Tuesday, February 13, 2018

Traditionally Hawkish Loretta Mester Signals "Stay the Course"

Cleveland Fed President Loretta Mester, in speaking to the Dayton Area Chamber of Commerce this morning, signaled a "stay the course" attitude regarding the Fed's current interest rate policy.  Her speech follows a week of extremely turbulent price action in the markets, raising speculation that volatility in the DOW would influence the Fed's pace of interest rate hikes through the remainder of the year.

The market has currently priced in three interest rate hikes for 2018, and sentiment shows a 77.5% chance of a 25 bps increase following the March 21 FOMC meeting.  Mester, one of the hawkish members of FOMC, said today that she supports a rate increase pace similar to what the Fed pursued in 2017 when they raised interest rates three times over the course of the year. 

Mester dismissed the current market action as little more than the normal correction one would expect after the explosive run-up in stock prices experienced over the past year.  “For now," she said,  "I expect the economy will work through this episode of market turbulence and I have not changed my outlook. In my view, the underlying fundamentals supporting the economy are very sound.”

 Historically, Mester has supported an aggressive interest rate policy, citing fears of a run-up of inflation should the Fed not raise rates quickly enough.  While she expects inflation to rise at an increasing rate, she does not foresee a need to increase the rate at which the Fed raises rates.  It's noteworthy that her remarks come a day before the February release of the closely watched CPI numbers.  Tomorrow's numbers should be a strong signal both for inflation's rate of change and for the aggressiveness the Fed is likely to take for the remainder of 2018.

The consensus for tomorrow's CPI release, according to Econoday is as follows:

PriorConsensusConsensus Range
CPI - M/M change0.1 %0.3 %0.3 % to 0.4 %
CPI - Y/Y change2.1 %2.0 %1.9 % to 2.3 %
CPI less food & energy- M/M change0.3 %0.2 %0.1 % to 0.3 %
CPI less food & energy - Y/Y change1.8 %1.7 %1.7 % to 2.0 %

Numbers that come in stronger that the consensus will add pressure to an already jittery market since it will increase speculation that the Fed will add a fourth rate increase into 2018.  That fourth increase is not currently factored into prices.

Mester also addressed the impact the 2018 tax cuts may have on the economy as a whole.  In her view, she expects the cuts to add between a quarter and a half of a percent to economic growth.  This, she expects, will support an inflationary rate just above the Fed's target of 2.0%.  It should also, in her view, support continued hiring in the private sector.  That will spur an increase in wage growth, the primary factor driving inflation.  (Wage growth in January increase 0.3% over December, and is showing an already strong annual 2.9% hourly rate.)

Scott Anderson, chief economist at Bank of the West in San Francisco, doesn't share the view that inflationary growth is under control.  “The acceleration in average hourly earnings growth punches a hole in the narrative that wage growth remains lackluster.  The Goldilocks view of inflation is being sorely challenged right now.”

Wednesday and Thursday provide a series of economic releases that will signal Fed's direction.  Definitely watch tomorrow's CPI release.  If there's surprise to the upside, expect the market to react negatively in anticipation of a more aggressive interest rate schedule.  But it doesn't end with the CPI.  Watch these releases tomorrow and Thursday for a more complete picture:
  • Wed - 8:30 AM - CPI
  • Wed - 8:30 AM - Retail Sales
  • Thu - 8:30 AM - Jobless Claims
  • Thu - 8:30 AM - Philadelphia Fed Business Outlook Survey
  • Thu - 8:30 AM - PPI FD
  • Thu - 9:15 AM - Industrial Production
 We share Mester's view that the fundamentals of the economy remain strong.  The question, however, is "how strong."  By market open on Thursday, we should have a good idea as to whether the economy is too strong or if it's proceeding at a healthy pace.

Happy Trading.

Sunday, February 11, 2018

Has the Time Finally Come for TWTR?

In the midst of last week's market turmoil, Twitter, Inc. (NYSE: TWTR) posted a five-cents per share earnings beat, but also posted a $45.94 million beat on revenue.  Those numbers were enough to drive a return to year-over-year revenue growth following a long history of declines.  Even more to the market's delight, Twitter posted a 7% year-over-year increase in owned and operated advertising revenue.  In the ensuing conference call, CEO Jack Dorsey gave a rosy preview of 2018, saying, "We're investing to make 2018 a year of growth and expect our expenses to more closely align with revenue after a year of significant margin improvement."

The market was most appreciative, drawing a significant break-away gap on Thursday in spite of a 1000+ point drop in the overall market.  Twitter continued to show strength on Friday with a very strong bullish candle that didn't penetrate the lows of the previous day's move.

