Stock Talk - Analyzing Trade Candidates
In Stock Talk, we focus on additional stocks not specifically covered in our weekly Focus Lists.
Links to older Stock Talk entries are at the bottom of this page.
Stock Talk for August 27, 2012
I have found that Keltner Channels often work well for identifying oversold/overbought levels
as well as good buying areas for strong stocks.
AGU, mentioned last week, has fallen back to the middle line of the Keltner Channels.
When AGU bounced off its middle Keltner Channel line in July, going long on the next day's
open at 89.68, up to the high of 97.49 6 days later, would have produced an 8.7% gain
(370% annualized). Going long after August's touch would have produced a 6.3% gain over
14 trading days (114% annualized).
chart courtesy of Worden − www.Worden.com
There is no guarantee AGU will do it again. But AGU has a good story, it's been in a
steady uptrend since early June, and it has a seasonal with an upside bias this time of
year (an indication institutions have regularly bought the stock in previous years).
Stock Talk for August 20, 2012
A number of stocks, such as AAPL, are breaking above significant resistance levels to new
highs. The 52-week highs list often contains many top companies whose stocks are on a
tear because their results have been showing why they are considered top companies.
(There are better explanations, but that is what it comes down to.)
The 52-week high list may seem like a tool designed for the longer-term investor, but short-term
traders can use it effectively as well.
We can trade in and out of various stocks using some system, say short-term moving average crossovers.
After commissions, the results of many trading systems don't look as impressive
as the theoretical results. When researching the traits of highly-successful traders,
one common theme is they usually identify stocks at the start of a long-term trend,
then jump on using leveraged strategies (typically incorporating options).
In keeping with this philosophy and aiming for the larger moves, I prefer to identify
higher-probability trade candidates.
I keep a number of resource stocks on my watchlists.
Agrium, AGU, has caught
my attention recently, especially because it also has shown up on my seasonal scans.
Agrium, supplying agricultural products and services (think fertilizer), may seem
like its business would be declining with the severe drought. But, as a recent
commentary in Investor's Business Daily pointed out, "Analysts reason that farmers will
buy more fertilizer to capture more profit from high commodity prices."
Fundamentally, AGU rates very highly in IBD's SmartSelect Ratings, and recent
earnings announcements have been good.
AGU made the 52-week high list on Thursday, closing at 100.37. It is difficult for
many investors, let alone short-term traders, to consider buying a stock
when it is at a high. As Bill O'Neil stated in his book How to Make Money in Stocks,
"Our study of the greatest stock market winners proved the old adage 'buy low, sell high'
was completely wrong. In fact, our study proved the exact opposite. The hard-to-believe
Great Paradox in the stock market is What seems too high in price and risky to the
majority usually goes higher eventually, and what seems low and cheap usually goes lower.
We see, in AGU's weekly chart, that AGU has moved above the 2011 high. IBD identified
a cup-with-handle pattern, with the breakout being at 92.84. Since they do not recommend
buying a stock more than 5% above the breakout level, their upper limit was 97.48.
If you are a follower of the IBD CAN SLIM system, you would wait for AGU to pull back to
97.48 before buying.
chart courtesy of Worden − www.Worden.com
The red upper horizontal trendline is the all-time high of 113.88 reached back in 2008,
and remains a near-term target for AGU.
Another way to time an entry on a strong stock is to use Keltner channels. Similar to
Bollinger Bands, they form a channel around the price chart based on the volatility of the
stock (see Keltner Channels)
Generally, when the stock is near the bottom of the Keltner Channel it can be considered
oversold, and when it is near the top it can be considered overbought. When considering
entering a new position on a strong stock, you often can get in at a better price by waiting
for the stock to fall to the center of the Keltner Channel. Looking at AGU's current
daily chart with the Keltner Channels we see that AGU falling to the center, currently at
96.16, would provide a good entry point, because we see that after the two recent touches
of the center line AGU rebounded strongly upwards.
Note: when AGU falls back to the center-line, the seasonal should be reevaluated. If it
takes too long for AGU to fall back, say a few weeks or more, the seasonal pattern,
or the fundamental picture for that matter, may have changed.
Looking at AGU's seasonal chart for this coming week, we see that historically, entering
a long trade this time of year, and holding for 5 weeks has averaged a 6.9% gain per year,
with gains in 13 out of 17 years (76%). 10 of those 13 years had gains greater than 5%,
which likely meant good profits for certain option strategies.
