CTBI: Icebergs on the chart

Community Trust Bancorp Inc. (CTBI) is a Pikeville, Ky. bank holding company that provides the usual suite of bank holding company services. The company is highly ranked by analysts. Web chit-chat says insiders have been buying shares. It is expansionary, having bought another bank in the last year. Earnings are up.

Basically, CTBI is a well managed bank that is participating in the recovery of the financial sector, and traders think will benefit further as the rest of us catch up to the money.

CTBI was one of 21 stocks added to Zacks' top rank today, and my analysis found it to have the best bullish chart of the lot. (See my essay "10,000 Charts" for an explanation of my screening methods.)

BAM came in 2nd, followed by TRGP at 3rd and LMCA at 4th.

CTBI, like all other stocks, peaked in 2006. But oddly, when the Great Recession ground more innovative companies to new lows and into the muck, CTBI retraced a mere 61.8% of its preceding six-year rise, pausing at that Fibonacci level.

It has since made a run up to the 23.6% retracement level, falling short at a peak of $37.17 in January 2009, and since then has gone basically nowhere.

But, it has gone nowhere with grandiosity, in a series of wide swings, and what is happening now on the chart is the most recent upward swing.

The current rise began in early Oct. 2011 at $22.28, and carried up, with a five-week sideways pause, to today's high (so far) of $30.89. The price has pushed above the most recent prior peak and now is preparing to challenge the April 2010 peak of $31.56. The next peak before that is $37.22 in late December 2008.

CTBI going forward can best be seen, I think, as a series of breakout attempts. If it fails to push above each peak set in its long, zig-zaggy course, then it's time for the trader to heed the chart and exit, post-haste.

That's a long way of saying: This is not a chart that I love.

I'm not alone. Institutional ownership is only 45%, way low for an up and comer.

However, return on equity is 11% -- respectable -- and the debt/equity ratio is 0.59 -- not horrifying.

And traders have bid the price up to 2.66 times sales per share. So, someone out there clearly has high hopes for the future.

To summarize, CTBI offers you the chance to pay triple the sales value for a moderate return on equity and a sort of highish level on debt in a small banking company, unaccompanied by a mob of enthusiastic big-money managers. Plus, average volume is 38,000 shares, and it has no options.

Hey, what's not to like?!?

CTBI next announces earnings on April 20. Its quarterly dividend, at 4.02% per annum, is due in March.

Decision for my account: I love Zacks, but this stock looks like a faith-based play, and I don't love Zacks that much. The low volume, the lack of options, the high price/sales ratio, and the previous resistance levels lined up like icebergs during the long zig-zag movement -- all feel to me like a Titanic moment in the making. 


No trade for me at this point. A break above the April 2010 peak -- $31.56, or 2.4% above the present level -- might cause me to reconsider. If I were a very long term trader, then I would think about stashing some CTBI in my hope chest. But my higher velocity approach means I've got better uses for my trading funds.

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 decision decisions for his or her own account, and take responsibility for the consequences.

MEOH's meth means money

Methanex Corp. (MEOH), based in Vancouver, BC, is a leading supplier of wood alcohol to global markets. Their product is known to scientists as methanol -- that's where the company gets the "meth" in its name. It is used mainly to make other chemicals, mainly formaldehyde, and from there is used in manufacturing products from plastics to plywoods to paints.

So MEOH is a classic bottom-of-the-food chain company. It needs a lot of downstream companies to prosper and provide a market for its product -- broad customer base; a good thing -- and requires economies of scale to remain competitive in such a broad market -- giant company; also a good thing.

MEOH has the most bullish chart among 16 stocks added today to Zacks top ranking. The runners up are AME in 2nd place, CATM in 3rd and CZNC in 4th.

What distinguished MEOH among the final four was high volume during up-bars on the hourly chart. AME volume was uppity during both rises and declines. It's a very small difference, but volume counts. And when the decision reaches two closely matched charts, it is often a choice between intraday volume and flipping a coin.

(See my essay "10,000 Charts" for a discussion of my screening methods.)

MEOH has been on the rise since Dec. 29, 2011, with only one retracement -- a five-day fall following an upward gap. Altogether during the rise, the stock has gapped three times at the open.

Altogether, the price rose from $21.83 in late December to $28.31 at today's high so far. The price has since retraced from that level but remains above yesterday's close. (I'm writing shortly before 2 p.m. Eastern.)

Longer term, MEOH hit an all-time high at $34.90 in May 2011 that retraced about half of the distance from its Great Recession low to May's high. Today it moved back to the 23.6% retracement, a Fibonacci level that often represents resistance or support.

The story behind MEOH's rise is obvious. The global economy is recovering, and MEOH is part of that, re-opening shuttered plants and negotiating new supply.

And it's doing quite well, thank you very much, with return on equity of 13%, although that comes with a cost, a debt/equity ratio of 0.77.

The big money clearly expects more growth. Institutional ownership is 82%. The price has been bid up to 1.03 times sales, meaning there's no discount from parity.

So the numbers paint an optimistic picture for a liquid stock. The average volume is 463,000 shares.

The options selection is limited, with only seven strikes available in February, but with three-figure open interest on calls surrounding the at-the-money level, and four figures for one of the put strikes. The bid/ask spread is decent, running $3.30/$3.90 on the near in-the-money call.

The next quarterly dividend is due in March. Earnings will be announced Jan. 27 after the close.

Decision for my account: The option pricing really doesn't give me sufficient return for a bull put spread. So my choice is to buy call options at $390 per 100-share contract, or shares at $2,772 per 100. I've opened the long call position, with April expiration, because it gives leverage.

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 decision decisions for his or her own account, and take responsibility for the consequences.

Vox populi vox VOXX

VOXX International Corp. (VOXX) is a distributor of consumer electronics headquartered on Long Island just outside New York City.

VOXX's main brand is Audiovox, but it has a lot of other labels for its products, such as RCA, Acoustic Research, Jensen and the newly acquired Klipsch. It also provides OEM components to the auto industry.

So car stereos, remote control units, mobile media, home electronics -- VOXX distributes stuff that's ubiquitous, but you've got to search your head to remember the brand name (the historical RCA being the exception).

In a sense, the voice of the people (in their ears, at least) is the voice of VOXX, but few are aware of it.

VOXX's chart is the most bullish among the 21 stocks added to Zacks top rank today. (See my essay "10,000 Charts" for an explanation of how I screen.) UAN was in second place, and CPWM in third.


The stock began its most recent upswing in early October 2011, at $4.69, and peaked today at (so far) $12.25. That's nearly a three-fold increase that grabs my attention, certainly. The only pause is the rise came during five weeks in November and December.

VOXX gapped up a spectacular $2.12 on Jan. 10, after earnings per share exceeded analyst expectations by 28%, with a volume that day of 855,000 shares -- this on a stock that normally trades below 100,000 shares in a day.

The price ended down a bit on gap day, and has in the five ensuing days risen, and today broke past the gap-day high.

So it's a classic bull chart -- steadily higher highs and higher lows with good news greeted by exuberance. 

Clearly, the rise is future oriented, based on hope rather than past performance. Return on equity is about 8% -- OK but nothing to celebrate. The debt/equity ratio is 0.19, not overly high but not low either. Institutional ownership is 65%, not down in the cellar but certainly with a foot through the cellar door. 

But price to sales is 0.37, which is astonishingly low. Anyone who buys VOXX is getting it for a song.

