.16, for this position to become a loser. The cost of such an offset is an increased risk/reward ratio of 2:1. The long leg of the position has a 68% chance of expiring in the money for maximum profit.
bought with a debit and expiring Aug. 21
Probability of expiring out-of-the-money
| AUG | Strike | % |
|---|---|---|
| 26 | 77 |
APA
Direction
APA began a decline in July 2014, reversing off its low in December 2014. The bounce has been a rather unconvincing move to the upside that looks very much a counter-trend correction to me.
The sticking point is that the bear signal came while the price trending upward, with higher lows and higher highs. The present break below the trend channel has yet to break through the significant levels shown on the chart.
Click on chart to enlarge.
 |
| APA 90 days 2-hour barss !0, arguing for a !bear position. |
Decisions for My Account
I've opened a bear position in GLW as described above. The bearish break below resistance, the Elliott wave count, and the high price relative to growth estimates in the face of negative brokerage ratings, and the ability to create a bear position that is profitable up to upside resistance on the chart were the deciding factors.
I'm declining to trade APA because its price remains above downside support and is, for the near term, trending upward.
-- Tim Bovee, Portland, Oregon, March 9 2015
References
My price channel trading rules can be read here. My long-term share trading rules can be read here. My volatility trading rules can be read here. The channel rules are based on the classic Turtle Trading rules, which can be read here.
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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.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.
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