SNDK: A long-term trade

Update 6/9/2015: I sold the long stocks that formed the base of this position, for a loss that was unmitigated by a failed hedge and dividend payments.

The shares lost 24.5% over 399 days, or a -22% annual rate. The position -- shares, options hedge and dividends -- produced a 29.0% loss on debit, for a -145% annual rate.

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Update 11/3/2014: I've closed my bearish hedge after the price of the underlying stock closed the month above its 12-month moving average. As is my practice, I'll put off calculating profit and loss until after the entire position is unwound.

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Update 10/10/2014: SNDK has closed below its 55-day price channel and I've opened a bear hedge on my longer-term bull position, structuring it as a bear call spread, short the $90 calls and long the $92.50 calls, and expiring Nov. 21. At expiration, if SNDK still remains hedgeable under my rules, I'll roll the hedge forward.

Click on chart to enlarge.

SNDK 90 days 4-hour bars

The chart shows wave 3 {+2} uptrend to have ended on July 16, and since then SNDK has begun a downward correction as part of wave A {+1}, the first part of the wave 4 {+2} correction. I counted the internal structure of A {+1} as being in the base degree, but that is meaningless at this point -- there's no way to tell what the present degree is. In any case, I expect that SNDK's hedge will be in place for a long time.

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Update 5/6/2014: I've opened a long-term bull position in SNDK, structuring it as long shares. Under my rules, the position can't be closed until May 7, 2015.

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I intend to open a long-term position in SanDisk Corp. (SNDK), which has closed above the 12-month moving average each month since December 2012.

In addition to upside momentum, the stock has a bullish rating on the fundamentals and pays a small quarterly dividend.

The Chart

Elliott wave analysis places SNDK in the middle wave of a rise from July 30, 2013 starting from $53.09. Once the present third wave is complete, SNDK will correct the rise from $64.50 that began Dec. 12, 2013, then push up to new highs as a fifth wave, which will at its end correct the rise from $53.09.

The chart presently shows SNDK in wave 3 {+2} of 5 {+3} of 3 {+4} to the upside.

SNDK 19 years monthly bars (left), 2 years daily bars (right)

Longer term, SNDK has had quite a roller coaster ride. I've presented the left-hand chart, covering 19 years, in logarithmic format, so that the distance covered vertically on the chart represents comparable percentages rather than raw numbers. Even so, the width of the swings is quite striking.

Options are pricing in confidence that 68.2% of trades will fall between $62 and $109.96 over the next year, for a potential gain or loss of 27.9%. The lower boundary of the implied volatility range falls within wave 1 {+2} of 5 {+3} in the uptrend that began July 30.

The level at which I would begin hedging my position with bearish options spreads currently stands at $73.11.

The Company

SanDisk, headquartered in Milpitas, California, makes data storage products. Perhaps their name is most associated in the public mind with the little thumb drives containing flash memory that people use with their USB ports to load and offload files.

Those devices, however, are a small part of their business, accounting for only 1% or so of their market cap. Solid-state drive memory and flash memory cards account for 51% of market. The latter categories are far broader than USB port devices and so gives SanDisk a less tech-limited sandbox to play in.

Analysts come in perfectly neutral in their expectations for SanDisk's future, with an enthusiasm index of zero. The forecasting firm Zacks, however, gives SanDisk a bullish rating.

SanDisk reports return on equity of 19%, with debt amounting to 16% of equity.

Earnings tend to peak in the 4th quarter, and that period's earnings have risen consistently compared to the year-ago period since the 4th quarter of 2012.

SanDisk has surprised to the upside 11 times in the past three years, and to the downside once, back in 2012.

The company's earnings yield is 5.63%, compared to 2.59% on 10-year Treasury notes. The earnings yield is comparable to that of other computer storage device companies.

The quarterly dividend yields 1.05% annualized at today's prices, or nearly 20% of the earnings yield.

The stock is selling for nearly 18 times earnings, and also goes for a premium over sales. It takes $3.06 in shares to control a dollar in sales.

Institutions own 89% of shares.

SanDisk next reports earnings on July 14. The stock goes ex-dividend sometime in August for a quarterly payout of 22.5 cents a share.

Liquidity

SNDK on average trades 3 million shares a day and supports a wide selection of option strike prices spaced $2.50 apart near the money.

The front-month at-the-money bid/ask spread on puts is 2.3%, compared to 0.3% for the exchange-traded fund SPY, the  most traded symbol on the U.S. markets.

Implied volatility stands at 28%, compared to 14% for the S&P 500. Volatility has been zig-zagging in a sideways pattern since it fell sharply from 17% on April 11.

Contracts are trading normally today, with a slight skewing to the bull side. Calls are running 18% above their five-day average volume and puts are at 99% of average.

