Wednesday, December 07, 2016

Mattel Forms Hammer on Strong Volume

Following a double top at their 52-week high on 18 April 2016, Mattel (Nasdaq: MAT) spent the remainder of the year trading in a horizontal channel that spanned about six points from low to high.  After tightening that channel nearer the low end over the last two months, Mattel signaled a break off the bottom trendline in today's trading.

MAT Daily Chart
The hammer candle that formed today did so at the 10-month low for the stock.  Now, as candlestick patterns go, the hammer (when formed at a major low) produces a bullish reversal approximately 50% of the time.  That statistic is much better than it sounds, however.  Consider that there are three possible outcomes from this position.  The stock can trade sideways, it can drop further, or it can rise from here.  To put that in perspective, there's a 25% chance it will drop, a 25% chance it will trade sideways, and a 50% chance it will rise.  That candlestick pattern suddenly sounds much more reliable, doesn't it? 

Of course, we never enter a trade simply based on a single candlestick pattern.  We need to consider the rest of the chart and determine if there are other elements that confirm the move and increase the probability of a successful trade.  One such factor is volume.  When you look at the chart, we see the second highest volume pattern since mid-June.  That implies demand - a lot of demand - entered the scene as MAT reached its low for the day.  Our odds suddenly got much better.

Look at the Fibonacci retracement grid drawn from the low to the high on the overall chart pattern.  The long tail in today's hammer just penetrated the 38.2% retracement level.  For stocks trading in a horizontal pattern as long as this one has, that's a very significant retracement level.  It would be safe to conclude that there were many limit orders to enter long positions just below that 38.2% level.  It would also be safe to conclude that there was a significant amount of short covering at that level, as well. 

Notice next the support/resistance line (dashed blue) right at our open today.  We broke below it for much of the day, but what's significant is that we pushed back above that level and managed to close not only above our open, but near the high for the day. 

Not shown on the image in this article are the RSI(14) and Slow Stochastic(14,3) oscillators.  Now, I don't enter positions based on technical indicator signals, however they are extremely valuable in adding confirmation to what the chart is already telling us.  In this case, the RSI(14) broke back above 30, today, and the Slow Stochastic(14,3) had a bullish crossover below 20, today.  Those are two extremely bullish signals on top of a chart that is already telling is to go long.

Now, this is a swing trade, not a long term position trade.  We are looking at a brief move of perhaps a week or less.  You'll notice two parallel dashed lines drawn in green.  Our target is that upper green line, and you'll notice that it's sloping down.  We're looking at about a two-point move at most, and this is a trade we need to exit at the first sign of trouble.  Since it's a pure momentum play, our stop is going to be just below the lower channel line, not below the low of today's hammer.  That increases the risk that we'll be stopped out of our trade for a loss, but if this stock doesn't take off immediately then the signal is invalid and we want out quickly, anyway. 

So that's the overall play.  We'll monitor futures before the open, and then watch the market for the first twenty minutes.  We want the market moving in our direction, and if it is, we'll enter the trade with a stop limit order between 29.61 and 29.66 with a start time of 9:50 EST.  (Meaning, we won't enter a position before 9:50 EST.  It's too easy to get caught up in the extreme volatility of the open.)  Our protective stop will be 28.98, and our price target will be 31.66.  That gives us a 2.88:1 reward to risk ratio.  It's a hair under the 3:1 we prefer, but it's still a solid gain. 

If we are not stopped out during the day, tomorrow, we'll look to adjust our stop to breakeven as soon as is practical.  This stock has tended to move quickly off its lows in the channel, however our objective is always to first identify risk, reduce risk, eliminate risk, and then protect any profits. Let's see how this one develops. 

Happy Trading.

Tuesday, December 06, 2016

Bearish Divergence in FITB - Nearing a Top or Just a Pause?

Fifth Third Bancorp (NYSE: FITB) appeared on one of my pullback screens, today, and upon closer inspection, it is indeed tracing an interesting, and somewhat conflicting, pattern on the daily chart.   It's worth a closer look.

FITB Daily Chart
FITB has been in an uptrend since 11 February 2016, however that's the first point of contention in the analysis of this chart.  In conducting an Elliott Wave analysis, we must first determine the point of origin for the impulse wave.  One possible point is the red "O" labeled at the low on 11 February.  It looks clear enough, right?  That's obviously our starting point for this impulse, isn't it?  Well, it does indeed trace five well-defined sub-waves, so on that score it qualifies.  The problem, though, is that the low on 13 May - a low that would mark the bottom of sub-wave (iv) in this case - is lower than the high of 21 March - a high that would mark the top of sub-wave (i).  That is a violation of one of the Elliott Wave rules in which wave 4 cannot penetrate wave 1.  So, unless we accept this rule violation, the wave count in red cannot be correct.  Note that Elliotticians are split on this topic, with many saying that this rule is more of a guideline than a hard-and-fast requirement.  I'm inclined to agree with them since, in most chart analysis, "close is close enough."