The low volume precludes any options position under my rules. There are only five strike prices for February, and only one strike has any open interest -- seven contracts. So it's shares or nothing for this play.

The next earnings announcement is May 16.

Decision for my account: I've bought share of the stock.

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 decision decisions for his or her own account, and take responsibility for the consequences.

DELL: Game of Triangles

Dell Inc. (DELL) -- a major computer maker, headquartered outside of Austin, Texas  -- is showing some serious triangulation on its weekly chart that might suggest interesting times ahead for traders.

There are two overlapping triangles, both having a floor stretching from the low the week of Aug. 23, 2010 through a higher low recorded the week of Aug. 15, 2011.

Triangle #1 is a larger-scale ascending triangle with a base ceiling at $17.52 (the week of April 12).

Triangle #2 is a symmetrical triangle with a base ceiling from the high set the week of July 18.

The symmetrical triangle can be seen as having broken out last week, and the breakout has continued this week. The triangle two base is $4.31 wide. The breakout point was about $15.68. So, triangle lore would have it that the upside target is $19.99 -- round it up to $20.

Triangle #1 won't reach braekout until it tops $17.52.

Dell reached the Triangle #2 ceiling through a 10-day rise that interrupted by only two stumbles, both followed by rapid recoveries. Analysts are also looking more kindly on DELL, amid chit-chat about how the company is reinventing itself.

The price has been in a sideways pattern since August 2009, with big swings that alone can produce plenty of profit.

If size counts, DELL counts. It serves a huge range of the computer market, from enterprise-level servers down to laptops, from giant corporations down to schoolkids.

With average volume of 15.2 million shares, it is a supremely liquid trade. Institutional ownership stands at 69%, a bit low for a behemoth. Perhaps money managers are still a bit skeptical of the reinvention talk.

DELL's return on equity is 47% -- growth stock territory. It's financing its reinvention through borrowing, with a debt/equity ratio of 0.95, which is far higher than I like.

The stock is cheap, like something you would pick up at the local thrift store, with a price to sales ratio of 0.46. That means less than half a dollar in stock gives ownership of a dollar in sales. I like that a lot, but with the caveat that cheap stocks are usually cheap for a reason.

DELL's liquidity comes with a full suite of options, with strike prices $1 apart, narrow bid/ask spreads, and lots of open interest.

Earnings are scheduled for Feb. 21.

Decision for my account: The triangle breakout combined with the high liquidity and analyst happy-talk makes DELL very attractive. The high debt and the fact that the price has been swinging sideways since the summer of 2009 are troubling. I considered opening a stock position, suitable as a basis for for selling covered calls. But present call premiums make the return too low. 


As an alternative, I've sold February bull put spreads, short the $16 strike and long the $15 strike, which is profitable down to around $15.73. The spread limits upside gains but also downside losses.


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 decision decisions for his or her own account, and take responsibility for the consequences.

DVAX: A Speculative Play

Dynavax Technologies Corp. (DVAX) is a Berkeley, Calif.-based drug company whose research focuses on asthma, anti-inflammatories and autoimmune diseases. It has the volume of an up-and-comer -- 1.4 million shares a day on average -- but the price of  garage project -- under $4 a share.

I picked DVAX as the best bull chart out of 39 added today to Zacks top rankings, which derive mainly on earnings estimates. (See my essay "10,000 Charts" for a description of my screening method.)

The runners up all had good charts, and my final pick is frankly way open for debate. It was a very tough call. What finally hooked me on DVAX was the rising volume during the recent price rise that peaked last week.

The runners up were EXR in 2nd place, HUM in 3rd and DELL in 4th. (If I think of liquidity and tradeability, of course, DELL wins hands down.)

DVAX hit rock bottom in November 2008 at 15¢ a share, in  the depths of the crash that followed the collapse of capitalist finance. It has since recovered steadily, with the exception of a downward correction from January into October 2011.

The price began its most recent rise on Oct. 18, from a low of $2.27, and pushed up to a peak of $3.83 on Jan. 12. (The stock's all-time high is $10.66 in November 2006, also known as the "good old days".)

Since the most recent high, last week, the price has declined for two days running -- lower highs and lower lows, hitting $3.51 in the first hour of trading before reclaiming about half of its lost ground and marking time through the next four hours. (I'm writing at about 2 p.m. Eastern.)

Put it together, and DVAX has a classic bullish chart: Steady higher highs and lows over an extended period, with corrections that are proportional to the rise.

What I hate to see most in a chart is choppiness during corrections, as bulls and bears battle viciously for control. That pattern lacks conviction. I much prefer to see a chart that smoothly declines from a high, since it shows a much broader consensus, and therefore more traders will be satisfied sooner that the correction has done its work.

DVAX has return on equity that -- well, the sort of return on equity some of my younger cousins might get with their chemistry set in the garage. The most recent ROE was minus 200%. So for fundamentalists, this is a speculative play. Warren Buffet would throw up his hands in horror at the thought of putting one thin dime in DVAX.

Debt/equity is less horrifying, at 0.34, but it's still a fairly hefty load for a company to carry.

Despite those bad numbers, institutional ownership stands at 71%. So either some very smart money managers see promise in DVAX, or there has been a resurgence of faith-based trading.

Stock options are not an option when a price is this low. And there are in fact only three strike prices available, although with surprisingly high, 3-figure open interest.

The next earnings announcement is March 7.

Decision for my account: I won't consider opening a position in DVAX until the price breaks above last week's high, $3.83. Were I to open a position, I would buy shares and squirrel them away in my hope chest, rather than trading options.



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 decision decisions for his or her own account, and take responsibility for the consequences.

The Week Ahead: Prices

Next week is a short one for U.S.  because of Monday's holiday in honor of Dr. Martin Luther King.

In the U.S., both stock and bond markets will be closed, along with exchanges for futures and options. However, markets will be open as usual in London, Tokyo and Sydney. So American traders will need to pay attention to the currency markets on Monday.

During the truncated week, the U.S. will have a full platter of significant economic reports  to motivate the market.

The theme of the week is prices -- inflation if they rise, deflation if they fall, stagflation (?) if they fail to go anywhere at all.

Producer prices will be released Wednesday at 8:30 a.m. Eastern, followed by consumer prices on Thursday, same time.

Also out,

Tuesday, The Empire State manufacturing survey, for New York, at 10:30 a.m.

Wednesday, Treasury international capital at 9 a.m. , industrial production at 9:15 a.m. and the housing market index at 10 a.m.

Thursday, Housing starts and weekly jobless claims at 8:30 a.m., the Philadelphia Fed survey covering the mid-Atlantic region at 10 a.m.,  and natural gas and petroleum inventories at 10:30 a.m. and 11 a.m. respectively.

Friday, Existing home sales at 10 a.m.


Practical trading: By my rules, as of Tuesday I can trade February vertical, calendar, diagonal and butterfly spreads, iron condors and covered calls, and April singles and straddles. Of course, shares are good at any time.

GPC: After the Gap

Genuine Part Co. (GPC) is where you go when things break down and you need replacement parts, be it on your car, in your office, or on your industrial assembly line. So GPC makes more money when people and companies, reluctant to replace big-ticket items entirely, stretch them out to get a few more years of use.

From a story standpoint, if you expect a rapid recovery from the recent recession and a rise in durable goods purchases, then GPC is bad play. If you expect things to creep along in the doldrums for a few more years, then GPC will look fairly good.