Decision for My Account

I shall open a long-term bull position in SNDK, structuring it as long shares, with the intent of holding it for at least a year while managing downturns by using options as hedges according to my long-term trading rules.

The company's own options are liquid enough for use as hedges.

References

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.

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 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.

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.

Revised Long-Term Trading Rules

Click here to go directly to the new rules, in Google doc format.

I have a problem.

My capital gains are all over the short term, and every April, the Taxman comes and takes away a huge chunk of my profits at the full tax rate, because the positions that earned the profits were held for under a year. So it goes with the U.S. income tax system. My tax rate would go down significantly if my profits were on positions that I held for more than a year.

Moreover, I keep going through periods when it's hard to find trades under my short-term rules, which are very exacting, since the positions must earn money right away. Such periods leave a large portion of my funds in cash, which produces losses to inflation.

My French protestant ancestors were firm believe that idleness is a sin, no more so than when the idler is money. I do believe they were right.

Last October I posted an essay called "The I Hate Stocks Trading Plan", intended for people who had money invested but who, for whatever reason, take the time to manage their positions intensively.

I followed it up with a formal set of rules for long-term trading and wrote about them in an essay titled, less puckishly than the first, "Long-term Trading Rules".

The old rules were based on 12-month moving average crossovers. When the price closed a month above the moving average after having been below it, that was a buy signal. When the price closed the month back below the average, it produced a sell signal.

The system worked after a fashion, but given the slow-moving nature of the system, whipsaws could be quite costly. Also, the need to wait for the moving average crossover month before entering made it difficult to find trades. And the reliance on the average as a signalling device meant that there was no guarantee that a position would last for a year.

The problem, I concluded, could be solved by retaining the 12-month moving average as a stock selection tool, but not as a signalling device.

That meant that I could enter into a stock at any time, as long as the price was above the 12-month moving average. The stock selection criteria could be anything, from rigorous fundamental analysis to a high dividend yield, a newsletter recommendation or a even whisper from a friend. Or even from the roll of the dice or on a whim.

That changes opens up a much wider range of trades. I included one criterion: Any stock that I bought had to be in an uptrend, as determined by the same chart analysis methods that I use in my short-term trading. Under my current practices, that means every trade must be declared to be in a bullish uptrend by means of Elliott wave analysis.

Also, without signals, there can be no forced sale of a position before a year is up.

How, then, to deal with the inevitable downturns?

I've decided that a hedging scheme was the only answer. Under the revised plan, I retain the bullish shares even if the price goes down, but I open a bear hedge position to offset or, best case, entirely eliminate any losses. A hedge would typically be an options spread of some sort.

Basically, then, a long-term position was long shares of stock held for at least a year, with short-term bearish option spreads as offsets to declines in the share price.

That decision, in turn, brought me back to trade selection. I added a second criterion: I can only trade shares that have liquid options with open interest running to three figures near the money and with bid/ask spreads of under 10%, the same rules I use in my short-term bear trades, which also are built from options.

After that, the only part missing was the entry and exit rules for the short-term hedging bear plays. Happily, I already have a rule set in place to cover it, the entry and exit rules used in my short-term trades.

The result has been a chimera, and it is in the nature of a chimera that its parts operate somewhat separately; they are not a unitary beast.

An Etruscan statue of a chimera found in Arezzo, Italy, ca. 400 BCE

The biggest danger I see still comes from whipsaws: The stock price drops, sending a signal to build a hedge, reverses to the upside, produces a loss in the hedge, which is closed, and then the stock price quickly reverses to the downside again, producing more losses.

Or a sudden decline, producing large losses in the shares, followed by a long period of sideways movement, would also make a profitable hedge impossible to create.

Good chart analysis can mitigate those risks, but never eliminate them.

The new trading rules may be read here, as a Google doc. My intent is to post analyses for long-term positions going forward, much as I do for my short-term positions.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Tuesday's Prospects: Round 2

None of the seven symbols that survived my first round of analysis (see "Tuesday's Prospects") made it through the second round.

I won't be analyzing any symbols off of the prospects list today.

Of the seven, four failed confirmation by moving back to within their 20-day price channels: TWC, LMT, MMLP and AMRE.

Two were breakouts to the upside within bearish charts: INCY and DRRX. My rules disallow counter-trend plays.

BEAV had a large opening gap after announcing that it has hired advisers to restructure the business, including a sale. The Bloomberg News story by Thomas Black in Dallas and Serena Saitto in New York can be read here.

My practice is to not trade after a large price-moving announcement. Either the restructuring goes forward, with its impact on the company's finances already, for the most part, priced into the market, or restructuring fails and the stock price falls. Most of the risk in such cases is to the downside.