Now, before we go too far in the discussion, Twitter is not, for me, an investment stock.  While the chart shows a very good potential for upside growth, it does lack the number one component I require in any stock held for investments, and that is a quarterly dividend.  Therefore, I'm looking at Twitter solely as a trade vehicle for short term capital appreciation, and would not be interested in holding Twitter as a longer term investment.

With that said, let's take a look first at the Weekly Chart.  This sets the overall canvas upon which our daily analysis will be drawn.

TWTR Weekly Chart
 What we've placed on this chart are the major support and resistance areas that are likely to impact any large-scale move.  Notice that last week's price action broke across the 200-day moving average (that continues to trend downward) but also broke above a major pivot line that has held since July 2015.There's a good possibility this line will be tested several times over the coming weeks, so factor that into any entry and stop plans.

There's a second resistance line looming around $35, and that, coincidentally enough, marked the high of our gap day.  Price hit that resistance and retreated back to the $30.50 range on that day, although it did recover back to $31.51 the next day.  What we need to take from this, though, is that there are sellers looming around $35 and they will have to be shaken out of the market a bit before Twitter can further advance.  Expect some horizontal movement at that level.

The major resistance zone, though, sits between $50 and $52.50.  That level formed a double top on the weekly chart between July 2014 and April 2015, and the stock retreated from there to its all-time lows.  We have due cause to respect this resistance level.  For me, assuming I'm still long the stock if it reaches that point, I'll exit there and wait.  It may become a good short opportunity at that point.  If nothing else, we can always reenter if it shows a breakthrough across that resistance line on strong volume.

What's encouraging about the weekly chart, though, is the 28-month base formed over the 2 1/3 years prior to Thursday's breakout.  The P&F price target from the breakout of that base would put us at $52.  Not by coincidence does that coincide with the major resistance zone discussed previously.

Okay, with that foundation, let's turn to the daily chart.

TWTR Daily Chart
Most of what appears on this chart is positive, and speaks to a decent move to the upside.  Consider the following:
  • Strong breakaway gap after good earnings and forward guidance.  It's even stronger considering that the overall market dropped over 1000 points that same day.
  • The breakaway gap also broke out of a strong rising channel that began developing in September 2017.
  • Volume from the start of this move two weeks ago shows very strong bullish tendencies, more than doubling the 50-day moving average of volume across the entire period.
  • On Balance Volume has been rising steadily since July 2017, showing money gradually moving into the stock.  
  • The MACD shows a bullish crossover at the start of the move, and then a nice bullish bump in conjunction with the breakaway gap.
  • Relative Strength broke out of a rising resistance line.
  • The JDK RS Ratio and JDK RS Momentum lines are both rising rapidly.
There aren't many negatives to speak of:
  • The RSI(9) is at a level that has proven to be extremely resistant on the last four moves.
  • The candle on the breakaway gap day was decidedly bearish, closing within 10% of the low.  In fairness, though, that did come on a major down day in the market, and Friday's candle was decidedly bullish.
  • The breakaway candle bounced off major resistance found on the weekly chart.
So, where does this leave us?  Well, given the glowing forward guidance from Twitter on Thursday, we've got at least a quarter for this stock to run without negative news weighing on it.  If TWTR can break through the resistance at $35, then it has a very good shot at running to $52. That's precisely how we're going to play it.  I don't intend an entry until TWTR breaks the resistance line above Thursday's candle.  We'll take 1/2 profits at $48.35 (the 78.6% Fibonacci level of the entire range,) establish a trailing stop set to the prior day's low, and allow the remaining half to run until we get stopped out.  The key, though, is to be patient and let it break that $35 level with volume. Do keep in mind that we expect that line to be tested once or twice as a support line, so don't set your initial stop too high. 

Happy Trading.

Saturday, February 10, 2018

Cup and Handle May Signal FLO Recovery

Following three consecutive quarters of earnings beats and some positive forward guidance, Flowers Foods, Inc (NYSE: FLO) may have finally turned it around.  A string of quarterly revenue misses dating back to November, 2015 put extreme pressure on the share price which bottomed at $13.56 in August of 2016.  Since then, the company embarked on a restructuring plan that is still a major work in progress.  The results are beginning to materialize, however, with their earnings beat announced on Wednesday, 7 February.

What caught our attention in the wake of last week's stock market turmoil was the relative strength FLO demonstrated while much of the broader market was getting crushed.  Tuesday through Friday were all up days with significant strength.  In fact, there was a missed short term opportunity with FLO since it drew a double bottom with a very strong bullish candle on Tuesday, then confirmed the double bottom with a breakout on Thursday.  The stock is now already trading too close to the double bottom price target for it to be a profitable play there, however.