The chart shows that GPC has been in a steady rise, from $24.93, since early March 2009, interrupted only by a period of sideways retrenchment from February to October 2011.

The most recent leg up began Oct. 18, 2011, at $53.60, up to a high of $63.31 this week, on Jan. 10. Since the peak the price has moved sideways for three days.

I selected GPC using a bracket on the 20 new additions made today to Zacks list of #1 ranked stocks. (See my essay "10,000 Charts" for a discussion of how I use brackets in stock selection.) The rest of the final four were TNB in 2nd place, AME in 3rd and TESS in 4th.

GPC's chart stood out because of its clear break, via an upside gap, above resistance, despite this week's ensuing stall. An intra-day decline, quickly retraced, on both Jan. 12 and Jan. 13 reached down, and covered the gap, increasing odds of further rise above the present micro-level congestion.

(I'm referring to the market lore that prices, after an upside gap, will drop down and "fill" the middle of the gap.)

However, what follows the gap is a puzzle.

The last three days of trading have shown lower highs, and the last two days reached lower lows than did the first day of the series. That's troubling to any expectations I might have for a breakout above $63.31.

The hourly chart over those two days shows a series of lower highs and more-or-less sideways lows, like a descending-triangle wannabe.

So it's a question of where I, as a trader, put the significance amid this contradictory evidence -- on the rise from mid-October? Or on the declining correction from this week?

This ambiguity is typical of today's bracket. Most of the 20 stocks had charts ranging from ambiguous down to bad, so if GPC is the pick of the litter, it was a litter filled with runts.

Financially, GPC is a fundamentalist's dream, with return on equity of 19% and a very low debt/equity ratio of 0.09.

And the price is cheap -- 80¢ of stock will buy a dollar's worth of sales. A bargain.

Institutional ownership is 73%, significant but not overly high. Perhaps it is the sector -- replacement parts doesn't have a cutting-edge image. Perhaps the cheap price is leading Big Money to say, "Stocks are cheap for a reason."

The stock is quite liquid, with average volume of 711,000 shares.

The selection of option strike prices isn't especially large -- only 10 strikes, $5 apart, for February, and the bid/ask spread isn't outrageously high, at $3.00/$3.70 for the nearest in-the-money call.

But open interest is better than on many stocks trading under a million shares, exceeding 1,000 contracts on three call strikes and exceeding 300 on three put strikes.

GPC's next earnings announcement is Feb. 21 before the open. The stock will next go ex-dividend in early March; the last quarterly payout was 45¢.

Decision for my account: I'm passing on GPC at this point. The lower highs and lower lows on the three-day micro-correction lead me to conclude that the next move could be in either direction. I'll reconsider this decision if the price breaks above $63.31, thereby setting a higher high, and accompanies that breakout with a higher low.


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 decision decisions for his or her own account, and take responsibility for the consequences.

VAL's Blue Sky Flight

Minneapolis-based Valspar Corp. (VAL) is world's sixth-largest manufacturer of paints and other coatings. As such, it is a fine example of a sector that lies behind a broad array of industrial and consumer products. As the world's economy recovers (And it will! It will!), the recovery will create an environment where VAL can profit.

The chart drew my attention because of the steadiness of its rise.

The price began its upswing in early August 2011, at $27.44, and peaked today at (so far) $41.63. The price has had corrections within that five-month span, but even the corrections have had an upward tilt.

The most recent leg up began Dec. 15 at $36.17.

I chose VAL using a bracket of 16 stocks selected at random from a universe of 67 issues -- the new additions over the last three days to the Zacks #1 list. (See my essay "10,000 Charts" for a description of how I use brackets to compare charts.)

IHS came in 2nd in the bracket, CRUS was 3rd and XOMA was 4th.

The case for VAL's chart was helped by the fact that, on the weekly chart, VAL has broken clear this week of the previous highest high of $40.60, set in early April 2011. This puts the stock into blue-sky territory, as it has never before traded at these levels.

I must confess, I have a huge weakness for blue sky stocks. There is no upside resistance, and I think that fact increases  the odds in favor of a profitable trade.

Zacks has mixed financials. The return on equity is 17% -- on the high side, although below growth-stock territory -- but the debt/equity ratio is 0.56, which is a bit more debt than I like to see.

The debt isn't a deal-breaker, however. Interest rates are low, and the company has taken advantage of that to do some acquisitions abroad, as well as to sell some of its own assets. So as long as the money is being put to uses that will grow the bottom line, what's to worry.

Institutional ownership is 72%, so the big money, although not wildly enthusiastic, doesn't seem to be afraid of VAL's prospects.

The average volume of 684,000 shares provides good liquidity, but that hasn't translated into a fine selection of options, and that poor inventory limits the things that a creative trader can do to increase profits.

There are just eight strike prices, $5 apart, for February. The only strike with large open interest -- 1,035 contracts -- is the just in-the-money call options, suggesting that traders expect the price to rise and are buying calls for some leverage as they go along for the ride.

The spread is on the wide side -- 75¢ for the nearest in-the-money call.

On the calendar -- VAL announces earnings on Feb. 14, before the open, and the next ex-dividend date isn't expected until spring.

Decision for my account: I bought shares in VAL today. I decided not to do options because of the limited selection, a rather wide spread, and the concentration of open-interest in a single call strike. If the stock heads down, there will be a panic out of those calls, and no one -- NO ONE -- will want to buy them.



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 decision decisions for his or her own account, and take responsibility for the consequences.

S&P 500: A Hanging Man

Update: The S&P 500 opened Thursday within the body of Wednesday's hanging man candlestick, thereby failing to confirm the signal.

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The S&P 500, which is tracked by the exchange-traded fund SPY, closed on the daily chart with a hanging man candlestick pattern. This pattern, if confirmed, can indicate a reversal of the current trend.

Candlestick charting is based on techniques that Japanese rice traders used several centuries ago. In a hanging man candle, the opening and closing prices are near one another, at the very top of the trading range.

This open-close range is called the "body" of the candle, and lines extending out from the body to the high and low are the wicks.

A hanging man basically looks like a letter "T" with top that's a little bit fatter than the stem. It has a narrow body, no upper wick or a very small one, and a somewhat longish lower wick.

The S&P 500 has been in an uptrend since Dec. 20, 2011 -- or 15 trading days. The upswing began at 1202.37 and has risen to a high of 1296.46.

Now, this hanging man may in fact just be a wannabe. A perfect hanging man has an open and close that are above the previous day's high. The hanging man candle, in other words, should set a higher high.

That's not the case today, where the high is 1293.65. Also, there is a small upper wick, like a small wart. It keeps this hanging man from being a truly beautiful hanging man. And the upper wick lengthened the last few minutes of trading.

Confirmation won't come until Thursday. If Thursday's open is below the body of the hanging man, that's confirmation. If the close is also below the body, then that's an even stronger confirmation.

As I noted in Tuesday's analysis, "S&P 500: Triangle Breakout", there is always the possibility of a false triangle breakout, where the price has sufficient momentum to throw itself over the triangle boundary, and then quickly retreats. A hanging man pattern in this position suggests that a retreat is imminent.

But, of course, candle patterns can fail as well.

The dirty little secret of chart patterns is that they always work, until they don't.

Ronald Reagan famously said, "Trust but verify." I say, "Play the pattern, but stop the losses." Not as catchy on Ron's pithy saying, but equally true.