I intend to take this "day off" from analysis to put the final touches on a a major revision to my long-term trading rules, which are designed to take advantage of the favorable tax treatment given capital gains on positions held for more than a year.

I'll be posting the revised rules later today.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Tuesday's Prospects

On Monday, May 5:

Of 3,869 stocks and exchange-traded funds in this week's analytical universe, 39 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 26 to the upside and 13 to the downside.

Thirty-one major-exchange small-cap symbols broke out, 20 to the upside and 11 to the downside.

Four over-the-counter symbols broke out, three to the upside and one to the downside.

Five mid- or large-cap symbols traded on the major exchanges survived my initial screening, all having having broken out to the upside. They are INCY, TWC, LMT, BEAV and MMLP.

Two small-cap major-exchange symbols survived initial screening, both having broken out to the upside. They are DRRX and AMRE.

No symbols traded over the counter survived my initial screening.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds.

I shall do further analysis of the surviving symbols on Tuesday, May 6.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:

• mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
• small-cap stocks on major exchanges,
• mid- and large-cap over-the-counter stocks.

The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Monday's Outcomes: SLV, FLT

I closed my bear position in SLV and moved the symbol to the Roll Shelf. See "SLV: Silver bears".

I analyzed FLT as a potential bull play but declined to take the trade. See "FLT: Like as Escher print".

References


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

FLT: Like an Escher print

FleetCor Technologies Inc. (FLT) sent a bull signal after closing twice above its 20-day price channel. A closer look at the chart, however, suggests that the breakout to the upside is a rise within a downtrend, a classic head-fake in the making.

The Chart

As I applied Elliott wave analysis to the FLT chart, my first reaction was to scratch my head and mutter, "What a mess".

A 17-month third wave set between a 11-month first wave and a one-month fifth wave offends my sense of proportion. Yet it adheres to the Elliott rule set.

Click on chart to enlarge.

FLT 3 years 3-day bars (left), 6 weeks hourly bars (right)

I counted the peak of Feb. 27, at $132.22, as the end of the fifth wave out of the same sense of proportionality. The decline that followed was of a similar magnitude to the second and fourth waves.

Aesthetics are everything in FLT chart, and its aesthetics give me the same uneasy sense of vertigo as does an M.C. Escher print.

Yet under the Elliott rules, the decline from Feb. 27 to April 28 can be considered a wave 2 {+1} internal to wave 5 {+2}. If that is the case, then the uptrend is continuing. The truth of the matter will become apparent only if the rise from mid-May exceeds $132.22, which lies 11.2% above today's opening price.

If wave 5 {+2} has concluded, then FLT is correcting the rise from $24.28 that began in August 2011. In that case using the {+2} degree for the A-wave that ended April 28 seems far to high a degree. It's disproportionate to the work of correction that must be done. Yet, again, it breaks none of the Elliott rules.

The case for a downtrending FLT can be confirmed only by the price dropping below the end of wave A {+2}, or $106.13, which is 12.9% below today's opening price.

The FLT chart stands in a position of extreme ambiguity.

Liquidity and Volatility

This is FLT's first bull signal since the downturn began on Feb. 27.

This is the stock's 10th bull signal since the broad uptrend began in August 2011. Six of thecompleted trades were successful, on average gaining 21.4% over 71 days. The three unsuccessful trades on average lost 6.2% over nine days.

The Company

FleetCor, headquartered in Norcross, Georgia, provides fuel-card charging services for companies in eight countries: The U.S., Canada, the UK, Brazil, the Czech Republic, Russia, Mexico and Australia. Customers of FleetCor are service stations run by Shell, BP, Chevron and other big names seen above gas stations around the world.

The small number of analysts covering FleetCor collectively come down with a negative 33% enthusiasm rating.

The company is extremely productive, reporting return on equity of 29%. Long-term debt stands at 38% of equity.

Profits have crept up steadily each quarter since the 1st quarter of 2012. All 12 quarters of the past three years have produced upside earnings surprises.

The earnings yield is 2.81%, lower than 76% of other business services companies and slightly higher than the 2.61% yield on 10-year Treasury notes. The company pays no dividend.

The stock is selling at 36 times earnings and also at a large premium compared to sales. It takes $10.46 in shares to control a dollar in sales.

Institutions own 80% of shares.

Fleetcor next publishes earnings on July 28.

Liquidity and Volatility

FLT on average trades 913,000 shares a day. It supports a moderate selection of option strike prices spaced $5 apart. The front-month at-the-money bid/ask spread is 8.9%, compared to 0.3% for the most-traded symbol on the U.S. exchanges, the fund SPY.

Open interest runs in the double digits near the money. That is too low for my trading preferences, so any position I open in FLT will be structured as long shares.