Let's follow-through with the red wave counts, however.  If the red counts are correct, then Wave 3 is longer than Wave 1, albeit by a hair (4.85 to 4.66.)  That satisfies the rule that Wave 3 cannot be the shortest of waves 1, 3, and 5.  Wave 5 is somewhat troubling in that it's an extremely steep impulse that far exceeds the angles of waves 1 and 3.  Now, that's not a rule violation, but it is definitely rare.  Looking at the pattern drawn by waves 2 and 4, there's really no problem there.  They adhere to the alternation rule, and wave 4 doesn't penetrate wave 1. 

If this count is correct, then we likely reached the top of this 5-wave impulse on 23 November.  That would put us into the A-B-C corrective pattern now, and that pattern has yet to fully develop.  Is the red count the correct one?  Possibly.  Let's look at the green count for comparison purposes.

The origin of the green count would be on 6 July 2016, and marked with the green "O."  Waves 1, 2, and 3 look pretty straightforward, and none of the subwaves violate any of the rules or even the guidelines.  We (so far) have good alternation between waves 2 and 4, although it's more common for wave 4 to be the steep retracement, not wave 2.  The steep acceleration seen in wave 3 is very common for that wave, so that's consistent with the overall pattern as well.  The shape of wave 1 is more consistent with the shape of an impulse where, whereas the shape of the red-labeled 1 is more consistent with the shape of a corrective wave.

If we were only considering the price chart, I would be inclined to consider the green wave count to be the correct count.  Chart analysis, however, is much more than just the patterns produced by price alone.  With these two wave counts in mind, let's turn our attention to volume.

Look at the three areas I've highlighted in orange.  Demand is certainly abundantly present.  Those black volume bars tower over their neighbors, and far exceed the 50 period volume moving average.  The only troubling sign is that each subsequent set of spikes is lower than the previous set.  Demand is starting to wane - a sure sign that this stock is running out of gas.

This is confirmed at the bottom of the chart where I saw the 9-period RSI.  The RSI is the "relative strength index" developed by Welles Wilder, and - without going into the actual formula - it measures the relative amount of gains vs the losses in the specified period.  There are several ways of using the oscillator in technical analysis, and one of the most reliable methods is to detect divergence between the RSI and the stock price. 

A bullish divergence would occur if stock prices were tracing lower highs but the RSI was tracing higher highs.  Conversely, a bearish divergence would occur if the stock prices were tracing higher highs but the RSI was tracing lower highs.  That, in fact, is what we see on our chart.  I mark the comparison highs with a vertical black dotted line, and you can clearly see that the RSI is tracing a bearish divergence.  This divergence is another major indication that the stock is running out of steam, and a breakout to the downside may soon follow.

The last three candles are troubling, as well.  2 December saw a long red candle on volume that was higher than the 50-period average.  That, coming off the new high of the day before, is a bearish reversal candle.  It was followed immediately by an inside day where the stock closed below its open.  Today it traced a hanging man candle - another bearish indication when this pattern appears at the top of an uptrend.

When we take volume, the RSI bearish divergence, and the current candle patterns into consideration, I'm inclined to believe that the red count is the correct count.  It's still not certain, of course, but all indications are that this stock is due for a bearish reversal.  Before we start to analyze potential price targets to the downside, I'd much prefer to see an indication that the reversal is in progress.  A quick glance at the chart, however, shows a very attractive target between 21.73 and 22.07, bounded by a strong support line at the base of the last major upthrust and the 38.2% retracement of the overall pattern.  We have yet to move in that direction, of course, but the warning signs are clear that this stock's upward run may be nearing its end.  I'll be avoiding long positions in this stock for the time being.

Happy Trading.

Stalking A Trade: Patience Is a Virtue

Almost two weeks ago, we discussed a bull pennant pattern setup drawn by General Electric (NYSE: GE).  A pennant breakout occurred twice in the last two weeks, however neither of them were solid trade setups.  Let's take a look at the chart as of this morning and review why we are still stalking this trade as opposed to holding on to an open position.