AGU's Historical Volatility is right at the low for the year. This implies the extrinsic
values of AGU options will be low, and even long call positions might be worth
considering.
A chart of AGU's option Implied Volatility on OptionsXpress confirmed IV
values are low. Sure enough, when I checked the AGU options chain, Bid/Ask spreads were
fairly tight, and calls were usually priced right around the theoretical values, suggesting
they weren't overpriced.
For the final bit of supporting evidence, I notice the Up/Down Volume Ratio, popularized
by Investor's Business Daily, is at a high level of 2.1. This shows strong net
accumulation in the stock.
Waiting for a pullback to the center of the Keltner Channel, entering an appropriate
bullish option trade if the trade makes sense at that time, and riding the trade up to
the 2008 high (and implementing a stop-loss strategy in case things change) may make
a very profitable trade.
Stock Talk for August 13, 2012
One thing I noticed is implied volatility values on the options of many of the top stocks
have fallen not only below the historical volatilities, but the IV's are often at the
lowest level of the past 12 months.
What this means is that, even though I typically trade spreads, with the low IV's
simple long call or long put strategies are worth considering. Even out-of-the-money (OTM)
trades are worth investigating. If the stock you hold a slightly OTM call or put on
moves sharply, like breaking out of the trading range many are in right now, then significant
triple-digit percentage gains can be made.
Let's look at one possibility. You know and use eBay (EBAY). You suspect that as
people come back from vacation and buckle down for the fall, activity will likely pick up
on eBay. eBay's best quarters each year are probably the fall quarters (Q3 and Q4).
Checking earnings.com
you see that is exactly the case.
EBAY has been stair-stepping upwards since the beginning of the year. Those two gap-ups
on sharply higher volume were in response to the past two earnings announcements. EBAY
has also been setting new 52-week highs, another sign of a strong stock.
chart courtesy of Worden − www.Worden.com
You check Investor's Business Daily's Stock Checkup
and find a Composite Rating of 97 for eBay.
It is 1st in its group for Composite Rating, 3rd for EPS rating, 1st in Relative Strength,
and so forth.
Timing-wise, you like to see a pullback to the center of the Bollinger
Bands (or Keltner Channels) to enter a long trade on a strong stock. EBAY has just
pulled back to the center lines of the Bollinger/Keltner channels. You're starting
to get excited.
You start thinking about debit and credit spreads and go to your broker's website.
OptionsXpress has a volatility graph.
From it you find that the Implied Volatility on eBay's options are near the lowest
point of the past 12 months. You think simple long calls might even work.
You wonder if EBAY has a history of rising this time of year. You can determine this
by looking over past daily chart data on EBAY, but I'll slip in a StockQuirks chart
here to save you a little time. A long position in EBAY entered this week, and held
for five weeks, produced an average 10.6% gain, with gains in 10 of its 13 years (77%
of the years). If the position is held for 3-4 months, the average gains increased
even more.
EBAY closed on Friday at 43.99. You wonder what if EBAY moved 10% again over the next
5 weeks or so. How would a slightly OTM long call work out? A 10% target move would
be a target price of 48.39, 4.4 points higher.
OptionsXpress shows the EBAY Jan 13 47 Call has strong Open Interest, a Bid/Ask
of 2.45/2.5, and a Delta of 40. EBAY's Implied Volatility, being at a low, is
most likely to increase over the next few months. It currently is at 27.75,
and it may be conservative to assume it will rise to at least say 35 over the
next several weeks (it is very likely overall stock market activity will pick up going
into September).
If you were to buy one Jan 47 Call at 2.5, EBAY rose 10% within the next 5 weeks,
and IV did increase to 35, the theoretical Jan 47 Call price would be 4.76, a 90% gain.
If EBAY did not immediately rise, the fact this is a January expiration option means
you could hold on for a few more months looking for a profit.
Of course, this is all theoretical, and things seldom work out according to theory.
But it shows the possibilities that exist right now for even outright Long Call
and Put positions. Check the IV's and option prices on the stocks you are interested
in. There may be some low-risk trades that can be created.
Stock Talk for August 6, 2012
Amazon (AMZN), mentioned last week, pulled back on weak volume, then gapped-up on Friday.