Implied volatility stands at 31% and has been declining from a 47% peak since April 14. The S&P 500, by contrast, has volatility of 13%. FLT's implied volatility is at the 22nd percentile of the one-year range. A position that low suggests that a long position, bought with debits, will have the best chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $112.83 and $134.71 over the next month, for a potential gain or loss of 8.8%, and between $118.52 and $129.02 over the next week.

Contracts are trading slowly today, with calls running at 39% of their five-day average volume and puts at 23%.

Decision for My Account

This chart has too many ambiguities to provide me with a sufficiently high comfort level. I would be more willing to play it if I could structure a hedged position with options, such as a vertical spread, but with such low open interest, that is not possible.

I won't be opening a position in FLT.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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 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.

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.

Monday's Prospects: Round 2

I'll be writing about FLT for today's analysis.

Of the eight symbols that survived my first round of analysis (see "Monday's Prospects"):

• The two downside breakouts -- EDE and EIX -- have insufficient open interest on their options to support a bear play.
• Three failed confirmation: FCX, IPXL and XXL
• One, SBAC, has a bull signal and chart but a bearish rating from Zacks. I prefer that Zacks and the signal be aligned.

That brought the choice down to FLT, which is traded on the New York stock exchange, and ALIOF, which is traded over the counter. Both have equally bullish charts.

FLT has far greater average volume than ALIOF, although neither is liquid enough to support options plays. But liquidity counts, even for shares, and so I choose FLT for analysis.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

The Week Ahead: International trade, Yellen

Traders will need to look to earnings  and occasional appearances by the Federal Reserve glitterati for excitement, as a slow week in economic reporting lies ahead, with only one publication of note on the calendar.

That report is international trade, due out Tuesday at 8:30 a.m. New York time.

Federal Reserve Chair Janet Yellen makes her two periodic reports to Congress on the economic outlook, before the Joint Economic Committee on Wednesday at 10 a.m. and the Senate Committee on Budget on Thursday at 9:30 a.m.

Leading indicators (in descending order of importance):

The interest rate spread between 10-year Treasuries and the federal funds rate, reported continually during market hours.

The M2 money supply, at 4:30 p.m. Thursday.

The average hourly workweek in manufacturing from the employment report, at 8:30 a.m. Friday.

The S&P 500 index, reported continually during market hours.

Average weekly initial jobless claims, at 8:30 a.m. Thursday. 

Other reports of interest:

Monday: The Institute of Supply Management non-manufacturing index at 10 a.m.

Wednesday:  Productivity and costs at 8:30 a.m. and petroleum inventories at 10:30 a.m.

Thursday:   The Federal Reserve money supply report at 4:30 p.m.

I also keep an eye on the Baltic Dry Index, updated daily.

Fedsters

Yellen aside, three other members of the Federal Open Market Committee will make public appearances: Fed Gov. Jeffry Stein on Tuesday, and Philadelphia Fed Pres. Charles Plosser and Fed Gov. Daniel Tarullo  on Thursday.

St. Louis Federal Pres. James Bullard, who is neither a member of nor an alternate on the FOMC, speaks on Thursday.

Analytical universe

This week I shall be analyzing new bull and bear signals among 3,869 small-cap and larger stocks and exchange-traded funds.

Trading calendar

By my rules, I'm trading June options for the short legs of vertical, diagonal and calendar spreads and covered calls, and for all legs of butterfly spreads and iron condors. I'm trading August options for single calls and puts as well as straddles. Shares, of course, are good at any time.

Good trading.

Monday's Prospects

On Friday, May 2:

Of 3,869 stocks and exchange-traded funds in this week's analytical universe, 44 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 30 to the upside and 14 to the downside.

Twenty major-exchange small-cap symbols broke out, eight to the upside and 12 to the downside.

Seven over-the-counter symbols broke out, five to the upside and two to the downside.

Seven mid- or large-cap symbols traded on the major exchanges survived my initial screening, five having having broken out to the upside and two to the downside. Sorted in descending order by average yield, the upside breakouts are FCX, SBAC, IPXL, SSL and  FLT. The downside breakouts are EDE and EIX.

No small-cap major-exchange symbols survived initial screening.

One symbol traded over the counter survived my initial screening, ALIOF, having broken out to the upside.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds.

I shall do further analysis of the surviving symbols on Monday, May 5.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:

• mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
• small-cap stocks on major exchanges,
• mid- and large-cap over-the-counter stocks.

The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Friday's Outcomes: WAG

I analyzed WAG as a potential bull play but declined to take the trade. See "WAG: The end is near".

References


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

WAG: The end is near

Walgreen Co. (WAG) is on the last leg of an uptrend that began June 20, 2012. It demonstrated that the rise still has power when the price broke above the 20-day price channel on Thursday and confirmed the bull signal by trading above that breakout level today.