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 decision decisions for his or her own account, and take responsibility for the consequences.

TRMB: Navigating a Breakout?

Trimble Navigation Limited (TRMB) is in the business of pinpointing where stuff is on Planet Earth. Not just -- OK, here I am on my hike -- but lots of stuff that can be analyzed statistically, big stuff as in surveying and construction, mobile stuff as in tracking vehicles for trucking firms.

The first thing I like to do with a company is state concisely what it's business is. In TRMB's case, the business is turning location into data.

I selected TRMB using a bracket on a random selection of 16 stocks selected from 24 added today to Zacks top bullish ranking. (See my essay "10,000 Charts" for an explanation of how I use brackets to select and analyze stocks.)

The Final four were POOL in 2nd place, NNBR in 3rd and DVA in 4th.

TRMB's chart recommends it because it is on a near-term roll. A three-day rise that included an upside gap has carried the shares from $40.46 at the Jan. 9 open to $43.24 at today's high so far.

This is within the broader context of a stock trying to recover from a stumble amid a bigger recovery from a decline that carried from $52.53 in late March 2011 down to $31.88 in early October 2011.

But honestly, I look at this chart, which was the pick of the litter, and I'm really ambivalent.

Yes, it has broken out of an area of congestion, but the congestion only lasted two days. I can get more congestion on the Capital Beltway in Washington, D.C.

Yes, this week's rise has carried the price above the beginning of last week's steep fall, but this week's high so far remains below the late October high. The price would have to break above $45.04 to hit a true near-term higher high.

So, I will say right here, to spare the barely interested further reading, that based on the chart alone I'm unlikely to open a bull position on this stock.

What's the upside?

Well, Zacks loves it, and Zacks is to stock analysis what Real Clear Politics is to political polling -- it aggregates opinions from all corners of its universe and distills those opinions into a single piece of guidance.

So when Zacks talks, I listen.

The big money managers are clearly listening. Institutional ownership stands at 91%.

Return on equity is 15% -- not rapid growth territory but respectable. Debt to equity is 0.36, a bit high but not horrid.

Price to sales is 3.46 -- meaning it costs $3.46 in stock to obtain a dollar in sales. That's pricey (or "spendy", as people say in the Pacific Northwest). While that high ratio means the stock is relatively expensive, it also means that big money thinks well enough of it that they've bid up the price.

Never fight big money in the market. Big money always wins.

TRMB is liquid, with an average volume of 595,000 shares. But its options selection is weak, with only 11 strike prices, and the spreads are huge. For example, the close in-the-money bid-ask spread is $1.40. Compare that to SPY, the most liquid exchange-traded fund on the market, where the comparable spread is 4¢.

So if I were to play TRMB, it would be as shares, with a 4¢ spread.

Calendar note: TRMB releases earnings on Feb. 2 after the close.

Decision for my account: I'm passing on TRMB. I won't open a position at this price level. I'll reconsider that decision if the price breaks above the most recent highest high of $45.04.



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 decision decisions for his or her own account, and take responsibility for the consequences.

CAT Breaks Out

Caterpillar Inc. (CAT) this week broke above a level of congestion that has been in place since late October 2011. An opening upside gap on the daily chart has pushed the price up to 2.9% above the prior day's close, bursting through the Fibonacci 61.8% retracement level.

Caterpillar is a household word, at least if your household is involved in moving dirt and other heavy construction tasks. It is a stock with a great story if economic recovery is at hand.

In slump, the dirt tends to stay where it is. As business activity picks up, then people feel a need to move that dirt elsewhere, and Caterpillar finds a growing market for its machinery.

The current rise is embedded within a retracement of a major decline, from $116.55 in early May 1011 down to $67.54 in early October. Since then, the price has traced a zig-zag back up -- today's high of $99.90 marks the terminus (so far) of a second zig.

That price pattern alone made CAT stand out as I ran a 16-chart bracket whose stocks were picked at random from 184 stocks that have been rated strong buy by Zacks. (See my essay "10,000 Charts" for an explanation of how I use brackets.)

Also in its favor was the fact that the breakout over the past two days has been on rising volume.

CAT has a fair degree of institutional ownership, at 65%, but that's far from being a poster child of professional managers of big money.

But its return on equity is well in growth-stock territory, at 36%. However, it has gone deep into hock in accomplishing that, with a debt/equity ratio of 1.88, well above my level of comfort.

The debt may explain the rather low premium for sshares compared to sales -- the price/sales ratio -- which is only 1.13. That means $1.13 worth of stock buys a dollar's worth of sales. That's close to bargain territory.

For the near term, I don't sweat the debt -- interest rates are at huge historical lows, and now is the time to borrow if borrow one must.

My main concern is the gap, since they tend to be filled in. So if I were to trade CAT, I would want it to be hedged somehow.

Happily for hedgers, CAT is a highly liquid stock, with an average daily volume of more than 6 million shares and a fine selection of options with high open interest. So it's a hedger's heaven.

But -- calendar note -- the stock goes ex-dividend on Jan. 18, so traders might want to have some shares in the mix in order to capture the 46¢ quarterly payout.  (Although it's a small payout: $46 on a 100-share $10,000 position.)

The next earnings announcement is Jan. 26, before the open.

Decision for my account: I shall open a February bull put spread, short the $97.50 put and long the $92.50 put, that is profitable above $96,  or so, a level that allows room to retrace not only today's upside gap but the entire rise of the past two days. I passed on shares because of the small return, and also because that expensive a stock tends to push me above the max position size allowed by trading rules.



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 decision decisions for his or her own account, and take responsibility for the consequences.

S&P 500: Triangle Breakout

The S&P 500 has broken above an ascending triangle that has been traced on the chart from Oct. 4, for the lower line, and Oct. 27 for the upper.

An ascending triangle is a pause within an uptrend that is destined, upon breakout, to continue the uptrend to higher price levels. Some say that ascending triangles don't work well. I say that they're like any other technical construction in trading: They work just fine, except when they don't.

A continuation would of the uptrend that began July 5, 2010 at 1028.09 and peaked on May 2, 2011 at 1370.58. The subsequent correction hit its low point, at a higher low, at 1074.77 on Oct. 3, 2011.

So far so good -- it is an ascending triangle, and it is within a longer-term uptrend.

Upon breakout, or so the lore goes, the following rise will be at the least equal to the base of the ascending triangle, stretching in this case from 1074.77 to 1292.66, or 221.89 points wide.

Today's triangle top is 1284.47, add the width, and the result is 1506.36, which would be within a mere 70 points of the 2007 peak, before the Great Recession crash.

All of which is futurology in my book. I tend to look at what's happening now, not at some mathematically determined might-be future.

And the now is this:

The S&P 500 broke above a five-day area of congestion, a near-term bullish signal. It also broke above the previous highest high of 1292.66, set on Oct. 27.

It is, however, important to look at the intra-day chart. Nearly all of the rise came immediately at the open. In the second hour, the high was set, but the price pulled down from the high, and in the two subsequent hours has dropped further. (I'm writing this at about 3 hours 45 minutes into the trading day.)

For practical trading, a decline below 1284 would negate the breakout. That's less than 7 points (0.5%) below the current level. A push above the opening-hour close of 1293.49 would keep me interested in the index as a bull play.

If the upswing continues, next resistance is at 1347, about 57 points (4%) away.


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 decision decisions for his or her own account, and take responsibility for the consequences.