GE Daily Chart
The initial post called attention to the bull pennant following the close above that pennant on 22 November 2016.  Notice the caution flag, though.  I pointed out that the breakout occurred on low volume.  When trading any breakout, it's important to confirm that there's true conviction behind the move.  Flag and Pennant breakouts have been popularized in numerous publications, and as a result, market makers will often take advantage of the pattern by targeting the entry stops that they know will exist in large numbers.  What you see in that case are a lot of traders getting trapped by an entry at the right spot at the wrong time, only to have the stock pull back into the original pattern.

The sign to watch is volume.  A breakout on low volume significantly reduces the probability of a successful trade and is a warning sign that you're falling into either a bull or bear trap depending on the breakout direction.  We see that clearly in the week following 22 November.  A couple of lackluster narrow range days on equally low volume followed, and the stock then dropped back into the bottom of the pattern.

But what about that second breakout on 1 December?  That was a nice, strong move to the upside, and look at the volume!  Sure that confirms the move, right?  Well, not so fast.  There was, indeed, high volume that should be the confirmation we're awaiting, however two warning flags kept us out of this move, as well.  The first warning flag was the rising volume on the two days preceding this breakout.  Both of those were down moves with confirming volume.  Why is supply coming into this stock, now? The second warning flag is that horizontal resistance level at 31.50.  Not only did it form an extremely strong and persistent level of resistance in that tight horizontal move from 5 August to 2 September, but the level held firm again when tested four times between 25 November and 5 December. 

That the resistance level sits close to the 61.8% retracement level of the overall pattern is a bit of a warning sign in and of itself.  That it has held firm now for four months is a major warning sign.  It will take some conviction to break through that barrier, and thus far we haven't seen it.

This is why we stalk a trade and seek multiple confirming signals before committing capital to a position.  As swing traders, we know that we're not going to catch the precise top or precise bottom of a move.  Many novice swing traders attempt to do just that, but in reality, it's the quickest path to draining an account that you can find.  Well, maybe the second quickest.  Not having a solid risk management plan with a well-documented exit strategy for a trade is likely quicker.  Either way, we know we're trading the middle of moves, not the full range.  So, in reality, when you factor in slippage, commissions, and actual entry and exit points, there has not been much profit potential for the retail swing trader between the top of that pennant and that overhead resistance line.  Before we commit capital, we need more confirming data points that a move is genuine.

So what are we waiting for here?  Well, a volume-confirmed break of that resistance line would be good.  From a Wyckoffian cause and effect perspective, that resistance line has build up a significant amount of cause.  The move off that line, therefore, can reasonably be expected to produce significant effect.  In fact, point and figure charts (not shown here) point to potential upside targets in the 34 to 38 range.  The time period for such a move would be well outside our swing-trade time horizon, of course, but you see the point.  A significant amount of cause is being built, and that normally results in a significant effect (i.e. price move.)

The point of all this is that we need to seek multiple confirming signals to increase the probabilities of a successful trade.  Pattern breakouts are but one signal.  Volume patterns are a second.  Support and Resistance Lines are a third.  Fibonacci retracement levels are a fourth.  Any combination of those converging in the next greater or next lower time period (e.g. a weekly or hourly chart if we're trading off the daily) would add a fifth.  The more confirming signals we have, the higher the probability of success.  At a minimum, we would like to see two signals, but if we're going to commit to a full position size, we would prefer to see three or four confirming signals.

Such a conservative strategy means missing some opportunities, of course.  Our objective, however, is not to capture every opportunity.  Rather, our objective is first and foremost to protect our capital.  That means managing risk properly, and only committing that capital when the probabilities strongly favor a successful outcome.  Stalk your trade, and display patience before committing capital to a position.  Leave it to others to fall victim to bear and bull traps by attempting to capture every move out of a widely known and well publicized pattern.  Instead, patiently enter after the weak hands have been shaken out of the market, and ride the wave generated by the market makers taking their own positions to the target profit level.  Trade with the market makers, not against them.

Happy Trading.

Monday, December 05, 2016

Watching EVHC For Direction Post-Merger

Envision Healthcare Holdings (NYSE: EVHC) and AMSURG completed their merger on 1 December 2016.  The merged entity continues to trade under the EVHC symbol and retains the Envision brand name.  Not surprisingly, the day of the merger generated exceptionally high volume but resulted in a bearish candle in the middle of a consolidation zone that has persisted since mid-August.  We're now watching this stock to see which way it will break now that the specter of the merger itself is behind them.

EVHC Daily Chart
What's interesting, however, are the two daily candles that followed the actual merger.  Both were high range, although the candle on 2 December was one of the longest on the chart.  Interestingly, while it had a large body, the upper and lower shadows were nearly equal in size and, in their entirety, provided some excellent guidance as to the location of support and resistance for the new pattern.