This is a high probability setup. AMZN's historical volatility is now in the middle of its
past year's range. Calls may be priced too high for simple long trades. Spreads may be
a better way to play further upside on AMZN.
chart courtesy of Worden − www.Worden.com
Citrix Systems (CTXS) has pulled back from resistance around 89 to its 50-week
moving average:
chart courtesy of Worden − www.Worden.com
Notice how CTXS regularly forms a short-term bottom. CTXS may have put in another bottom:
CTXS's seasonal shows a very good track record of upward movement from this week onwards:
© StockQuirks.com
Coupled with a what looks like a short-term bottom, CTXS may be tradable back up to the
89 resistance level.
Stock Talk for July 30, 2012
Amazon (AMZN) announced results last night and as of mid-day Friday it is poking above the
trading range on strong volume:
chart courtesy of Worden − www.Worden.com
For now, the best plays are identifying stocks in trading ranges and playing moves
from one side to the other. Seasonal patterns will soon start becoming a factor in
trade selection decisions, but right now, concentrate on refining your trading range
expertise.
Stock Talk for July 23, 2012
VRSN, mentioned last week, moved upwards for four days, however the volume was weak.
A strong down day Friday shows there is still more selling interest than buying interest.
Further downside may be in order.
This week Amazon.com (AMZN) will report earnings (after the market close on Thursday).
Let's investigate the opportunities, if any, on this stock.
AMZN is near the top of its well-defined trading range:
chart courtesy of Worden − www.Worden.com
There are 4 trading days until Amazon reports Q2 earnings. Let's take a look at how AMZN responded
to the past 24 earnings announcements, by determining the net change in AMZN from 4 days before
through 2 days after the announcements:
The cursor is on the '4 days before' datapoint and shows the quarter-by-quarter results.
There has been an average 5% gain over the 24 most recent announcements, with gains in
15 of those quarters. Many of those announcements produced significant moves, the kind that
make certain option strategies come alive (pay off handsomely).
Since you never know which way a stock might respond to an upcoming announcement,
short-term traders think in terms of buying straddles to play an earnings announcement.
There are two things to look for to help increase the odds of success of a straddle.
Both of them are related to volatility. You want the Historical Volatility (HV) to be near
its low of the past year, and you would like the option Implied Volatility (IV) to be near
its low of the past year as well.
OptionsXpress.com, as well as many other broker
sites, can help with this. OptionsXpress produced a chart for me that looked like this:
The red line shows AMZN's Historical Volatility over the past year. We see that it is
at the lowest level of the past year's range. This certainly meets the first volatility
criteria for considering a straddle trade.
The blue line shows the Implied Volatility for the past year. The IV is calculated from
the current quotes for AMZN's options. If IV is near the bottom of the range, you will likely
pick up a straddle at a very reasonable cost, and it will take less of a move in AMZN to
make a profit (a straddle becomes profitable only if the underlying stock moves a certain
minimum amount in either direction). AMZN's IV is around the middle of the past year's range.
This means we'd need to see a stronger move in AMZN to make the profit we'd like to see.
I will look at AMZN options 2-3 months out. Since AMZN has October options, and it closed at
228.29, I will consider the 230 straddles. Checking Friday's closing quotes, the AMZN Oct12 230
straddle (long 1 Oct 230 Call, long 1 Oct 230 Put) has a Bid/Ask of 29.50/29.90. This implies
that at expiration, AMZN would have to be at least 30 points away from the current price to
make the slightest profit.
But we are concerned with AMZN's chances over the next several days, not through the middle
of October. Using Thinkorswim's risk profile tool, I see
that buying the AMZN Oct 230 straddle at 29.7 first thing Monday morning calculates the
(theoretical!) break-even points on Monday, 7/30 (2 trading days after AMZN announces)
at 216.17 and 238.24. Assuming everything went according to the math, AMZN would have to
close below 216.17 or above 238.24 on next Monday, for the Oct 230 straddle to begin to
show any profit. From Friday's 228.29 close that would be a 5.3% move on the upside, and
a 4.4% move on the downside, just to break even.
AMZN's AVERAGE move over the past 24 quarters has been 5.2%. To make this trade you
would have to hope that AMZN would make more than the average 5% move over the earnings
announcement, if your primary objective is to trade just the earnings annoucement.
If you didn't meet your primary profit/time targets, you could hold the straddle looking for
further moves in the stock. The seasonal chart for AMZN shows potential for that type of
'Plan B'. Over the next 8 weeks, AMAN has gained an average 9.5% a year, with gains in 80%
of the years.
A move by AMZN matching the average within the next 8 weeks would likely
produce strong gains in the straddle, if you still held it. So even 'Plan B' has
potential.
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