EWBC: Banking the China Trade

East West Bancorp. Inc. (EWBC), a holding company based in Pasadena, Calif., through its East West Bank focuses heavily on international banking services, especially those involving the China trade.

This regional bank has been on the rise since early October, with top ratings by analysts.

The China exposure could cause a loss of business if China goes bust and quits exporting. Everyone who thinks that's likely, raise your hand. No one? Me too.

That's the EWBC story. But, I'm a chart guy, not an consumer of trader tales or analyst dreams. So, let's look at the chart.

And a thing of beauty it is, for bullish traders, at least. Three of the last four days have shown long intra-day rises, and all four have set higher highs and higher lows.

The last four weeks -- the same. The last four months -- intra-day rises across the board and two higher highs and higher lows.

It is a stock on the move. It has momentum. That alone can be a good reason to enter a position, as long as the trader is prudent with his or her stop/loss points.

On the caution side, EWBC is no blue-sky stock. There is historical congestion in the region where EWBC is now trading, dating from last March. Today's high (so far) is at a level struck in a March decline. The previous peak, at 23.79, is 11.6% away.

But for a short-term play, I'll take 11% any day.

At a micro level, the current rise began today at the open, and has set higher highs for each hour of trading today, and net intra-day rises for all but one of those hours (I'm writing at 2:20 p.m. Eastern).

I selected EWBC using a bracket (see my essay "10,000 charts") from a universe of 185 stocks ranked strong buy by Zacks. The runner-up was CVGI. Third-place went to SLXP, and 4th to ACAT.

EWBC was on the strength of its steady rise across four levels of granularity -- hourly, daily, weekly and monthly.

CVGI, by contrast, has been in a zone of congestion since Nov. 7. If it breaks out of that zone, above $11.88, then it will be a much stronger chart.

EWBC has a strong institutional presence -- 85% -- and decent financials, with a return on equity of  11% and a debt/equity ratio of 0.31.

With an average volume of 938,000 shares, it is liquid, although that level of liquidity is not supporting an active options market: There are only five strikes available for February, and total open interest for all five strikes is 5 contracts.

So if it's a play, it's shares play, not options.

EWBC releases earnings on Jan 24. after the close.

Decision for my account: I bought shares in EWBC.



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 decision decisions for his or her own account, and take responsibility for the consequences.

The Week Ahead: Fedster Mania!

The week of Jan. 9 kicks off with.... well, nothing worth speaking of, unless you're a fan of Fedster speeches. It fact, there are Fedsters all over the calendar, except for Thursday, when they will refrain from speeches and spend the day pondering the mysteries of economic theory.

The econ reports do get interesting beginning Thursday, with weekly jobless claims and retail sales, both at 8:30 a.m. Eastern.

Friday also shines with the release of international trade stats at 8:30 a.m.

Practical trading: By my rules, as of Monday I can trade February vertical, calendar, diagonal and butterfly spreads, iron condors and covered calls, and April singles and straddles. Of course, shares are good at any time.

But back to the Fedsters.

The Fed's Beige Book is never a market motivator, but is always a gripping read that keeps me glued to its pages, my hands tightly clinging my Kindle Touch. It will be released Wednesday at 2 p.m. And it may well inform what the Federal Reserve VIPs have to say as they swarm, like a herd of bumblebees, around the microphones during the week.

When these folks speak, I tend to listen, because whether one is a Paulian or a new Chartalist or even a Krugmaniac, under our present system it is the Fedsters, ultimately, who determine our financial fates.

(Wikipedia: Paulian, new Chartalist, Krugmaniac.)

Here's the roster.

Federal Open Market Committee members:

Chicago Fed Pres. Charles Evans took office under President George W. Bush. He came up through the Fed system. Evans has regularly dissented, beginning in late 2011, in votes to maintain current policies, arguing that the Fed should do more to encourage growth. Some would call him an inflation dove, but I would call him an inflation atheist. He speaks Wednesday at 8:40 a.m. and Friday at 1 p.m.

Philadelphia Fed Pres. Charles Plosser also took office under Bush. His resume shows institutional ties to Chase Manhattan Bank, Eastman Kodak Co., Wyatt Co., ViaHealth Inc., RGS Energy Group Inc. and Chase Manhattan Bank, all in consulting or advisory capacities. He also co-chaired the Shadow Open Market Committee, which second-guessed the Fed’s monetary policy. One of the Gang of Three, Plosser dissented in votes last summer on expanding the money supply to encourage economic growth. Some would call him an inflation hawk, but I would call him a deflation atheist. He speaks at 12:30 p.m.

Other Fedsters:

Kansas City Fed Pres. Esther George assumed her position under President Barack Obama, replacing inflation hawk Thomas Hoenig, who was nominated for the FDIC board of directors, after rising through the Fed system. She speaks Tuesday at 1 p.m.

Richmond Fed Pres. Jeffrey Lacker took office under Bush II.  He taught economics at Purdue University before coming to work for the Richmond Federal Reserve Bank in 1989. He is alternate member of the FOMC. He speaks Friday at 12:45 p.m.

Atlanta Fed Pres. Dennis Lockhart, another Busher. His resume shows institutional ties to Citigroup (then called Citicorp/Citibank), Heller Financial and the private equity firm Zephyr Management L.P. He is alternate member of the FOMC. He speaks Monday at 12:40 p.m. and Wednesday at 9 a.m.

San Francisco Fed Pres John Williams took office under Obama. He came up through the Fed system. He is alternate member of the FOMC. He speaks Tuesday at 10 a.m.

And that's the week that will be. Too much fun!!

LCAV: Is LasikPlus heading back to 20/20?

LCA-Vision Inc. (LCAV) is LasikPlus -- the clinics where lasers are used to make eyes normally sighted.

With an average volume of only 83,000 shares, LCAV is more pint-sized than the stocks I normally look at. But with the market in confusion (up? down? anywhere?) and the end of the trading week growing nigh, I decided to pull the seeds for today's bracket (see my essay "10,000 Charts") from a broader pool than normal.

And, although not quite a penny stock, LCAV is trading for about $4.40.

I selected from the 185 stocks currently rated "strong buy" by Zacks, with no filter for price or volume. Low price and low volume means greater volatility, generally, and also less "trendiness" -- the charts tend to be little bit flaky compared to the mega-caps that dominate the market.

After LCAV, the bracket's top rankings were 2nd place FLT, 3rd CRMT and 4th VPHM.

LCAV is in the third trading day since opening, on Jan. 4, with a 10.1% gap, followed by an intra-day rise of 28.6%. And it followed that fairly amazing bump with two days that each set higher highs and higher lows.

I always feel a bit astigmatic when I look at charts with gaps and follow-throughs of that degree. My gut feeling is always  that everyone will take the money and run to the exits, all at the same time, causing the price to collapse back to its pre-gap levels.

And maybe it will, and maybe it won't. That's the risk a trader takes with any stock.

Case in point: Yesterday (Jan. 5) I opened a bull position on GOOG, which on the third day after a gap was slightly below the high. Rather than dithering a bit, and then again rising, GOOG today (Jan. 6) continued to fall, prompting me to close immediately for a small loss.

GOOG's price is 148 times that of LCAV, and its average volume is 2,600 times greater. So high liquidity and a price sufficient to screen out poorly capitalized amateurs is no guarantee of stability.