Today's candle was even more telling.  What appeared to be a strong bullish candle at the top, we closed the day after tracing an inverted hammer.  The upper shadow ran into heavy resistance as it penetrated the consolidation zone that ran from March through July 2016, and quickly retreated below the overall high/low 50% retracement level.

Both candles were on higher than average volume, but on the whole the volume was not consistent with the overall size of the candles.  Today's volume, in fact, was higher than yesterday's, giving added strength to the inverted hammer signal.

The synergies and efficiencies of the two merged companies are still a big unknown, and I think we're seeing that in the two post-merger trading days.  We'll be watching this stock for some sign that it will ultimately form an impulse in either direction.  It's entirely possible that the prior consolidation period was used for accumulation by the larger operators, but thus far we haven't seen convincing evidence that they're ready to start a campaign to the upside just yet.

Given the inverted hammer coupled with today's volume signature, we're watching for a play to the short side with a potential pullback target of that dotted red line that forms a convincing diagonal support line.  That yesterday's candle bounced off it did not escape notice, however today's pattern implies that there's possibly one more test of that line to come.

That, in fact, is the way we plan to play this stock.  If we get confirmation of a downward move, we'll play a short position targeting that support line to exit the trade.  What we're really looking for, however, is a retest of that support line.  We'll take a long position there and look for a target at least to the 61.8% full pattern retracement level.  That point looks to be the next resistance test level and it would be a good target to exit a long trade.  A bounce off support will be the lower risk trade of the two, and we'll size our positions and stops accordingly.

This is definitely a stock to add to your watch list.  The wide-range consolidation zones offer excellent swing trading opportunities themselves, and this stock has the potential to move sharply once it begins an impulse wave in earnest.  Keep an eye on the volume activity as well as the breakout levels for a signal as to when this will be a good play to either side.

Happy Trading.

Sunday, December 04, 2016

What To Watch As IDTI Lines Up For Next Move

As I've mentioned previously, one of my favorite setups is a long lower shadow (preferably a hammer) following a down trend, or a long upper shadow (preferably an inverted hammer) following an up trend.  When found at the potential top or bottom of a trend, both of those candles signal a potential trend reversal if they are accompanied by high volume.  When volume does not confirm the pattern, however, a much deeper analysis may be needed to determine what is truly happening with the stock.

Integrated Device Technology, Inc. (Nasdaq: IDTI) appeared on my scans this morning, and it prevents a fascinating study with multiple options setting up over the next week.  We'll add this stock to the watch list and keep an eye on it since the setup for the next move has only started to develop.  Let's take a look at the daily chart to see what it can tell us.

IDTI Daily Chart
We can immediately see that, following a major gap down on 2 February 2016, the stock traded sideways for the remainder of the year.  The gap was closed several times however no upward breakout was sustainable.  The major pivot point, interestingly enough, is the 50% retracement from the pattern established with the 3 December 2015 high and the 11 February 2016 low.  Thus far, attempts to push above that 50% retracement have been brief and unsustainable.  Thus far.

With that in mind, let's look at the two major setups that we see, one forecasting a move to the downside and the other a move to the upside.

Setup One - Flag Development with Downside Break.

Could we possibly ask for a better flagpole setup than we have starting with the high of 25 November to the low of 2 December?  The low ended with a long-shadow candle, but on lower than average volume.  It wasn't quite a hammer - the wick is a bit too long for me to call it a hammer - but the implications of the long shadow remain the same. 

Remember that pivot point at the 50% retracement?  Well, that's precisely where we sit right now.  Two consecutive long down candles on high volume pushed us back below that 50% level, but unlike the three prior tests of that major support/resistance line, we've immediately retested it with a bullish candle pattern with a long shadow.  That long shadow indicates demand coming into play at the low.

Another major significant pattern to note is that the 2 December retest starts at the bottom of a significant congestion range that ran from 1 November to 11 November.  The bottom of that range was formed with a gap up on 1 November, and it has thus far proven to be a significant line of support.

What we are watching for now is the strength of signals over the next week.  There is a very good possibility that we will trade in another tight horizontal consolidation range bounded by the two thick purple lines drawn on the chart.  Coupled with the flagpole that ended on 2 December, that would create a classic bearish flag pattern.  Given the height of the pole, I'd really like to see at least 4 bars in the flag, and no more than 7 for it to remain a valid pattern.