My first instinct upon seeing the chart was to conclude that the end is near. But WAG is one of the symbols that just keeps on pushing to the upside, giving "near" a curiously protean definition. Yet, a close reading of the chart suggests that my first instinct may not be too far off the mark.

The Chart

The little secret that makes Elliott wave analysis possible lies in the the 3rd-wave rule, which says the 3rd wave cannot be the shortest of the three.

So figuring out what degree to assign to wave in the direction of the trend depends upon the length of the 3rd wave. If it comes in too short, then it gets counted as the 1st wave one degree lower, setting up a further series of subdivisions within the fractal structure of price movements.

Some symbols, like WAG, carry this characteristic to extremes, as, for example, in wave 3 to the upside on the right-hand chart.

The {-1} degree was quite straightforward, but the rise after wave 4 {-1} came up short, and so I had to drop down a degree in the count, labeling it as wave 1 {-2} rather than 3 {-1}.

The same phenomenon kicked in wave what I labeled as wave 1 {-3}.

Some students of Elliott would call this an extended 5th wave up from the end of wave 4 {-1}. I find it more rational, and informative, to just keep subdividing, since the Elliott rules don't require that waves be proportional to their degree.

Click on chart to enlarge.

WAG 20 years monthly bars (left), 2 years daily bars (right)

The result of all of this subdividing is that WAG is at wave 5 {-3} of 5 {-2} of 5 {-1} near the end of wave 3, which began July 20 from $28.53.

There is no rule under Elliott that limits the length of the 5th waves in that series. In all cases, at those degrees, the 3rd wave is longer than the 1st, and so no matter how long the 5th wave is, the 3rd will not come in as the shortest.

Once the 5th waves have ended at all degrees, which will happen when wave 5 {-3} concludes, wave 4 to the downside will correct a portion of the rise from $28.53 to whatever the endpoint might be (the high so far is $70.07).

Given the magnitude of the rise -- 173% so far -- I would expect the correction to be equally dramatic. But it's not required under the Elliott wave rules, and in fact the wave 4 correction could be quite shallow.

The 3rd wave at the {-3} degree last for 13 days and the 1st wave for 20 days. The present wave 5 {-3} began on April 11, so a proportion 5th wave would come to an end in the last week of May.

That's not far away, so in this case, my instinctive feeling that the end of the rise is near may prove to be correct.

However, I must in honesty recognize that WAG's upside momentum is strong enough that the rise might well be extended longer than I expect.

Odds and Yields

WAG has completed eight bull signals since wave 3 began in 2012. Six were successful, on average yielding 8% over 31 days. The two unsuccessful trades averaged losses of 3.4% over 15 days. I traded one of those signals, midway through wave 3 {-2} to the upside in October 2013. It proved to be profitable. (See my analysis at the time, "WAG: A drug store bull play")

The Company

Walgreen, headquartered in Deerfield, Illinois, operates a drugstore chain of more than 8,000 stores in the United States. About 60% of its market capitalization comes from sales of prescription drugs.

Analysts collectively give it a 9% positive enthusiasm index.

The company reports return on equity of 16%, with long-term debt amounting to 22% of equity.

Earnings tend to peak in the quarter reported in March. The most recent quarterly report showed Walgreen's earnings down from the year-ago quarter. Moreover, the report missed the consensus estimate slightly, producing a negative earnings surprise.

Over the last three years Walgreen has surprised to the upside nine times and to the downside three times.

Earnings yield 4.1% at today's prices, compared to a 2.75% yield for 10-year Treasury notes.

The dividend yield is 1.82%, amounting to 44.4% of the earnings yield.

Walgreen's earnings yield is similar to that of other drug retailers.

The stock is selling for 24 times earnings but at a discount to sales. It takes 89 cents in shares to control a dollar in sales.

Institutions own 62% of shares.

Walgreen next publishes earnings on June 24. The stock goes ex-dividend May 19 for a quarterly payout of 31.5 cents per share.

Liquidity and Volatility

WAG on average trades 5.5 million shares a day and supports a moderate selection of option strike prices spaced $2.50 apart near the money, with strike prices running to three figures generally.

The front-month at-the-money bid/ask spread on calls is relatively narrow, at 3.2%, compared to 0.6% for the most-traded symbol on the U.S. exchanges, the fund SPY.

Implied volatility stands at 25%. It has began declining since April 10, when it hit 30%.

Volatility stands in the 53rd percentile of its one-year range, suggesting that a position structured as long shares or an equivalent synthetic position built from options would have the best chance of success. Forward-looking implied volatility is 3% below historical volatility.

Options are pricing in confidence that 68.2% of trades will fall between $64.16 and $74.18 over the next month, for a potential gain or loss of 7.3%, and between $66.76 and $71.58 over the next week.