The January gap broke a period of congestion that followed a decline from $5.52 on July 6 to $1.86 on Oct. 4.

Once upon a time, in early July 2007, LCAV was selling at an all-time peak of $50.69. But it doesn't take 20/20 vision to see that good eyesight, in the midst of a recession of this depth, is a luxury that people couldn't afford. Business declined, and so did LCAV's price.

Zacks' high ranking for LCAV, clearly, is based on an expectation of much improved performance. The company's return on equity is a 33% loss. The debt/equity ratio, however, is only 0.16, which is well within my comfort zone.

The stock is relatively cheap, with a price/sales ratio is 0.83. Of course, cheap stocks are often cheap for a reason, so that's no guarantee of happy days ahead.

Institutional ownership is at 65%, fairly high for a low-priced, low-volume stock. So either the fund managers have held on for four years reluctant to take a loss, or some have jumped in expecting LCAV to recover along with the broader economy.

Calendar note: LCAV announces earnings on Feb. 14 before the open. The company discontinued paying dividends in 2008.

Decision for my account: Options on LCAV have insufficient open interest to be attractive. I've tucked some shares of LCAV into a dark corner of my portfolio, next to my Fannie Mae shares and other foolish dreams, in the hope that the company might indeed be recovering.


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 decision decisions for his or her own account, and take responsibility for the consequences.

PX: Gas with Big Biceps

Praxair Inc. (PX) is gas. Not just the whispy normal gas or the perfumed air of a spring evening, but hard-core gas, heavy industrial gas, gas with big biceps and an economic punch.

This Connecticut-based company's business of selling industrial gas and related equipment puts it in the enviable position of an Intel or a Microsoft when it comes to nitrogen, carbon dioxide, argon, rare gases and a long menu of others. PX makes the essential components that downstream industries absolutely require do their thing.

And there are a lot of industries downstream. The boilerplate from Reuters says that PX "serves approximately 25 industries, such as healthcare and petroleum refining; computer-chip manufacturing and beverage carbonation; fiber-optics and steel making; and aerospace, chemicals and water treatment."

I selected PX for analysis out of a 16-stock bracket where I compared charts in a single-elimination tournament looking for bullish patterns. (See my essay "10,000 Charts" for an explanation of how the bracket works.) I randomly chose the seeds from a group of 924 optionable stocks having average volumes above 2 million shares a day.

GILD was the runner-up, with PAYX in the 3rd slot and VIAB taking 4th place.

PX, like all the charts I've read these days, is bullish but with a lot of bearish issues in its recent past. Sort of like the Republican presidential candidate Newt Gingrich with that embarrassing photo someone dug up of him seated cozily next to uber-Democrat Nancy Pelosi.

So when PX claims the championship as the best bull chart on my bracket, it's all very relative. We're not talking about the best of the best here.

But there is a bullish case to be made, and perhaps it is best to consider plays whose bullishness is not yet burning brightly. Buy early and sell when everyone else piles in -- a good practice for any trader.

PX hit bottom late October 2008, at $47.40, and from that dark time traced an impressive rise, with only one major pause, up to $111.74 on July 7, 2011. Since then it has paused again, retracing nearly 38% of the 2008-2011 rise, and Nov. 28, began to recover. Today the price stands within 3.4% of  the high.

An old-school breakout-trader would wait until the price bumped above $111.74 before opening a position. Yet there is an alternative view that says, "Look, with options there's enough leverage so that 3.4% will produce a tidy profit."

I have a fairly short horizon in my own trading, so I tend to favor getting in before the breakout.

On a micro level, the price hit a higher high yesterday, Jan. 4,  but with a lower low than the prior day. Today , Jan. 5, it has pulled back to a (so far) lower high but also a higher low.

The price now, less than 90 minutes before the close, is down for the day, but it has pulled sharply above the day's low, meaning the sellers have been unable to prevail.

For candlestick pattern fans: Neither two-candle pattern qualifies as an engulfing or a harami, in my opinion. I think the short-body candles are insufficiently short.

Normally, I steer away from telling stories about stocks. I think they lead to obsession, and the Ahab syndrome, where traders chase good stories as though they were great white whales. Jim Cramer, honestly, is sort of a Capt. Ahab.

In the case of PX, however, some storifying might be appropriate. Because of its position upstream from so many industrial concerns, it is well positioned to benefit from the ongoing, molasses-slow recovery of  the American economy. As consumer markets recover, the added business demand will inevitably  defy the laws of physics and trickle up to PX.

PX has some good numbers, with a return on equity of 26% (growth stock territory). Debt/equity is 0.95 -- higher than I generally like -- but with interest on debt so low, it's a good time to borrow for purposes that will expand the business.

The stock is slightly overpriced, with a price-to-sales ratio of 2.95. That means a long trader is paying three times the price that can justified by sales. But that's not too far out of line for a stock seen as having a profitable future.

Institutional ownership is at 88%, so clearly some big guns out there are taking an interest in the potential for a profitable future.

Calendar items: PX announces earnings on Jan. 25 before the open, land last went ex-dividend on Dec. 2. The amount of the quarterly dividend was 50¢.

Decision for my account: I've opened February bull put spreads, short the $105 strike and long the $100.



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 decision decisions for his or her own account, and take responsibility for the consequences.

A GOOGlelicious Breakout

Google Inc. (GOOG) has lodged itself so successfully at the heart of the online experience that it's almost inescapable, like air or sunshine or political rhetoric.

Just considering what I do here every day, my life is a googlelicious experience.

The Private Trader weblog is hosted by Blogger, which is owned by Google.

The text documents I use to save my boilerplate, such as the legal disclaimer, are on Google documents, as are the spreadsheets I use for stock picking and other analytical tasks.

My Christmas list is on Google documents.

I share photos of my 17-month-old grand-daughter on Picasa -- owned by Google.

I plan my walks on an online map -- Google -- and thanks to that maps ability to plot GPS positions need never get lost again while exploring the stranger nooks and crannies of my city.

I keep in daily touch from Oregon with my family in Japan using Gmail -- once again, Google.

And when I want to find out about stuff -- such as the property qualification for voting in New York during the American Revolution, I google it, and Google brings the state's 1777 constitution to my fingertips, and a tool needed to translate British pounds of the year to 21st century dollars. It took me about 3 minutes to get info I needed.

And I suspect it is that way for nearly everyone who uses the Internet as a daily tool in their lives.

It is, in fact, a googlelicious world.

All of this screen time has made Google one of the premier advertising companies in the world, with sales of $29.3 billion.

I would expect a company like GOOG to be a rip-roaring bull play, but its longer-term chart shows it to be a mature company, whose stock has basically been sideways since 2009 -- albeit with some very wide swings that could put money in any trader's pocket.

GOOG came out at the top of the 16-symbol bracket that I used to select today's trade. It works much like the college hoops championship. From a universe of 63 bullish picks, ranked using the Zacks system, I selected 16 at random to seed the bracket, and then compared charts.

(See my essay "10,000 Charts" for a full explanation of how my bracket method for analyzing stocks works.)

GOOG was the winner, followed by 2nd place LULU, 3rd place CAT and 4th place IVZ.

I selected it in my out of contests between pairs of stocks because the weekly chart shows a sharp break above the previous highest high, set in January 2011. That alone makes GOOG stand out. Many stocks have had sharp rises over the past two days, but GOOG is outstanding for the clarity of the its breakout.