A downward break following a 4 to 7 day consolidation would set a price target of between 18.69 (the 76.4% extension of the flag pole) and 17.59 (the 100% extension of the flag pole.)  Notice that the 18.69 target sits right smack on top of a support line also created by a brief consolidation period from 3 to 12 August.  If we do break to the downside, that's the likely destination for price.

Watch for this pattern to develop, however it's important not to jump the gun on a trade to the short side.  For this setup to be valid, we need to see that 4 to 7 day congestion period for the flag followed by the break to the downside on high volume.  Don't ignore the volume.  We need it for confirmation of the break to differentiate between a legitimate move and a potential bear trap.

Setup Two - Mirrored Pattern Development with Upside Break.

Traders are creatures of habit, and, at least in the short term, patterns have an uncanny habit of repeating themselves.  There's a high potential for this happening with IDTI.  Take a look at the two areas I've highlighted in the light orange rectangles.  Do you see any similarities between them?  Both cover roughly the same range in roughly the same amount of time.  Both volume signatures are uncannily similar.  Both end in a long shadow candle, although the 2 December candle is a bit more bullish with a close above the open.  The two patterns certainly do have the same look and feel to them.

In fact, you can even walk back further in the chart to the prior wave and see roughly the same setup.  The difference in that wave is that much of the downward move was covered in a single gap down, and the volume signature was much higher. Despite those subtle differences, we're seeing essentially the same move.

Now let's consider the three waves that have tops on 27 July, 5 October, and 25 November.  What we can clearly see here is a succession of higher highs, accompanied by higher lows (3 August, 13 October, and if it holds, 2 December.)  In fact, when you start with the 52-week low of 2 February, there is a crystal clear up channel formed with three significant touches of the bottom of the channel.

What we are watching for in this setup is a break above the upper congestion line marked in purple.  We expect volume to confirm the size of the candle that creates the break, however we are not expecting high volume on that break.  An upward break would suggest a continuation of the bullish channel, and that would setup a longer-term play to the upside.  Based on the two prior bullish moves, we should anticipate a two step move, not one.  A seven-to-ten day consolidation period at the mid-point of the move has been the norm, so plan for it.  Either decide to ride it out, or take profits and then re-enter when the move resumes.  Either option works.  (A third option is to take partial profits and let the remainder of the position ride it out.)

If this setup materializes, our price target is between 26.61 and 28.13 marking the 76.4% and 100% lengths respectively of the previous wave.  Excellent risk management, however, is needed since the top of the current wave sits right at the 61.8% extension of the previous wave.  That will be a major resistance level and could well be the source of the anticipated consolidation period.

So there you have it.  Two potential plays coming out of the current pattern.  Let's not anticipate one or the other.  Rather, let the market play out and let's ride the setup that materializes.

Happy Trading.

Saturday, December 03, 2016

PTC In Strong Bull Channel Showing Signs of Distribution

When Parametric Technology Corporation (Nasdaq: PTC) missed earnings by $0.10 per share, and missed revenue estimates by $8.79 million, one would reasonably expect a downturn in stock price, or at least a lengthy consolidation period while the new data were processed and factored into future estimates.  Instead, the response was, "Damn the torpedoes; full speed ahead," albeit on higher volume and increased daily ranges.

PTC Daily Chart
You will often read that technical analysis is more art than science, and nothing illustrates that better than this chart.  You will notice that the charts I post rarely include the more popular indicators such as a MACD histogram, an RSI(14) oscillator, or a Stochastics oscillator.  The reason is simple.  The more I trade, the less I care about technical indicators and the more I care about only two data elements: price and volume.  Aside from the moving averages you see on this chart - which I do reference to help clarify trend - there are only two technical indicators besides the price and volume bars. 

You'll see an orange line representing "On Balance Volume" overlaying the volume histogram.  Again, it's used (in my case) to help identify volume trend.  Is high (or low) volume an indication of accumulation or distribution?  That's all I care about in that case.

You'll also see the bars extending from the left side of the chart.  That's a "Volume by Price" indicator that depicts the amount of support or resistance has thus far occurred at a specific price level.  It helps identify how strong a particular support or resistance line may be.

That's it.  My trading does not rely on technical indicators, it relies on chart analysis and attempting to decipher what the market specialists are doing so we can trade alongside them, and not opposite them.  My experience has been that trading solely on indicators is one of the easiest ways to lose money, and my personal preference is to do just the opposite.

So let's take a look at PTC and try to decipher what's going on.

This stock appeared on my radar today following the hammer candlestick (circled in green) that closed the stock's trading for the week.  That the hammer followed two wide-range down days is significant, so that meant giving this chart a closer look.

