Wednesday, March 20, 2013

Signal With 71% Accuracy Says This Tech Icon is a Long-Term 'Buy': INTC

Many traders try to make decisions using short-term charts, some looking at charts using bars that update every minute or less. These time frames can be useful but individual traders should normally use longer-term charts. Wall Street powerhouses are competing against high-frequency trading firms for the intraday profits that are available and individual traders probably can't match their advantages. Daily charts could be more useful for individuals, but weekly and monthly charts should also be considered.

Most of the tools normally applied to short-term charts will work well on weekly or monthly charts, although sometimes the indicator setting should be changed. Relative strength (RS), for example, works well using a six-month time frame. On different charts, the look-back period should be about 125 days, 26 weeks or six months. Other indicators like stochastics or Moving Average Convergence/Divergence (MACD) work well using the same parameters in any time frame.
Intel (NASDAQ: INTC) recently gave a stochastic buy signal after becoming oversold on the monthly chart. The chart below shows the results of the last five signals, which include one losing trade in 2002 and four consecutive winners. Since 1981, the system has been right 71% of the time, but there have only been seven signals with five of them coming in the past 10 years. That is because Intel only became oversold twice in the 20-year bull market that topped in 2000.

Intel Stock INTC Chart
To find a larger number of trades, we tested the system using all of the stocks currently in the S&P 100 since 1981, or whenever they began trading, and found that 66.3% of 528 trades were winners. Positions were sold when the stochastics indicator became bearish or after one year, whichever came first. Risk, measured as the largest loss, was reduced by about 40% compared to buy and hold.

It is also important to consider fundamentals when using long-term charts. Intel is a buy based on standard fundamental measures:
Intel Stock Fundamentals
Analysts expect Intel to grow its earnings per share (EPS) at an average rate of 12% a year in the future, so it could be worth $25.20 based on estimated earnings of $2.10 per share in 2014.

Buying INTC at the market price is one way to benefit from the expected stock appreciation. With INTC currently trading at $21.40, if it reached the $25.20 price target by December 2014, traders would have a capital gain of about $3.80 and dividend payments totaling $1.58 (seven quarters) if the current payout remains unchanged. That offers a total return of about 25% in less than two years.

Alternatively, traders could use long-term call options expiring in January 2015. Calls with a strike price of $20 are trading for about $3 and would be worth at least $5.20 if INTC reaches the $25.20 target. The dollar amount of the potential gain ($2.20) is lower than buying the stock but traders need less capital to trade options. Since each call contract controls 100 shares of stock, a trader could enter the options trade for $300 while $2,140 would be needed to purchase 100 shares of stock.
If a trader was willing to risk more than $2,100, they could buy seven call options and potentially earn $1,540 on the trade if INTC reaches $25.20, a potential gain of 73% in less than two years. The maximum loss on the trade is the amount paid for the options although a stop-loss could reduce that amount.

Intel is a buy on the monthly chart and based on the fundamentals. Long-term options offer an aggressive trading strategy for this trade setup. Buying the stock is also recommended and offers the advantage of dividend income, which is not available to option buyers.

Recommended Trade Setups:
-- Buy INTC at $22 or less
-- Set stop-loss at $19
-- Set price target at $25.20 for a potential 22% gain in 21 months, assuming dividend payments remain unchanged

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