For those interested in an intermediate term play, it's worth looking at the Cup and Handle drawn by the stock on the daily chart from February through the breakout of the Handle at the end of the last trading session. 

FLO Daily Chart
The target price from the breakout is $23.52, representing the 78.6% extension of the right rim of the cup from the bottom of the cup.  Now, there's a fair amount of resistance right at the breakout level, so do expect the stock to retrace back to that resistance level at least once.  The bounce off that retest would be the safest entry, and given the underlying volatility in the market, that's precisely when I intend to enter. 

Looking at some of the other technicals lining up on the chart, we can see that this breakout also involves a channel that formed from the low of the cup last August. That channel did breakout once before, and you can see that it offered a bit of support towards the end of 2017 before collapsing.  Be cognizant of it, however, it's also more likely that the support will hold the second time around.  (If it doesn't, get out of the trade fast.)

There are two cautionary tones in the RSI(9) and in the MACD(5,34,5.)  Both are showing a bearish divergence which should give us pause.  The MACD just drew a bullish crossover, but I'm concerned about that divergence.  It's another reason to wait for a pullback to support before entering.

Relative Strength - the bottom-most indicator I'm showing - is sitting right on a resistance line.  I'd really like to see RS break through that line and hold before entering as well.  When you look at the JDK-RS line and the JDK-RS Momentum line, all indications are that it should do just that.  RS is improving, and more importantly, the momentum of the RS line is improving. 

We're going to play this as an intermediate length trade.  I expect it to take several weeks to reach the target after a true breakout - meaning, after a breakout and then a pullback to or just below the breakout level.  By waiting for that pullback, though, we'll be able to set a much more aggressive stop just below the handle top, and set ourselves a much better risk/reward ratio.  It should also give the overall market time to settle down a bit and show us its true next move.

Add this one to your watch list and wait for the pullback.  There's no point in rushing the trade given the volatility in the broader market.

Happy Trading.

Wednesday, February 15, 2017

Rising Wedge Signals Trouble For PAA

Despite a bullish channel pattern on the weekly chart, Plains All American Pipeline L.P. (NYSE: PAA) is showing all bearish signals across multiple time frames from the daily through to the monthly charts.  For our analysis, we'll start with the broadest view on the monthly.

PAA Monthly Chart
Since inception, PAA drew a strong 5-wave impulse leading to what appears to be a Wave-I top in September, 2014.  Wave-II appears to be in progress now, forming what is shaping up to be either a zig-zag or a flat correction.  Wave-A retraced over 61.8% of Wave-I, however, which is an extremely deep corrective pattern.  From its current position, Wave-C is somewhat limited to the downside, otherwise the entire wave count will be invalidated.  (Wave-II cannot retrace 100% of Wave-I to be a valid count.)

The RSI(9) oscillator does signal a bearish divergence on both the highs and the lows, however, so continued weakness appears to be in the offing.  From the overall monthly pattern, we do expect a Wave-C to the downside, however given the volume signature in December 2015 through February 2016, we believe significant demand exists between $15.00 and $17.00, so it's not likely for Wave-C to travel below those levels.  Watch for a shallow correction from the current level.

PAA Weekly Chart
On the surface, the weekly chart would appear to offer a contrary interpretation.  A strong, tight bullish channel marked price starting in February 2016 and continuing through to the present.  Note, though, that price has traveled horizontally since November 2016 and has been riding the support line for most of 2017.  On Balance Volume is rising, however price is not rising in conjunction with the indicator.  Both the RSI(9) indicator and the MACD(5,34,5) have rolled over into a bearish configuration.  Similarly, the 200-day moving average is above price, has rolled over, and is now descending.  These are all indications that a downward price move is pending.

PAA Daily Chart
That brings us to the daily chart.  The most recent trend, starting in September 2016, formed a rising wedge pattern.  That, as we've discussed in other posts, is a bearish signal.  Price tends to break downward from a rising wedge pattern, although the price target from such a pattern is somewhat unpredictable.

The other major warning sign is a diagonal trend line that starts in April 2016 and had seven firm touches before being penetrated to the downside on 12 January 2017.  Since then, it has acted as resistance with three touches. 

Volume since the first of the year has been bearish as well.  Notice the extremely weak volume over the first week of February, and notice the falling volume in general for all of 2017.  Interest in the stock appears to be waning, and demand is required to drive price higher. 