Contracts are trading actively today, with calls running 53% above their five-day average volume and puts at 42% above average.

Decision for My Account

I don't intend to open a bull position in WAG. My chart analysis convinces me that the symbol will swing into a downside correction sometime within the next month. I'd prefer to have a longer time horizon for the uptrend.

WAG has surprised me before, and might well surprise me again by continuing to rise. At this point, however, I judge the weight of the evidence to be in favor of a correction beginning soon.

And yet... And yet....

My trading rules won't allow for an ambiguous play like WAG, and I have this nagging feeling that they should, that there ought to be a way to play this ambiguity rationally and profitably. Note to self: Must work on this.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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 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.

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.

Friday's Prospects: Round 2

All five survivors of my first round of analysis (see "Friday's Prospects") confirmed their signals by continuing to trade beyond their breakout levels.

The one symbol from the small-cap list, the drug company RXII, gave a bull signal in a huge 18% opening gap to the upside on news about drug testing. I tend to avoid signals resulting from news, and besides, the bull signal has occurred on a bearish chart.

Of the four mid-/large-cap symbols, RAD and CLS are also bull signals occuring on bearish charts, so I have set them aside.

That leaves CMCSA and WAG. (I'm ignoring CMCSK which is essentially the same as CMCSA.)

CMCSA my well have peaked on Feb. 12. A quick assessment suggests to me that the next major price move will be a reversal to the downside. (In Elliott wave terms, I see CMCSA as having completed wave A to the downside on April 15 and as now rising in wave B. One wave B is complete, then wave C will carry CMCSA down again, perhaps below the endpoint of wave A, $47.74.)

WAG remains quite bullish within the uptrend that began in 2012. Thursday's bull signal produced a new high that suggests the stock has moved into the final phase of that rise.

Although WAG is late in its rise, I find the chart interesting enough to warrant a closer look. It's possible, certainly, that the uptrend is less advanced than a first glance suggests. I'll post an analysis prior to the closing bell today.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Friday's Prospects

On Thursday, May 1:

Of 3,901 stocks and exchange-traded funds in this week's analytical universe, 53 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 32 to the upside and 21 to the downside.

Fifteen major-exchange small-cap symbols broke out, seven to the upside and eight to the downside.

Five over-the-counter symbols broke out, three to the upside and two to the downside.

Five mid- or large-cap symbols traded on the major exchanges survived my initial screening, all having having broken out to the upside. They are CMCSA, CMCSK, RAD, CLS and WAG.

One small-cap major-exchange symbol survived initial screening, RXII, having broken out to the downside.

No symbols traded over the counter survived my initial screening.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds. SLM met all the criteria for inclusion on the list, but its breakout to the downside came as a result of news that produced a 65% drop in the stock price.

I shall do further analysis of the surviving symbols on Friday, May 2.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:

• mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
• small-cap stocks on major exchanges,
• mid- and large-cap over-the-counter stocks.

The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Thursday's Outcomes: GILD

I analyzed GILD as a potential bull play but declined to take the trade. See "GILD: Big pharma redux".

References


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

GILD: Big pharma redux

Gilead Sciences Inc. (GILD) is making its second appearance on Private Trader in recent memory. I last wrote it up as a potential bull play late last year.

GILD is back, having broken above its 20-day price channel on Wednesday and confirmed the bull signal by trading still higher today.

The chart, however, is less bullish than it was before. The big rise from July 2010 that multiplied GILD's price by four appears to have ended, setting the stage for continued decline. The chart is quite ambiguous, but the balance of risk and reward favors a bearish opinion.

The Chart

I shall focus my Elliott wave analysis on both the recent past, the chart from the Feb. 25 peak of $84.88, and the history of the past 20 years. Any assessment of GILD's future must rest upon the interpretation of those few months.

For the intermediate picture, see the charts in my analysis from Nov. 25, 2013: "GILD: Bullish on big pharma".

Click on chart to enlarge.

GILD 20 years monthly bars (left), 24 days hourly bars (right)

There are two possibilities. By the long-term count, GILD has completed the wave 5 {+4}, the final wave of a rise than began with GILD as a penny stock in 1994.

That implies that GILD has moved into a downtrend rather than a correction. In a downtrend, the primary tendency of the chart is a decline. A downtrend will resolve itself at the highest degree into a five-wave decline.

The alternative would be to count the decline as a correction, perhaps a wave 4 {+3} within wave 5 {+4} on the 20-year chart on the left. A correction has a lot of possible patterns, but they resolve themselves into sets of three in the degree below the major tendency.

The chart since the February peak will support either case.

In the downtrend scenario, the low of $63.50 on April 11 is labeled wave 1. In the correction alternative, it is labeled wave A. Likewise, the rise from April 11 is wave 2 under the downtrend scenarios and wave B under the correction scenario.

