Wednesday, July 06, 2016

Awaiting a Pullback on VTR

[Disclaimer: Trading examples used here are not recommendations.  They are intended to demonstrate my personal analysis and style of trading.  Always do your own analysis and tailor strategies to your own risk tolerance.]

When you consider the Italian Banking Crisis, Brexit, slow growth in the US economy, and the potential for recession looming in Europe, prospects for another Fed rate hike in 2016 are growing slimmer by the day.  As a result, the REIT (Real Estate Investment Trust) stocks are starting to soar.  One such stock that caught our attention recently is Ventras, Inc (NYSE: VTR.)   Headquartered in Chicago, this firm focuses primarily on properties in the healthcare industry, both in the US and Canada.

Looking at the chart, we can see that VTR started an uptrend on February 12, 2016.  Wave 1 sub-divided very nicely into 5 sub-waves, and Wave 2 was a classic A-B-C pattern that ended on April 21.  We are now into Wave 3, and this wave appears to be extending.  The 5th sub-wave (in green) appears to be sub-dividing into another 5-wave impulse, although today's candle with an opening gap down may have signaled the end of that wave.  We'll need to watch that for the rest of the week, because if that's the end of Wave 3.v.(v) it would mean that Wave 3 was shorter than Wave 1.  That seriously limits the upward potential of Wave 5 since Wave 3 cannot be the shortest wave in a 5 wave Impulse.  A bit of caution is warranted here, although Wave 3 has still run up 17 points, so even with a truncated Wave 5 there's good profit potential.

What makes this stock even more attractive on the long side is the very handsome 4.34% forward dividend yield it's currently sporting.  VTR has yet to announce it's next dividend, but history shows it will go ex-dividend around September 9th and should be in the $0.73 range.  One major caution, though, is that they announce earnings on July 22nd before the open.  My personal trading rules don't allow opening a position within 10-days of an earnings announcement, and if open, I close the position the day before any announcement. I don't like the unpredictability of the first 30-minutes of trading following an earnings announcement, so there's no reason to carry that risk forward.  Remember, too, that the next FOMC meeting is July 27th.  I don't close positions around FOMC meetings, but neither do I open them that day.

How we'll play this is as follows:
  • If the uptrend resumes this week, we'll take a long position with a stop below 72.57 assuming the reward:risk ratio remains greater than 3:1.
    • We'll exit 50% of our position at 76.41.  That marks the height of Wave 1.
    • We'll set a 1-day trailing stop .10 below the low, and ride it until the remaining position is stopped out. 
    • We'll close any positions still open on 7/21 at the close.
  • If the uptrend does not resume and we enter Wave 4, we'll continue to monitor the pattern for a Wave C.  We expect Wave 4 to bottom around 70.21 - the start of sub-wave iv - and if so, we'll enter at that point.
    • As in the last case, we'll exit 50% of our position at 76.41.  A truncated Wave 5 often just touches the top of Wave 3.
    • Wave 5 should be a 5-wave impulse, so at that point we'll trail the remaining 50% just below the low of each sub-wave.  
    • Once we hit sub-wave 5 of Wave 5, we'll set a 1-day trailing stop .10 below the low and ride it until the remaining position is stopped out.
  • In both cases, if we are close to the ex-dividend date, we'll take the .73 adjustment into account when setting our stops.  (We don't want to be artificially stopped out because of the dividend adjustment.)
Happy Trading!

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