At a casual glance, we can see that the stock underwent a major change of character starting October 24th.  Volume started to increase and the stock declined significantly on increasing range.  It bottomed before the close on the 26th, and this is where we have the first major indication that the smart money has an interest in this stock.

PTC released their earnings after the close on the 26th. That entire three-day decline was in anticipation of the earnings announcement, not as a result of it.  As we stated at the start of this article, PTC missed on both earnings and revenue.  The stock, therefore, should continue heading south when the market opens the next day, right? 

Wrong.  In fact, PTC gapped UP at the open by $2.45!  It then soared upward another $1.50 before finally settling back to close at $45.59, representing a 4.7% gain on the day following a bad earnings announcement.  It then continued to gain for two more days before a three-black-crows candle pattern drove it back to the low traced on the 26th.  But look at the volume on those three days as compared to the actual ranges of the bars.  Now look at the volume on the four up days that followed.  Clearly, the volume is contradicting the move down.

So what happened?  Well, we know that this stock started to climb steadily higher following a low on February 8th.  The move has been steady but daily ranges have been narrow, and the large volume days had come with the stock opening and closing in a tight range.  What this means is that there was heavy institutional buying.  Market specialists were accumulating this stock long before the public became interested in it. 

In fact, as the public started to jump on the bandwagon, what do we see? Two consecutive down-gap days, only one on higher volume, in late June as the specialists move price back to a level at which they prefer to accumulate shares. 

So that brings us to the current situation.  What do we believe is happening?  Well, based on the patterns we're seeing unfold, it appears that those same market specialists are preparing to take their profits.  It's been a nice ride, and the stock has almost doubled in price since the accumulation campaign started.  What we see at the end of October is the first of the tests to see how much demand remains, and as we saw November 4 through 10, there was quite a bit.

November 30 and December 1, the next two down days on significant volume, represent the start of the next test.  Those two days occurred without any negative news, so there was no fundamental reason for the decline.  Rather, it's part of the distribution phase test as the market specialists sell their shares to a public that is very impressed by that lengthy bullish channel that dominated 2016.

Notice the hammer candle that formed yesterday.  The range was very narrow, however volume was above average.  Demand still came into the stock on decent volume and notice that it came in right at the 61.8% retracement level of the last upward move.  Notice, too, that it did not penetrate the 50% retracement level.  Are the large institutions done?  Probably not.  They accumulated shares for 8-months, and it's going to take more than a month to distribute them.  More likely, we're in for a period of consolidation before the next move.

Can this pattern be traded?  In the very short term, yes, but it won't be for the faint of heart.  If price breaks the 50% retracement, there's a good probability that it will bounce back up to the overhead resistance line set by the pattern highs.  Odds that it will penetrate that level diminish rapidly, however.  The caution flag here, though, is that this does appear to be a distribution campaign, so the insiders are counting on the public buying, here.  At some point - it could be next week, it could be next month, or it could be next quarter - the distribution campaign will conclude and the market specialists will cease holding the stock at its current levels.  When this stock finally plummets, that rate of decent will be extreme. 

Should you chose to trade this pattern, be sure to watch the volume signatures as compared to the daily candles.  The combination will offer the best clue as to whether another test of the low will be offered or whether the bottom will fall out swiftly. My preference here is to play the short side, not the long.  We'll wait for the stock to approach the top of the channel pattern - adjusting that channel if it switches to a horizontal pattern - and take short positions on short-term reversal candles with confirming volume signatures.  This way, when the rug is finally pulled, we'll be on the right side of the trade, and not holding a long position as the stock dives past our stops.

Chart reading is very much like detective work.  Look for the clues being offered and attempt to glean what the smart money is attempting to do.  It's more work than simply watching for a cross on an oscillator, but it will improve your capital protection and your risk management significantly.  That, after all, is the key to profitability.  Protect your capital and manage your risk. 

Happy Trading.

Friday, December 02, 2016

Jobs Report Mostly Positive But LFPR and Earnings Decline

The much anticipated November Employment Situation Report was released by the Bureau of Labor Statistics, this morning. The "jobs report" is issued monthly and has a major impact on financial markets worldwide.

