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Bulkowski's Trade in YRC Worldwide

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As of 02/20/2019
  Industrials: 25,954 +63.12 +0.2%
  Transports: 10,627 +9.81 +0.1%
  Utilities: 746 +2.71 +0.4%
  Nasdaq: 7,489 +2.30 +0.0%
  S&P 500: 2,785 +4.94 +0.2%
Tom's Targets    Overview: 02/14/2019
26,000 or 24,600 by 03/01/2019
10,900 or 9,900 by 03/01/2019
755 or 725 by 03/01/2019
7,700 or 7,050 by 03/01/2019
2,825 or 2,650 by 03/01/2019

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

I have often told people and learned this the hard way: When the market gives you a gift, take it, and run to the bank with the profits.

The following charts of YRC Worldwide (YRCW) show a trade in which I made 34% in one day. Let me tell you about it.


YRC Worldwide Entry

I had been watching this stock since the weekend before September 14, based on the flat base pattern I saw developing in the stock.

If you switch to the arithmetic or linear scale, you'll see what I mean. Price moves horizontally since November 2007.

Picture of YRC Worldwide (YRCW) on the weekly scale.

Unfortunately, I forgot to switch scales for the chart on the right. You know this because the vertical price scale on the left of the chart shows uneven divisions (the distance from 1 to 2 is much larger than from 5 to 6, for example). On the linear chart, the distances are the same.

With the stock trading at 4, it had the potential to reach 12 -- a triple. The downside is a complete loss of capital: $4. In other words, the company could go bankrupt.

Let's take a look at the stock on the weekly scale, shown. The red lines represent overhead resistance. At 6, resistance takes the form of prior peaks stretching back to November 2008. This is the top of the flat base I spoke of. The bottom is everything below 6. If you were to look at this portion of the chart on the linear scale using daily price data, you would see price moving in a trading range between 6 on the top and 1 on the bottom. It's a tall range, to be sure, but an upward breakout from this range could mean a move back up to 12.

Twelve represents a loose area of valleys that stretch from December 2007 until almost a year later, but if you look back on the monthly scale, you will see additional valleys from year end 1995 through the start of 1997 and another drop in mid 1998. In other words, this overhanging cloud bank represents a formidable layer of resistance to an upward move.


YRC Worldwide: The Buy

Picture of YRC Worldwide (YRCW) on the daily scale.

Switching to the daily chart zooms into the price action.

When the stock looked as if it was going to break out of the congestion area (day C on the chart), I decided to place a buy order for the open the next day. The stock filled at 4.40 and the inset shows this at A.

I expected to hold this stock for years because price usually does not double or triple quickly. With long term buy-and-hold positions, I do not use a stop. Why? Because a stop often gets hit as price swings from its yearly high to low, and I did not want to be stopped out prematurely.

Since I review my stocks daily, I can always decide to sell them if the fundamentals suggest a deteriorating financial position that's reflected on the charts. That means I use a combination of fundamental and technical analysis for the longer term plays such as this trade.


YRC Worldwide: The Sale

I define end-of-day traders as people that look at the market after the close each day and decide what to do then. They are not day traders, ones that watch the market during the day, while it is open.

Thus, I didn't see the up move until after the close when I checked on the trade. I couldn't believe it! The stock was up over 30% from my buy price. "Dump it!" was my first thought.

The reason for selling these moon shots is a event pattern called an inverted dead-cat bounce. Often, but not always, when price shoots up by 5%, 10% or even more, the stock may make a new high the next day but then pros like me will take profits. That selling will force the stock down -- not always -- but often.

I checked the news for YRCW on yahoo, but they only reported the large gain. Everything else was old news. I did notice that two other trucking companies were upgraded by a brokerage that same day, so I figured the 30% gain in YRCW was a sympathy move. In other words, there was nothing propping up the stock.

I thought that within a few minutes of the open, the stock would hit a new high but then close lower. Instead of trying to day trade it and perhaps missing a good exit price, I decided to sell at the open using a market order. That is point B on the chart.

I bought at 4.40 and sold at 5.91, making 34% in one day. As the inset shows, price has closed below my purchase price and continued lower.


YRC Worldwide: The Future

After the trade completed, I learned that there is a large short position in the stock. Yahoo!finance says it's 29% of shares outstanding. Since the number is dated August 11, it could be that short covering after the broker upgrade on other trucking companies was the reason for the move up. My guess is the short position has diminished to the point that it might not be a factor now.

With a low price of 4.01 (on October 1, 2009), is this another buying opportunity to catch the stock on its way back up to 12? Maybe, but news reports of "substantial layoffs" coming means the company is still losing customers. The more business it loses, the more employees it has to lay off and the more their debt weighs on performance. They just might go bankrupt, and I'm not sure the risk is worth the reward now.

There is good news, too. The company is being given more leeway in its financial dealings with debt holders. A unit of YRC in Peru inked a 3-year service agreement for a mining company, so the company is getting at least some customers. That's international, of course, so I think the US side is still under pressure with other companies poaching customers at every opportunity.

Picture of a YRC Worldwide (YRCW) on the daily scale.

YRC Worldwide: Aftermath

I look at a chart like this and it brings a chill to my bones. I feel fortunate to have escaped the large drop in the stock.

The reason for the plunge was a debt for equity swap announced by the company that would dilute existing shareholder positions. With customers looking elsewhere for a more stable shipping partner, the recession is forcing the company toward bankruptcy, at least according to the news reports I checked.

-- Thomas Bulkowski



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Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Celibacy is not hereditary.