The stock has been in an uptrend since Oct. 4, when it began rising from a low of $480.60 up to today's high of $670.25, an increase of 39%. The rise was broken in mid- and late-November with a retracement to a Nov. 25 bottom of $561.33. From that point, the price has risen steadily to its present level.

GOOG has the numbers to match its chart. Return on equity is 20%, which is in growth-stock territory by my book. The debt/equity ratio is 0.05, which is quite small and very healthy.

But the price-to-sales ratio is 6:1, which if one considers 1:1 to optimal, means that GOOG is selling for six times its justifiable price.

Institutional ownership is a bit on the low side, at 63%, and perhaps that high price compared to sales is one reason why some institutional players steer clear.

One downside is simply the $600+ price, which puts the 100 shares needed to match a single option contract at $67,500 -- well out of the reach of most individual traders.

GOOG is long overdue for a stock split, and I can only ascribe the lack of a split to vanity on the part of its principal owners, who must love to see their  shares grow to big numbers. (Although GOOG has never been super-cheap. Its lowest low for all time is $95.96.)

Even a single at-the-money June call contract is going for $5,160 -- not awful but its granularity is too large to allow diversified traders to fine-tune exposure.

GOOG announces earnings on Jan. 19 after the close, so any trader entering a long position now should be prepared to hedge it with some way-out-of-the-money puts as earnings day approaches.

Decision for my account: I'm opening a bull position by selling February bull put spreads to capture any near-term rise, but with the intention of closing or hedging with otm puts prior to earnings.


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 decision decisions for his or her own account, and take responsibility for the consequences.

What's the Trend?

I'm calling  today's market trend as bullish, but to tell the truth, that's a stretch. I could just as easily call it bearish.

I'll take the bull case first. The S&P 500 has hip-hopped up a trend line beginning from the Oct. 4 low of 1074.77, touching down on Nov. 28 and coming close to a second touchdown on Dec. 19. That's an uptrend, a series of higher lows.

However, the top of the range is far more ambiguous, with a high of 1292.66 on Oct. 27, and a second peak on Jan. 3 of 1284.62. So that's two lower highs, although just barely. The pattern can best be seen, I think, as a somewhat malformed ascending triangle, which is a bullish formation.

Now to the bearish case. The index topped at 1370.58 on May 2, culminating a rise from the March 2, 2009 low of 666.79 (known as the Support Level of the Beast).

Since then, the index has hit a series of lower highs, on Jul 7, July 21, Oct. 27 and most recently Jan. 3. That's bearish.

Moving to the trading tools, which I tend not to use, the 10-day moving average is above the 40-day, which is near-term bullish, but the 50-day moving average is below the 200-day, which is bearish. 

So, that suggests bullish for a month's time horizon but bearish for a year, with the understanding of course that moving averages are intensely backward looking and may have nothing at all to do with today's facts on the ground.

Today's candle on the daily chart is showing a dragonfly doji wannabe, shaped like a T but the top crossbar is too fat. That candlestick pattern signals buying pressure, because the decline reversed, but insufficient buying pressure, because the price has barely budged from the open. 

So it can sometimes signal a top, coming as it does after a price rise. But it is considered to be a weak signal. (Of course, the day still has hours to go before the close, so that pattern could change dramatically.)

Finally, I wrote in a recent essay that flipping a coin is a perfectly rational way of determining a market opinion, as long as I don't trade solely based on the toss.

The coin came up tails, which is bearish.

(Insert heartfelt sigh here.)

Life is so ambiguous.

10,000 Charts

They say that it takes 10,000 repetitions to become proficient at anything, be it Tiger Woods (before his fall) on the golf course, or Venus and Serena Williams on the tennis court. Or my grand-daughter taking her first of many thousands of steps.

When Woods or the Williams sisters do their thing, they don't think about it. I mean, Tiger doesn't recite in his mind the steps of hitting a golf ball, nor do Venus and Serena silently rehearse the elements of a swing. Each acts from an unconscious mind that has been honed by repetition into an unseen expert in the sport.

David Brooks, in his excellent book The Social Animal: The Hidden Sources of Love, Character, and Achievement, presents some recent findings of scientists studying the unconscious mind.


The research finds that the unconscious mind works by finding patterns, and that it is far more powerful than our conscious minds, can handle complex tasks without any help from consciousness, works faster than the conscious mind, and produces fuzzy results, often from fuzzy input.


Brooks writes: "Conscious processes are better at solving problems when the factors are concretely defined. Unconscious processes are better when everything is ambiguous."

What does this mean for traders like us?

Ambiguity is soul of the markets. When a trader looks at stock chart with the goal of picking out the trend, he or she is confronted not by a single trend, but by a barrage of contradictory possibilities. Any market at any given time is in many bull phases and bear phases, simultaneously.

Traders deal with this by using technical tools, like moving average crosses or the relative strength index, to produce yes-or-no -- binary -- results, reducing ambiguity by moving away from the reality of the price movements.

But I've concluded that such technical tools generally produce bad trades. (See my essay "Technical Trading Doesn't Work".) And certainly their clearly defined, binary results do little to engage the powerful unconscious mind of the chart-reader. A bare-bones chart, by contrast, gives full scope to the unconscious mind's skill in pattern recognition -- patterns on such a chart are all it has to work with.

So I propose an alternative method that will 1) ensure that the trader has analyzed 10,000 charts in less than a year and half, and 2) engage the unconscious mind with the goal of developing the ability to judge a chart in a glance as a single gestalt of the current reality of the market.

I do this by running a 16-stock bracket, much like the NCAA Men's Division I basketball championship, a single-elimination tournament.

Here are the steps.

1) Form an opinion of the broad market's direction. 

This can be done by listening to market commentators, or analyzing the S&P 500 chart, or for that matter flipping a coin.

2) Select a universe of stocks from which the bracket will be seeded.

I generally use a scan of stocks ranked by Zacks, choosing stocks expected to outperform if I'm bullish on the market as whole, or under-perform if I'm bearish. But I could as well use any method, or simply use a grab-bag of stocks selected using no method, except volume to assure liquidity.

I generally go for 60 stocks or more, and I want them to be in a form that I can copy and paste their symbols into a vertical list in a spreadsheet.

3) Select 16 stocks at random.

Get 16 random numbers in the range from the first item in your list (generally #1, or #2 if the first row is a label) to the last item.

The website randomizer.org is a great place to do this, and it's free. The results will look like this:

       5, 11, 49, 2, 10, 65, 56, 58, 25, 7, 59, 27, 39, 67, 50, 3


4) Associate each random number with a stock symbol.


Looking at your list, put the number 1 beside the 5th item, 2 beside the 11th item, 3 beside the 49th item, and so forth to 16 beside the 3rd item. (It helps to sort the random numbers into numerical order, to save jumping back and forth in the spreadsheet.)


5) Seed the bracket.


Put the 16 selected symbols in the first column of the bracket. The bracket I did today looked like this:


Seed:
DFS-LULU
SE-COH
HOT-PXP
IVZ-NI
BA-ABC
XEL-V
URI-TWX
CREE-ASML


Quarter-Final
DFS-SE
PXP-NI
BA-XEL
TWX-ASML


Semi-Final
SE-PXP
BA-TWX


Final
PXP-BA


Winner
PXP


6) Disengage the conscious mind.


Remember, one goal of this method is to bring the unconscious mind into play, to look at and judge the charts without the inner narration that accompanies us most of our lives.