This morning's report offered mixed news, however.  The key takeaways are:
  • Unemployment declined to 4.6%. That's below the 4.9% consensus estimate.
  • The Civilian Labor Force Participation Rate declined to 62.7%.  
  • Number of people employed part time for economic reasons is unchanged at 5.7 million.
  • Number of people marginally attached to the labor force increased by 215,000.
  • Number of discouraged workers remains unchanged at 591,000.
  • Total NonFarm Payroll Employment rose by 178,000 versus a 170,000 consensus estimate.
    • Professional and Business Services rose 63,000.
    • Health Care Employment rose 28,000.
    • Construction Employment rose 19,000.
    • Employment in other major industries remains unchanged.
  • The average workweek for all employees was unchanged at 34.4 hours.
  • The average hourly earnings for all employees declined by 3 cents to $25.89.
Despite the drop in Labor Force Participation Rate and the drop in Hourly Earnings, the report was primarily mostly positive.  As we've stated numerous times, we prefer to focus on the LFPR instead of the published Unemployment Rate since the LFPR more accurately reflects the number of Americans currently out of work.

The rise in Professional and Business Services, Health Care, and Construction are marginally encouraging, however the increase of only 178,000 across all industries was well below the whisper numbers circulating yesterday.  Job growth, while gradually increasing in 2016, is still well below the pace needed to sustain GDP growth in the 3% to 4% range.

The average hourly earnings survey did drop by 3 cents for all employees, however it increased by 2 cents for all private sector production and non-supervisory employees.  For the year, hour earnings is still up 2.5%.

What all this indicates is that the US economy continues to grow, however that growth remains slow.  With regards to the FOMC decision in two weeks, this report is unlikely to influence them in either direction, although from a PR perspective, I would not be surprised to see Fed Chair Janet Yellen latch onto the 4.6% number in her post-meeting announcement.  A "5%" target was oft cited in 2015 as part of the criteria used by the Fed in setting interest rate policy.

Since this morning's announcement, the Dow, Nasdaq, and S&P futures have all fallen into negative territory, although not by any significant margin.  The open, today, looks to be flat to slightly down, however there appears to be nothing in the Jobs Report to unnecessarily either spook or excite traders heading into this weekend.

Next up in the major news cycle is the Italy Constitutional Referendum set for this Sunday, followed by next Thursday's ECB meeting.  Keep an eye on both as they have the potential to rock international markets.

Happy Trading.

Thursday, December 01, 2016

AIG Draws Bull Flag In Mid-Elliott Wave 3

American International Group (NYSE: AIG) formed a strong bull flag pattern after tracing sub-wave (iv) in Elliot Wave (3).  The flag follows a 7.35 point surge in six trading sessions.

AIG Daily Chart
A selling climax marked the start of the last upward thrust and the subsequent six trading days that formed the flagpole saw a volume signature that confirms the move.  Since then, the stock has traded in a classic flag pattern on below-to-average volume.

The Elliott Wave count tells an interesting story, as well.  Both wave (1) and wave (3) are comprised of five distinct sub-waves.  Wave (2) was similarly comprised of a classic (a)-(b)-(c) corrective pattern.  Looking at the development of wave (3), we are now in sub-wave (iv), and (iv) completed an a-b-c sub-wave itself.  The next move could be a breakout of the flag pattern into sub-wave (v) to complete wave (3). 

The price target for the flag pattern is 69.51.  This is consistent with Elliott Wave projections of sub-wave (v) with our flag target hitting the 76.4% length of sub-wave (iii.)  Even more enticing is the fact that, once price breaks the top of the flagpole, there's no overhead resistance going back at least 18-months.

AIG reports earnings after the close on 9 February 2017, so there won't be any earnings concerns in our trade horizon.  Be aware, however, that the stock will trade ex-dividend on Tuesday, 6 December 2016.  The dividend is $0.32 and has a pay-date of 22 December.  Historically, dividends have not hurt the performance of the stock post-ex-dividend, however when planning your stops do be aware that 32 cents will be deducted from the stock's price at the open on Tuesday.

Also be aware that there are four news items coming in the next two weeks that may have market impact.  The first is this Sunday (4 December) when Italy votes on a major Constitutional Reform referendum.  Next up is the 8 December ECB (European Central Bank) meeting.  Then, on 14 December, the US FOMC meets and is widely expected to raise interest rates for the first time in 2016.  Amidst all of this financial news is a potential recount of the Presidential Election vote tally in three states.  While that is not likely to change the outcome of the election, it will likely dominate the news heading into the 13 December deadline for declaring each state's electors.  Be aware of the potential volatility any of these items can create.

Here's how we're trading this stock.
  • Based on the chart, we do not foresee a trade to the short side.  That can certainly change, however it's not currently a consideration.
  • If the stock closes above the flag, we will take a long position.  Our target will be 69.51 and our stop will be just below the flag pattern low.
  • If we're still in the stock on 5 December and the pattern still supports maintaining a long position, then we'll take the dividend at the close.
Happy Trading.