Under either scenario, the wave up from $63.50 will reverse to the downside while below the Feb. 25 peak of $84.88. If wave 2 (or B) moves above the Feb. 25 peak, then it brings in a third scenario saying that wave 5 {+4} to the upside is not yet complete and the uptrend is continuing.

So far wave 2 (or B) has retraced nearly 78.6% of the decline from February to April. That's a large retracement and is nearing the Fibonacci level of 78.6%, at $80.30. If the two bearish scenarios -- downtrend or correction -- are indeed accurate descriptions of what is happening, then I would expect a reversal to the downside very soon, as wave 3 under the downtrend scenario or wave C under the correction scenario.

A C wave might well stay above the April low of $63.50, or it could push below it. A 3rd wave must move below $63.50.

If the correction scenario is accurate, then the C wave will upon its end begin a new five-wave rise that will eventually exceed $84.88. If the downtrend scenario is correct, then $84.88 won't be seen again and after a 4th wave correction, GILD will move to new lows.

That's a lot of ambiguity, but it is easily resolved. As long as the price remains below $84.88, then I have to assume that the tendency is bearish. Given the extent of the Fibonacci retracement, nearly 78.6%, then I have to assume that the wave 3 or C reversal will come quite soon.

Only a move above $84.88 will resolve the ambiguity entirely, but that is nearly 7% away.

Given the structure of the Elliott wave analysis, I see a greater likelihood that GILD will resume its downward course rather than breaking above February's high. However, it isn't conclusive, and all of the three scenarios I discussed remain in play.

Odds and Yields

GILD has completed one bear signal since the Feb. 25 peak. It was successful, yielding 1.6% over 27 days.

The Company

Gilead Sciences, a pharmaceutical company headquartered in Foster City, California, at the outset developed HIV therapies. It has since branched out into cardiovascular, respiratory, liver and cancer treatments.

Analysts collectively come down with a positive opinion of Gilead's prospects, with a 60% enthusiasm rating.

And with these financials, no wonder! Gilead reports return on equity of 41% with no long-term debt.

Heavy sales of a hepatitus C treatment called Sovaldi catapulted 1st quarter earnings to triple earnings in the year-ago quarter. With that exception, Gildead's earnings have been steady for the past three years, with eight upside surprises and three to the downside.

Earnings yielded 3.41%, compared to 2.61% for U.S. Treasury notes. Gilead's earnings yield is less than 61% of other biotechnology and drug companies. The company pays no dividend.

The stock is selling at 29 times earnings and also at a high premium to sales. It takes $8.83 in shares to control a dollar in sales. Institutions own 91% of shares.

Gilead next publishes earnings on July 28.

Liquidity and Volatility

GILD on average trades 23.2 million shares a day and supports a wide selection of option strike prices spaced $2.50 apart near the money. The front-month at-the-money bid/ask spread on calls i 4.5%, compared to 0.3% for the most heavily traded symbol in the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 33% and has been on a sharp decline from 53% beginning April 10. The S&P 500, by contrast, has volatility of 13%.

GILD's volatility is in the 32nd percentile of the one-year range, suggesting that trades structured as long option spreads, bought with a debit, have the greater chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $71.74 and $86.74 over the next month, for a potential gain or loss of 9.5%, and between $75.64 and $82.84 over the next week.

Contracts today are skewed toward puts, which are running 10% above their five-day average volume, compared to 89% of average for calls.

Decision for My Account

I'm declining to take a bull trade in GILD for the reasons outlined in the chart discussion. I'll add the symbol to the Watchlist for consideration above $84.88, the February high.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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 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.

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.

Thursday's Prospects: Round 2

Three symbols survived my first round of analysis, one each from the mid-/large-cap, small-cap and over-the-counter lists. See "Thursday's Prospects" for details of the first round.

The small-cap symbol, XUE, sent a bear signal, but it has insufficient open interest on its options for me to construct a bear position.

The two remaining symbols have equally bullish charts. Large-cap GILD has highly liquid options, providing a chance for leverage, and over-the-counter LZAGY has no options.

An easy choice. Liquid options trump shares any day in my book. I'll do a full analysis of GILD before the closing bell today.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Thursday's Prospects

On Wednesday, April 30:

Of 3,901 stocks and exchange-traded funds in this week's analytical universe, 60 mid- and large-cap symbols that are traded on the major American stock exchanges broke beyond their 20-day price channels, 39 to the upside and 21 to the downside.

Seventeen major-exchange small-cap symbols broke out, seven to the upside and 10 to the downside.

Eleven over-the-counter symbols broke out, three to the upside and eight to the downside.

