Sunday, July 10, 2016

Iron Mountain Potential Long Play

[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.]

Iron Mountain (NYSE: IRM) appears to have completed a rather brief A-B-C correction, and is showing new Impulse tendencies in a potential Wave 1. 

Iron Mountain in a potential Wave 1 impulse
Headquartered in Boston, Massachusetts, this document and media storage provider operates across North America, Latin America, Asia Pacific, and Europe.  While new data replication technologies and the elimination of physical tape and optical media storage throughout the technical industries have diminished the need for many of the services that drove this market for decades, legal requirements to maintain physical records for extended periods, data destruction services offered across the industry, and the media services IRM offers to smaller institutions continue to provide growth potential for the storage media giant.  The growing adaptation of cloud computing in numerous industries is also adding to IRM's growth potential at a time when analysts thought the demand for the company's services would rapidly decline.

What the daily chart shows is a company that has been in an uptrend for virtually all of 2016.  A well-defined 5-wave impulse completed in March, however the resulting running flat correction retraced only a fraction of Wave 5.  With no overlap in sight for the current wave, it appears we may have resumed the uptrend and may well be in either the early stages of a new Wave 1 or (pessimistically) just starting a Wave 3 after a short 1 and short 2.  Either way, the chart is suggesting that the direction from here is up, and this is a potential long play. 

For intermediate to longer term players, Iron Mountain offers a very attractive 5.1% dividend yield.  They have yet to announce their next dividend release, however we expect IRM to go ex-dividend around September 9th, paying $0.485 per share.  With that high a yield, they have extremely limited exposure to any interest rate hikes the Fed may contemplate in either September or December, although the strength of the dollar may have some impact on their services outside of North America.

There are a couple of clouds on the horizon, at least for the short term trader.  First, there is some overhead resistance that shows on the weekly chart around $41.15.  That resistance may slow upward progress a bit, but it's likely far enough in the past that it won't completely halt the trajectory.  Second, earnings will be announced before the open on Thursday, July 28th.  We may not have reached the end of this impulse by then, so a decision will need to be made as to whether or not to exit the trade on the 27th or buy protective puts and ride it out.  (One word of caution on that latter strategy.  Remember that implied volatility on those puts will start to skyrocket about ten trading days before earnings, so if you want puts, you may be wise to buy them before this Thursday.  By the close on the 28th, implied volatility should be back below historical volatility, and that will cut a lot of the value from the puts.)  Personally, I prefer to exit the trade on the 27th.  If earnings go well and there's an opportunity to jump back in after about 10:30 AM on the 28th, fine.  If not, well, there are another 9000 stocks out there from which to choose.

The play we're looking at is as follows.  Remember, this is not a trade recommendation!  Do your own research, and tailor it to your own risk tolerance. 
  • Place a BUY Stop Day order at 40.11 with a Limit at 40.16.  (We won't allow more that .05 in slippage.)  Start time for the trade is 10:01 AM and we'll submit it only if DOW Futures are positive before the open and the market is in positive territory at 10:00 AM.
  • Initial protective stop is 39.13.
  • Once the daily low is greater than 41.11 we will raise our protective stop to break-even.
  • We will exit 50% of the position at 42.76. 
  • At that point, we'll begin to trail our stop at .05 below the daily low until we are stopped out.
  • We will exit any remaining positions at the close on 7/27. 
We only want to open this trade if the market heads up tomorrow.  With overhead resistance only a point above our entry,  we want the market to provide a strong tailwind, otherwise we'll sit it out.  Also, if we trade below 39.13, it invalidates the current wave count and again, we want out.

Reward to risk on this trade is 2.66:1 which is a bit less than our 3:1 preference.  That means we'll be looking to reduce our risk as quickly as possible, so we'll manage this trade rather tightly.  The time horizon we are looking at to hit the initial target is between 7/14 and 7/20. 

Remember the mantra:
1.  Identify Risk.
2.  Reduce Risk.
3.  Eliminate Risk.
4.  Protect Profits.

Happy Trading!

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