Baxter International Signals Start of Next Move

One of my favorite swing-trading scans searches for stocks that draw a hammer candle at a major low or an inverted hammer at a major high.  In the context of Japanese Candlestick charting, a hammer is formed when the open and close are both near the top of the trading range for the period.  The low for the day is significantly below both the open and close, and the high for the day is either at the open or close or it's just barely above them.  When you see the hammer on a chart, it truly looks like a good old-fashioned sledge hammer.  The inverted hammer is the opposite.  Just stand that sledge hammer on its head and you have that pattern.

The significance of the two comes when they are at a major low (for the hammer) or a major high (for the inverted hammer.)  In both cases, they signal a high potential for a trend reversal.  In the case of a hammer, you have a stock that has been trending downward.  After the open, the stock plummets even further, but at that point, demand starts to enter the scene and the stock rises to ultimately close near its daily high.  This often happens when the low encounters a major support line, triggering buy stops for bottom feeders waiting to enter the market.  In the case of the inverted hammer, the opposite behavior occurs.  In both cases, confirmation the following period is essential, and for it to be a good signal, the hammer or inverted hammer should occur on high volume.

Baxter International (NYSE: BAX) appeared on my scans last night, tracing a classic hammer pattern on high volume at what appears to be the bottom of an Elliott "C" wave in an A-B-C corrective pattern.

BAX Daily Chart
Here is a chart where the theories of both Elliott and Wyckoff work hand-in hand.  From an Elliott Wave perspective, I show two possible wave counts.  The Fibonacci retracement levels drawn from the count represented in green line up perfectly, in fact, and that's the count that appears to be the more accurate interpretation. 

The most striking characteristic of this chart is the huge volume signature that dominates May, 2016.  From a Wyckoffian perspective, this would indicate a major change in character and would signal the start of the distribution phase in which market insiders begin a lengthy campaign to sell the shares they purchased at wholesale prices during an extended period of accumulation.  The objective of the market insiders at this point is to hold prices in a tight horizontal range while they sell off their shares over time.  This, in fact, is what we see from the chart.  After that climax marked by the top of Elliott Wave 3, we see a somewhat lackluster fifth wave, followed by a very controlled A-B-C flat corrective pattern.  Notice the nice upward push on high volume just after Wave A completed as the market makers needed to push the stock back up to levels where they wanted to sell.

This brings us to our current analysis and yesterday's hammer candle at what may be the end of Wave C.  Notice that the low of the hammer rests on the 38.2% retracement of the entire pattern.  That's a very convenient support level and the volume signature suggests demand came into play at that point, pushing the stock back up fairly close to its open.  As signals go, it would be stronger if the close were above the open, however the lower close does not invalidate the hammer.

What we don't know, at this point, is which way this stock will trade following the completion of Wave C.  There are three possibilities.  The stock could enter a complex correction pattern tracing another A-B-C wave cycle or an X-A-B-C cycle.  In either case, the direction of travel from here is up.  Or, a new Wave 1 pattern in a 5-wave impulse could initiate, driving the stock higher.  Similarly, a new Wave 1 pattern could initiate driving the stock lower.  The hammer suggests that this is the least likely of the scenarios, but again, we need confirmation.  Today's candle will provide tremendous clues as to where this stock is headed.

When looking at the chart, it's hard to miss the curve of that 200-day moving average.  On July 1, 2015, Baxter spun-off Baxalta which resulted in a major distribution to shareholders.  This positive event had a negative impact on some of the technical indicators such as the 200-day MA that still have a look-back to that time period.  In this case, it's best to ignore the 200-day as it's meaningless following that spin-off.

So here's how we plan to play this stock:
  • We will monitor the candle patterns for the next couple of days to determine if Wave C has truly ended.  We will also be looking for confirmation that the hammer signal is valid.
  • If the hammer is valid and we close above the hammer, we will take a long position.  Our price target will be 48.70, marked by the overhead resistance level shown in a blue dotted line.  If we are into an X, A, or 1 wave, then that is the most likely short-term target.
  • If the hammer is invalidated and we subsequently close below the low of the hammer, then we'll stay on the sidelines.  There's a major support line only two points below the low of the hammer, and that does not provide enough reward for a trade to the short side.
This will be an interesting pattern to watch.  There are numerous upside plays here, and overall the company has been performing extremely well.  They've a very long history - several years, in fact - of consistently beating earnings and revenue estimates.  They have a new drug - Prismocitrate 18 - entering Phase 3 Clinical Trials with 160 ICU patients in the US and Canada participating, and they are one of the primary renal care providers in the nation.  All things considered, there is more to the upside than downside with this stock.

Happy Trading.