When it comes to convincing an audience of a particular viewpoint, you should lead with your best argument. A good song, at its core, is a good song. A terrible composition, however, will be rather obvious, even layered under mountains of reverb and autotune. And that’s the proposition behind Boston Scientific (BSX). For the time being, BSX stock is playing a catchy tune.
Specifically, I’m going to present a single argument: BSX stock is currently trading inside the market equivalent of a hot deck. As a card-counting blackjack player, it’s a relatively ideal time to take a shot. No, a probabilistic approach doesn’t guarantee success; after all, we’re still talking about what is probable, not what is certain.
Nevertheless, by focusing on names that are potentially “unbalanced” from a predictability standpoint, you can theoretically improve your success rate. Part of the challenge with trading is that, in any given period, the market’s natural upward bias will give most high-quality stocks a long success ratio of 52% — technically an advantage but nowhere near enough to provide a distinct edge.
However, it’s highly unlikely that all quality stocks across all regimes or sentiment cycles will command long odds of 52%. During some emotionally heightened states, whether of extreme fear or greed, the odds may shoot significantly above or below the baseline probability. Attempting to decipher when these transitions occur — from baseline state to excited state — represents the core reason why the financial publication industry exists.
The thing is, the analytical frameworks of many traditional technical and financial models and methodologies are logically specious.
Cracking the Sentiment Genome of BSX Stock
I didn’t pick Boston Scientific randomly. Sure, a structural reason why it was a candidate for consideration was that it fell under Barchart’s Most Active Stock Options list. Still, the spotlight ultimately descended on BSX stock because its sentiment cycle favored long exposure, providing superior odds beyond its baseline.
To make statements regarding sentiment, though, one must define what that word means in the context of the system it falls under. Here, the common mistake is for analysts to predict price with price; that is, to make assumptions of forward behavior based on past price points. However, price represents a continuous, unbounded concept. It has no form and thus no inherent meaning.
To make reliable, effective predictions, one must see patterns — and for all practical intents and purposes, patterns require the existence of boundaries, or to use the lexicon, discrete events. Such events are observable, categorizable and may recur, thus enabling odds-assigning initiatives.
Of course, not all stocks are priced the same way, which is another reason why price is actually a poor metric for driving a predictability engine. Instead, in a mathematical process called abstraction, I compressed the entire price action of BSX stock (and other screened securities) into a quasi-binary sentiment genome featuring 33 strings.
With this approach, I am no longer comparing wildly variant prices across multiple disparate enterprises but rather, shifts in sentiment captured by a single, universal genetic code or language. In other words, I am no longer interested in the outside chaos of price discovery and its magnitude but in sentiment and its transition from one state of existence to another.
In researching BSX stock, it’s currently riding in total a “4-6” sequence: four up weeks interspersed with six down weeks, with a negative trajectory from the beginning of the 10-week period to the end. This pattern implies a 64.29% upside success ratio for this week, a much better ratio than its baseline odds of 55.93%.
What’s more, BSX stock is on track to print a 5-5 sequence next week with a net negative trajectory. This pattern yields a 63.46% upside probability with an implied near-term upside price target of just under $103.
At first glance, the concept of converting price into discrete events may sound utterly ridiculous. Just keep in mind that when I labeled Yum China (YUMC) the Lazarus Trade, I didn’t do so because of a Sunday school lesson.
No, I forecasted an upswing in YUMC based on the stock’s responses to certain negative streaks, which represent a discrete event.
It popped sharply higher the next day.
Plotting a Bullish Strategy for Boson Scientific
With the bulls appearing to gain control of the market, speculators may consider taking a more aggressive wager with BSX stock. For such folks, you may consider the 100/102 bull call spread expiring May 9. This transaction involves buying the $100 call and simultaneously selling the $102 call, for a net debit paid of $105 at time of writing.
Should BSX stock rise through the short strike price of $102, the maximum payout clocks in at $95, a payout of over 90%.
For the most aggressive trade that’s within the realm of rationality, the 100/103 bull spread for the options chain expiring May 16 could be open for consideration. Should the terms of the spread be fully reached, the payout stands at over 122%.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