I do this by directing my attention elsewhere. I'll plug my iPhone into my ear and play an episode of NPR's "Planet Money" or "Freakonomics" and concentrate on that while judging the charts. My conscious mind is listening to the program, so my unconscious mind takes on the task of judging charts.


For some reason, White House briefings by Jay Carney on C-SPAN seem to be especially effective.


7) Compare charts.


What follows is just like the basketball tournament, except rather than games I'm using bare-bones stock charts, containing only the daily prices (I use candlestick charts myself, but any kind will do) and the daily volume.


My market opinion was bullish in the bracket above, so I was looking for the most bullish chart in each case.


Compare each pair of charts from the seed column, bringing the most bullish into the quarter-final column. Repeat, and move the results into the semi-final column, and so forth until there's a winner.


In the bracket above, I compared DFS and LULU, and moved DFS the next column. And then I compared SE and COH, and moved SE to the next column. And so forth down to CREE and ASML.


If the market opinion is bearish, then move forward the most bearish chart of each comparison.

Once I have a winner, I go back to the semi-final column, and compare the two losers, which provides 3rd and 4th place for my ranking. The losing finalist is 2nd place, and of course the winner is 1st place.

Why worry about anyone but the winner? Sometimes the winner can be disqualified, such as by an earnings release scheduled the same week, or by bad news that casts doubt on the company's quality, or by a poor selection of options for the winning symbol.

In that case, then I'll go down to the 2nd place finisher, or further down to the 3rd or 4th if necessary.

8) Get conscious.

Once I've picked a winner, I unplug my iPhone.


First, I immediately write down why I chose the bracket's winner instead of the runner-up. By the time a bracket reaches the finals, the charts tend to be very similar. It's always a tough choice.

By writing down an ex post facto justification, I gain skill in determining what to look for in a chart.


Then I start looking at the chart consciously, narrating why I should or should not trade this stock, drawing trend lines and channels on the chart, looking at company finances, slapping up Fibonacci retracement ladders, even bringing in binary technical tools just to understand where the stock really stands.

Based on that conscious analysis, I'll make the final decision whether or not to take the trade.


Altogether, each bracket gives the trader an opportunity to do 31 chart comparisons, picking the 'best" chart in each case. At that rate, it will take 323 days to reach 10,000 charts.

Stocks trade 252 days a year on the American exchanges, So it will take one year and 71 days, a couple of weeks over 15 months, to reach the goal.

But why a bracket? Why not just pick 31 stocks and run down the list, picking out the best chart of them all?

I find that my mind, especially when distracted, as I've proposed above, works better when choosing from a limited field: This one is better than that one.

And I think we see that every day in our daily lives, where we tend to compress our choices into this-or-that, or possibly a trilateral this-that-or-the-other. People rarely try to choose the best out of a dozen choices without somehow organizing the selection into intermediate choices.

Anyhow, that's the method. It can be a training method, with paper trades, or an operating method, with real trades. I use real trades, because I find that I respond differently when I have real money on the table.

There are always far too many stocks for a trader to analyze in any one day, especially without binary technical indicators, so I find that a random sample from a universe that is biased in the direction I'm interested in provides a workable process.

Finally, I always look back to see how my choices fared a week or so down the line. That provides the feedback to improve my ability at chart reading, much as the young Tiger Woods, the novice sisters Serena and Venus Williams, and the Oregon Ducks football team have relied on post-mortems of their contests to see what they did right or wrong.

PXP: Playing the gap

The first day of trading has opened with upward gaps.

Running the charts was like spending a summer day on a crowded public beach. There were big gaps, little gaps, gap wannabes, gaps of all shapes and sizes.

And many were dejected gaps, spending the day in sad disappointment as the bullish promise of the open gave way to a sinking despair.

For today's analysis, I ran a 16-symbol bracket, much like the college hoops championship. From a universe of 63 bullish picks, ranked using the Zacks system, I selected 16 at random to seed the bracket, and then compared charts.

The final four were SE, PXP, BA and TWX, and then PXP beat out BA for the championship. TWX won over SE in the consolation match. They were all very close matches; it was hard to choose between the charts.

PXP is the symbol for Plains Exploration and Production Co., a Houston-based company that does just what its name says: Explores for oil and natural gas and then produces it by yanking it out of the ground.

The stock opened with a 2.8% gap, at $37.76, and then built on that for a rise to $39.24, before pulling back to the mid $38 range.

This sets PXP apart from most of the other stocks I analyzed, which tended to open with a strong gap and then sink, a classic hook pattern that I read as bear prints, even if the gap set a higher high, or even a highest high.

In doing so well PXP is following crude oil, which also had a significant opening gap and a continuing rise thereafter.

PXP, like most highly liquid shares, is recovering from the market downturn that reached its nadir in early October. From that low, $20.25, the stock rose to $36.91 in early November, dithered in a sideways move through mid-December, and then began a rise.

Today's gap marks the first significant break beyond the resistance levels set in November and December.

With average volume of 2.5 million shares, PXP has sufficient liquidity to support a full range of options with sufficient open interest for quick turnaround.

The company has a low return on equity -- 6.4% -- and a fairly high debt-to-equity ratio of 1.1. Institutional ownership is 88%, a level that ensures plenty of analyst attention (a good think for traders).

In terms of practical trading, I'm reluctant to open any position immediately after a gap. A gap means a lot of traders who bought in before the gap will be taking quick profits, one reason why stock prices tend to retreat and "fill in" the mid-point of the gap.

Yet, the recent heating of the Iranian nuclear dispute suggests that there are good reasons for short-term bullish plays on energy, especially for a company like PXP whose mineral resources are within the United States.

If Iran shuts down production, then the price of crude rises, and PXP, with its resources outside of the Middle East, will be among those who prosper.

So I want to get in, but I'll wait and see what happens post-gap. If the price exceeds Monday's high, now $39.24, then I'll treat that as an entry opportunity. A drop into the gap, followed by a rise above the gap would also signal entry for me.

Decision for my account: No trade now, but maybe later this week.


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 decision decisions for his or her own account, and take responsibility for the consequences.

Welcome, 2012

Long-time readers will know that I'm not usually a fan of unhedged predictions. The past is unalterable and the future unknowable, so my practice is to trade in the present.

Yet there's something about New Year's Day that just pushes the built-in human prophecy button.

My prediction for 2012 is that there will be a lot of apocalyptic chit-chat (and not just from Republicans bashing President Obama), because the Mayan calendar long-count ends its cycle on Dec. 21, causing the world to end.

So, Greetings! Happy New Year, and Farewell!

Yet we all have many trading opportunities between now and The End, so let's take a look at the first week of 2012.

Which, to no one's surprise, begins with a whimper. Monday, Jan. 2, is a market and bank holiday in the United States, the United Kingdom, Australia and Japan, and practically everywhere else on Earth and in near space that honors the calendar of Julius Caesar as tweaked by Pope Gregory.

For traders, the year really begins on Tuesday, the third day of the year. In the United States, look for the Institute of Supply Management's manfacturing index at 10 a.m. to motivate trade, and near the end of the session, the minutes of the most recent Federal Open Market Committee meeting, at 2 p.m.

There are no major market motivators scheduled for release on Wednesday.

Thursday, weekly jobless claims provides a stirring overture to Friday's release of the monthly employment and unemployment statistics. Both are out at 8:30 a.m. on their respective days.

And  that's the week to come.