IMAX : Heading For Support?

06/19/13 04:38:39 PM

by Donald W. Pendergast, Jr.

Shares of IMAX Corp. are off by nearly 14% since late May 2013; is this stock due to meet up with major support soon?

Security: IMAX
Position: N/A

IMAX Corp. common stock (IMAX) had enjoyed a sustained uptrend after rising out of a major multicycle low on September 26, 2012; it managed to gain nearly 54% before peaking at $28.99 on May 22, 2013. Since then the stock is down by nearly 14% and is sitting right at a key near-term support level, with a major support level not too far below at $24.00. Here's a heads-up look at some interesting technical dynamics, all of which agree that IMAX may be due for a rebound once support is tested.

Figure 1. IMAX Corp. (IMAX) Whenever the ConnorsRSI drops below 10 (or rises above 90), traders will want to do further analysis to help time potential reversal trades near key support/resistance levels. With the oscillator already at a low level, long-term money flow bullish, and a key support area near 24.00, the odds for a tradable bounce in the near future are very high in this stock.

Graphic provided by: TradeStation.

Graphic provided by: ConnorsRSI from Connors Research LLC.

There are two key long-term bullish dynamics shown on IMAX's daily chart in Figure 1:

1. The "golden cross" of its 50- and 200-day simple moving averages (SMA) on January 14, 2013.

2. The long-term money flow (based on the 100-day Chaikin Money flow histogram (CMF)(100) has remained well above its zero line during IMAX's 14% pullback.

Both of these suggest that the probabilities are good for some sort of a rebound in the stock, especially since there is a convergence of three powerful support areas in the $24.00 area (see blue shaded area). That's the general price range in which the 200-day SMA (blue up-sloping line) meets up with the 50% Fibonacci retracement of the entire September 2012-May 2013 rally and the 62% Fib retracement of the December 2012 to May 2013 phase of that larger bull run. This should be a strong support, especially given the outstandingly bullish long-term money flow trend in the stock. At the moment, IMAX has managed to drop slightly below its most recent swing low (dashed horizontal line) so it could be that the next wave of selling is getting underway, one that should find solid support near $24.00.

Fundamentals in IMAX are also very attractive, at least from a quarterly earnings trend perspective – IMAX has managed to meet and/or exceed its earnings expectations in every one of its last seven earnings releases. With the next set of earnings due on July 25, 2013, for IMAX, it's possible that the "smart money" will be building a new position in the stock as it descends toward support, looking to hold the shares through what they may believe to be yet another positive quarterly earnings report next month.

Shorting IMAX here is way too risky, given that the stock is still above its 200-day SMA at a time when long-term money flow is strong and the ConnorsRSI (a unique momentum-based oscillator developed by Larry Connors) is at an extremely low reading. The smartest way to play IMAX here is to wait for the stock to bottom out at/near the $24.00 level before turning higher; on such a turn, you may want to consider selling the July '13 IMAX $24.00 put option, looking to cash in on what could be a strong rebound rally – one that could quickly evaporate the value of the short put, putting some quick profits in your pocket. Open interest on this put is 214 contracts and the daily time decay comes in at $1 per day/per contract. If IMAX rallies strongly, try not to let open profits slip through your hands by buying back the put (or puts) if they decline in value by 60% or more. Conversely, if the move back up is weak and sputters, buy it back at a loss if it increases in value by 80 or 90% or if IMAX touches $24.00 after an initial rally attempt fails. As always, trade wisely until we meet again.

Donald W. Pendergast, Jr.

Freelance financial markets writer and online publisher of the Trendzetterz.com S&P 500 Weekly Forecast service.

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IMAX : Heading For Support?

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