Monday, January 28, 2019

Chart Setup and Annotation Methodology

Given the amount of volatility we’ve seen in the market over the past six months, I thought I’d give an overview of how I go about preparing a chart and then reviewing the current setup.  The chart I’m showing: Helmerich & Payne Inc (NYSE: HP) just happened to be one of the charts that popped up on a scan, yesterday.  I don’t have any position in HP at the moment.  Here's the daily chart we will review:

HP Daily Chart

 First, let’s look at the chart setup itself.  I use a daily chart for my primary analysis and only use the weekly chart for support and resistance analysis.  The chart is configured as follows:

•    Candlesticks – I use candlestick analysis very heavily when entering a trade and again to determine if it’s time to exit that trade.
•    Bollinger Band (20,2.0) – This gives me a nice 20-day moving average and also shows consolidation points that often result in a tradable explosive move.
•    50-day Exponential Moving Average.  This is a heavily watched indicator by swing-traders and is a very good bellwether of current trend direction.

The indicators that I use on the chart are as follows:

•    Volume – This is obvious.  Volume is the most important piece of information on a chart besides price itself.

•    I use a 63-day exponential moving average attached to volume.  This tells me whether we have something exceptional happening that may require a closer look.

•    On-Balance Volume – I plot OBV in the same pane as volume.  This is a great indicator that tells us if shares are being accumulated or distributed.  Attached to OBV I plot a 20-day exponential moving average that is used to signal when the trend in volume may be changing.

•    Commodity Channel Index (CCI) – I use a 20-day CCI as a trend indicator.  Readings above 100 indicate a bull trend is in progress and readings below -100 indicate a bear trend.  CCI is a leading indicator and is a powerful signal for trend-following strategies.

•    Relative Strength Index (RSI) – I use a 9-period RSI coupled with a 21-day exponential moving average for measuring momentum and – coupled with the MACD – as an entry indicator.  (Note that I find a 9-period RSI more conducive to early entry in a trend system than the default 14-period.)

•    Moving Average Convergence Divergence (MACD) – I use the MACD(5,34,5) histogram in conjunction with the RSI(9) as my primary entry.  Again, I find the 5,34,5 setting to be much more accurate for short-term trading than the default 12,26,9 setting.  Note that I’m primarily using the histogram, and not crossover signals.

•    Full Stochastic (5,3,3) – I use this as an early warning indicator that a trade entry opportunity may be imminent, and it’s my primary exit “canary in a coalmine” indicator.

•    I also have a 12-period Rate of Change indicator drawn, and I plot the strength of the stock vs the S&P paired with a 20 period EMA of the same.  These two plots show additional information about the relative strength or weakness of the stock, but they are not part of my overall signal strategy.

So now that you know what my charts look like, let’s review the steps taken to annotate the chart before analyzing any setups.

1.    Find the lowest low and the highest high on the chart.  In this case, the low was 31 August 2017 and the high was 9 October 2018.  Draw the Fibonacci levels from the low to the high.  You’ll see them on my chart in grey.

2.    Now find the highest high and lowest low of the current primary trend for the stock.  In this case, the high was on 9 October 2018 and the low of the current primary trend was on 26 December 2018.  Draw the Fibonacci levels from the low to the high.  You’ll see them on my chart in a light orange.

3.    Next, we need to add the horizontal support and resistance lines.  I use the following schema for drawing these lines.  Dotted thin light blue line is a simple (weak) support or resistance line.  Dashed thick light blue is a significant strong support or resistance line.  Dashed thick purple is a significant support or resistance line from the weekly chart.  Don’t forget the weekly support or resistance.  They produce very strong levels on the daily chart.

4.    We should now look for major trendlines.  I use a dashed green line to indicate an upward support trendline, and I use a dashed red line to indicate a downward resistance trendline.  Be sure to extend them to their extremes.  As you can see in February 2018, once the upward support line was broken, it became a major resistance line for the subsequent consolidation period.  Notice that the current trend is down (red,) although on 26 December we started a countertrend rally that entered a small consolidation phase on 10 January 2019.  That countertrend rally is shown with a green support trendline.

5.    Next, I add the Elliott Waves for the current primary trend.  These are indicated in bold black on my chart.

6.    Once we know where we appear to be in the Elliott Wave cycle, we can determine price targets for the next wave.  I show price targets using a Fibonacci extension plot in green.  Notice, in this case, that the 100% extension is just beyond a major weekly support line.  That’s no coincidence, and with this being the 5th wave in the cycle, that weekly support line would be a likely location for price to consolidate for an extended period.

So now that our chart is annotated, we can then look at the setup and determine what signals will tell us to enter or to walk away from the trade entirely.

1.    We see that we are in Wave 4 – a consolidation wave – of a downtrend.  This tells us we likely have one more downward wave to go before the cycle is complete.

2.    Notice the downward resistance trendline and the upward support line of the countertrend rally.  They are rapidly converging.  A break of the support line and/or a bounce off the resistance line will be a powerful signal.

3.    For an early warning indicator, I’m watching both the CCI(20) and the Fast Stochastic (5,3,3).  What will tell me an entry is imminent is if the CCI(20) drops below 0 and the Fast Stochastic(5,3,3) experiences a bearish crossover within a day or two of each other.  That puts me on alert for an entry signal.