From a fundamental perspective, we see that PAA lowered its dividend from $0.70 to $0.55 in October, 2016.  This is accompanied by nine consecutive quarters of missed revenue, and 5 out of 10 quarters of missed earnings.  "Troubled" would be the best way to describe the company.  Trading at a P/E of 78.38 - nearly triple its nearest competitor - it's hard to envision much in the way of an upside, even with the favorable energy infrastructure outlook fostered by the current US Administration.

The only play we see for PAA is to the short side.  We are looking at two possible entry points.  The first is a short trade on a close below the support line of the wedge.  In that case, we'll place a protective stop just above the horizontal resistance line around $33 and we'll set a price target at the horizontal support line around $25.

The second potential play is if price rises a bit further within the wedge.  In that case, we'll watch for a reversal at one of the three major resistance lines: the diagonal resistance line (in red), the blue horizontal resistance line, or the top of the wedge.  A reversal at either of those points will signal a short entry with a protective stop above the next highest resistance line.  Again, our target will be the horizontal support line around $25, although we'll watch for an early exit if the wedge support line appears to hold.  Watch this one carefully since the breakdown, when it comes, may be swift.

Happy Trading.

Monday, February 13, 2017

MGM Near Rounded Bottom Breakout

MGM Resorts International (NYSE: MGM) formed the left lip of a rounded bottom pattern the week of 3 March 2014.  From there, the pattern developed with near perfection, including a classic bump mid-way through the pattern that would have been an ideal swing trade opportunity had this stock been on our radar at the time.  The right lip of the pattern formed the week of 21 November 2016, and the consolidation period that is still running is typical of this type of formation.

MGM Weekly Chart
Price was rising steadily into the pattern in 2014, as is typical 62% of the time.  The horizontal consolidation we are currently experiencing will mark our entry, should this stock break to the upside as is expected.  More on that when we analyze the daily chart, however.

To get a price target for the pattern, we'll take the low of the pattern from the height of the left rim and then use the 61.8% extension measured from our right rim breakout point.  That gives us a potential target of $36.87 and a nice 3:1 reward:risk ratio.

MGM Daily Chart
The daily chart offers additional evidence of the potential move.  From the pattern low in February 2016, coinciding with the bottom of the "bump" on the weekly pattern, the upward impulse pattern has drawn at least 3 full waves, with wave 4 either in progress or having just completed.  It's wave-5 that we intend to ride for this trade.  The price target obtained on the weekly is within range of a wave-5 target and, in fact, falls about a point shy of that target.  So we can stick with it as a decent measure.

The consolidation that appeared on the weekly forms a tight channel with a slightly downward bias on the daily.  It has numerous touches both top and bottom, making it an extremely reliable formation.  Notice, too, the diagonal trend-line that extends up from the bottom of Wave-2.  We traded briefly below that trend-line, but with today's close, price is once again above it.  We don't yet know if that line will be significant, but with at least four touches, we can't ignore it.

We'll be playing this stock as a traditional breakout, albeit from a rounded bottom.  Our entry will be long on a close above the current channel.  The protective stop will be just below the support line of the channel, and our price target will be $36.87.

The only caution is that earnings are reported before the open on 16 February.  Per our trading plan, we cannot enter a position this close to an earnings date, so we'll have to wait until Friday for an entry, assuming price hasn't outrun us by then.  It's entirely possible, though, that earning could be the catalyst for the move, so be ready to play it after the turbulence that typically marks an earnings day.

Happy Trading.

Wednesday, February 08, 2017

PHM Weekly Descending Triangle and Daily Bull Flag

Two seemingly contradictory signals are flashing on the daily and weekly charts for PulteGroup, Inc. (NYSE: PHM).  We'll start our analysis with the weekly chart, since that gives us a broader perspective on the intermediate term trend. 

PHM Weekly Chart
I had to step back to the monthly chart (not shown) in order to put this pattern into context, and it turns out that what we see on the weekly is, indeed, the start of what appears to be a five-wave impulse.  The first motive wave lasts about 18-months, ending in May, 2013.  What follows is at least a double flat correction.  Whether or not that turns into a triple remains to be seen.  For now, Wave-2 appears to be still in flight, although there are hints in the last two weeks that Wave-3 may have started.

The interesting pattern throughout Wave-2, however, is a descending triangle.  The number of touches on the top resistance line are significant, with six touches completing as of two weeks ago.  The support line is much weaker, although it, too, is well defined.  It's important to note that descending triangles break to the downside over 70% of the time, however a downside break in this case would be inconsistent with the Elliott Wave structure.  We'll have to watch that, since it may force us to reconsider our wave count.