One mid- or large-cap symbol traded on the major exchanges survived my initial screening, GILD, having broken out to the upside.

One small-cap major-exchange symbol survived initial screening, XUE, having broken out to the downside.

One symbol traded over the counter survived my initial screening, LZAGY, having broken out to the upside.

No large-cap symbols survived screening for inclusion on the supplemental list of high-volume large-cap potential bear plays, each having met the earnings exclusion test with sufficient open interest on its options, regardless of historical odds.

I shall do further analysis of the surviving symbols on Thursday, May 1.

The next round of earnings began April 8 with the announcement by AA. Under the exclusion rule that forbids me from opening new positions in stocks within 30 days of an earnings announcement, increasing numbers of symbols will be removed from my prospective trades list during initial screening.

Methodology

The symbols are sorted into three groups and all have analyst coverage through the stock-ranking company Zacks. The groups are:

• mid- and large-cap stocks as well as selected exchange-traded funds listed on major exchanges,
• small-cap stocks on major exchanges,
• mid- and large-cap over-the-counter stocks.

The small-cap group is further selected to ensure a minimum market capitalization of $1 million and a Zacks ranking of neutral or more bullish. (Small-cap stocks rarely have sufficient liquidity to allow a bear trade.)

I then screen the symbols for historical odds of a profitable signal in the direction of the breakout since June 24, 2013. That date is when the present uptrend on the S&P 500 chart began. In Elliott wave terms, it is wave 5 to the upside.

If the odds of success are greater than 50%, I next screen for the absence of an earnings announcement within the next 30 days.

For bear signals, I also screen to ensure the ability to do a trade because of the presence of options.

I sort by the results in descending order by the average yield on signals in the direction of the breakout in preparation for the second round of analysis after the opening bell.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

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.

Wednesday's Outcomes: None

There were neither trades nor analyses to spice up the day. My earlier post, "Wednesday's Prospects: Round 2", gives specific reasons why nothing met my criteria.

More broadly, I see two reasons for the lack of activity. First, we are in earnings season and nearly all of the possibilities for trading identified in my first-round analysis fall within the 30-day earnings exclusion period. Once symbols near to an earnings release are eliminated, there are very few left over as potential trades.

Arguably, earnings have a major negative impact on my trading pool for as many as six months out of the year. 

Secondly, the markets broadly seem to be in the process of slowing in the uptrend that has been underway for the past couple of years. That doesn't mean that the party is over, only that it has reached that awkward silent moment in the middle of the evening when everyone glances at everyone else and realizes they have nothing else to say. 

Arguably, slowdowns like the present one have a negative impact on my results.

The earnings season problem and the slowdown problem combined mean that my trading funds are, for the most part, in cash. That's a problem. It is a core principal of trading that idle money loses value.

My rules are geared toward the short term, with positions lasting a few months at best. Those rules are doing their job by keeping me out of trades that seem likely to produce a surprise or a loss over the nearer term. Those rules aren't the problem.

However, exclusive reliance on the short term means that I'm missing out on the tax and dividend opportunities that come from holding shares for more than a year. The opportunities, I think, lie in diversifying my approach by adding a longer term component that will allow me to put idle funds to work.

I don't for a moment propose scrapping or weakening my present short-term plan. But I am looking at how to create a rule set that will allow me to supplement that plan with longer term positions geared both to growth and income.

References


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.

Wednesday's Prospects: Round 2

Four symbols survived my first round of analysis. (See "Wednesday's Prospects".)

One, MILL, is a potential bear play. However, its options are insufficiently liquid to allow me to construct a bear position.

The three remaining symbols, all potential bull plays, confirmed their breakouts by trading still higher this morning, although SWHC on the small-cap list flirted with non-confirmation, breaking back into its 20-day price channel before rising again.

An initial assessment of the CCL and TSS charts tells me that each is, most likely, within a downtrend. The bull signals they gave are retracements to the upside as the stocks zig-zag lower. I much prefer to trade with the trend, not against it.

SWHC is in an uptrend, although in a late stage. It lacks liquid options and so presents no opportunity for leverage.

Only CCL out of the bunch has options that I could trade.

Bottom line: I don't like any of these enough to do a full work-up, so I'm failing them on the second round of analysis.

No symbols survived the first round on the supplemental list of large-cap bear signals, no there's no joy there.

I won't be writing any analysis today from the new prospects lists.

NGG, which has been on the Watchlist since April 16 as a potential bull play, is on track to confirm a fresh breakout today that meets my chart criteria for trading. However, the company publishes earnings on May 15, which brings NGG within the 30-day earnings exclusion period, so I can't take the trade.

NGG will remain on the Watchlist and I'll do a fresh assessment post-earnings. See my initial analysis, "NGG: Whipsaw candidate".

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

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.