I've also shown a diagonal support line coming out of the last Wave-A bottom.  Whether or not that support has teeth remains to be seen, but I show it just in case.  Notice, too, that OBV remains flat, although there have been signs of strong demand entering the scene in recent weeks.

PHM Daily Chart
That pattern that caught my eye, however, is evident on the daily chart.  Following a five-day upward thrust, a tight bull flag pattern formed the last week of January and continues through to the present.  Using 61.8% of the flagpole height as our price target, we have a potential upward breakout target of $23.32.  That'll give us a 3:1 reward to risk ratio, so it's worth further analyzing the chart.

We're seeing strength in the RSI(9) oscillator, especially as compared to the last major high on the chart.  The overall RSI has flashed a bullish divergence at least since the beginning of December.  The same is true for the OBV which shows an extremely strong rise coinciding with the flag pole development.  The demand signature for those five days is especially strong.

In fact, the only cautionary tale on the chart thus far is the bearish crossover in the MACD(5,34,5) indicator.  Watching the pattern, however, it's easy to predict that a breakout of the flag will coincide with a bullish crossover, and that's a signal for which we'll be watching.

Trading this stock is relatively straightforward.  It's a classic bull flag trade, so we'll go long on a breakout of the flag.  Our protective stop will be just below the flag, and our target is $23.32.  If we see a bullish crossover of the MACD prior to breakout, we'll take that signal and enter long at that point.  You can see on the chart that it's been a reliable signal for this stock, so it'll be worth the risk to play the potentially early entry.

The next earnings date isn't until April, and the next ex-dividend date is expected to be in March, so there's nothing artificial in the way of a trade.  We'll play this one as it develops.

Happy Trading.

Tuesday, February 07, 2017

LPX In Tight Horizontal Channel

One glance at the monthly chart for Louisiana-Pacific Corp. (NYSE: LPX) reveals a chart that has been in a corrective state for virtually its entire trading history.  The small-cap building products manufacturer is gradually improving its balance sheet while also growing market share for its SmartSide product family - a realistic-looking wood-grain siding alternative that purports to be lighter and more durable than other traditional artificial siding products.  This has not been enough to garner interest capable of pushing the stock into a typical 5-wave impulse, however, and as a result, it continues to oscillate in an endless corrective wave cycle.

LPX Weekly Chart
The weekly chart shows a lengthy up sloping channel that is showing no signs of ending its nearly two-year run.  Volume is starting to diminish, however, which does not bode well for any attempt to mount an upward surge.  It takes demand to drive a stock higher, and thus far, we're not seeing much of it.

On Balance Volume on the weekly remains flat, and there's no hint of a divergence either way in the RSI.  Thanks to the undulating nature of the channel, the MACD(5,34,5) has been a rather decent indicator of the turning points, however, so we'll certainly keep an eye on that going forward.

LPX Daily Chart
Now, it's the daily chart that caught my attention in the first place.  The higher lows starting in February, 2016 do form a good support channel, and we note that on the chart, however it's the very tight horizontal channel that formed in December that most interests us.  Just look at the number of three and four day swing trades that channel has produced since the channel formed.

Interestingly, the MACD appears to be providing a very consistent signal for directional shifts going back at least to the November time frame.  Until that changes, we'll continue to take our cues accordingly. 

Where we expect some deviation in the pattern is where we see the diagonal support line now intersecting our channel.  This suggests that our horizontal channel may turn into an ascending triangle.  If that happens, of course, we'll need to watch for a breakout play to either side.  Currently, the intermediate trend is up - and an ascending triangle tends to break to the upside - but that could easily change on a whim.

LPX reports earnings before the open tomorrow, so we'll need to watch what those earnings do to our pattern.  Consensus estimates are for $0.19 EPS and $539.90 Million in revenue for the quarter.  Annual estimates are for $0.84 EPS and $2.26 Billion in revenue.  The pattern for this stock over the past year, though, has been for price to form a spinning top on earnings day, but not do much of anything else.  We'll see what tomorrow brings.

How we trade this stock will depend on the pattern that emerges post-earnings.  Until we see evidence that the MACD is no longer reliable, our trades will be long on a bullish crossover and short on a bearish crossover.  Our exit strategy will be to trail a stop $.05 below the low each day and ride it until stopped out.  Our protective stop will be set to just above or just below the signal candle depending on whether we are taking a long or a short position. 

If the ascending triangle does form, of course, we'll change strategies to a triangle breakout and play that accordingly.  Until then, let's enjoy the oscillation this stock is currently providing.

Happy Trading.