4.    My entry signal -- in this case, for a short position - will be a bearish crossover of the RSI(9) and it’s EMA(21) within one day of the MACD(5,34,5) histogram turning negative.

5.    The entry trigger will be pulled if the signal occurs on a bearish candle, preferably with above average volume.

6.    The stop will be placed above the high of Wave 4, and the (imaginary) price target will be the weekly support line near the 100% price target I drew in step 6 above.  I say “imaginary” because we are not going to actually exit the trade with a pre-defined limit at that level.  Rather, we will exit the trade on a bullish reversal candle coupled with the Fast Stochastic (5,3,3) signaling a bullish reversal.

There you have it!  I hope this provides some insight into how I setup my charts, what indicators I use (and how I use them) and how I go about determining trade setups.

Happy Trading!

Monday, February 19, 2018

Cup and Handle Breakout in KFRC with Flag Forming

All systems appear go-for-launch with KForce, Inc. (NASDAQ: KFRC,) the Tampa, FL based temporary and permanent placement agency that released very strong earnings and revenue numbers on Tuesday, 6 February.  While it took a couple of days for the good news to sink in, a vertical move over the last four trading days pushed the stock to a 2-year high and resulted in a breakout of a year-long cup and handle formation on confirming high volume.

Today's analysis will focus on the daily chart.

KFRC Daily Chart
The cup formation in the pattern started on 2 March 2017 with a failed test of a longer term high set on 8 February, just a month earlier.  The round-bottom cup formed over the remainder of 2017, tapering off into a consolidation pattern to end the year.  The handle represented a nice 12% decline off the right lip of the cup.  Of significance, however, is that volume throughout the entire development of the handle was well below the 50-period volume-EMA.  That's a major sign that the decline into correction territory was without conviction and wouldn't be sustainable.

Following the strong earnings release, we can see the 4-day vertical rise that may well be the development of a flagpole.  We'll watch this for the next couple of days to see if the flag or pennant actually does form.  The spinning top candle on Friday, appearing below the 50% mark for the day, suggests that it will.

A closer look at the handle itself shows that we attempted a breakout on 14 Feb, however we retreated to close precisely at the top of the right rim. The actual close occurred the next day, with a very strong bullish candle.  The spinning top on Friday, however, suggests a pause or pullback to, or slightly below, the breakout line.  Given the choice, a second thrust above the breakout level is the one we'd prefer to play.  Just remember that we're not always given that opportunity.

A closer look at the technical indicators shows a lot of confirmation around that handle breakout.  The RSI(9) broke a down-trending resistance line on that same day.  The MACD(5,34,5) confirmed with a bullish crossover.  The JDK RS Ratio continued an upturn above the 100 level, and JDK RS Momentum followed suit. (It's always a good sign when both the RS Ratio and the RS Momentum indicators are showing improvement above 100.)  Finally, the Relative Strength vs the S&P broke a down-trending resistance line as well.

Volume, as we mentioned, was extremely depressed through the handle formation but began its rise heading into the earnings release.  Breakout day and the day following the breakout experienced the highest volume of the entire formation, and the On Balance Volume indicator turned sharply upward to intersect a horizontal resistance level.

For a short-to-intermediate term trade, this is a long stock only.  There's nothing that we are tracking to suggest a potential short play, here. Our strategy now is to watch the next couple of days for either a flag or pennant to develop or, if that doesn't happen, to play a break above Friday's candle if there's a continued move upward on volume above the 50-day volume EMA.  We do expect a pullback before entry, but we also need to be prepared to go long if the pullback doesn't manifest.

The price target for the Cup and Handle will be $34.23.  If a flag develops, then the price target for that flag play will be $3.34 above the level of the breakout.  Either way, the play at the moment is long.

Happy Trading.

SHLX At Long-Term Support in Inverse Cup and Handle

Four consecutive quarters of missed earnings and missed revenue estimates took a major toll on Shell Midstream Partners, LP (NYSE: SHLX).  It looked like a positive report on 3 November 2017 would turn it around, and share price did, indeed, rise at a promising rate.  That, however, was undone by news on 2 February 2018 that the company would issue 25,000,000 common units in a series of public auctions, while also providing the underwriter an option for an additional 3,500,000 common units as part of the overall deal.  Shareholders were decidedly displeased, and the share price plunged 16% in just 3 weeks.

In today's analysis, we're going to examine the weekly chart since that offers an excellent overview of what has happened to this stock and also provides a glimpse into what trading opportunities we may see in the near term.

SHLX Weekly Chart
What attracted my attention to the chart in the first place was a large gap down into support on the daily chart.  That manifested as the long red candle you see here on the weekly, the last week of January 2018.  The pattern itself appears to be forming an inverted cup and handle.  If that's accurate, we're now two weeks into the handle portion.  We would expect this handle to run about 4 or 5 weeks, although that could change depending on the health of the overall market in that same period. 

In marking the weekly chart, though, a second confirming pattern emerged as well.  The support line on which the stock currently rests extends all the way back to September 2015, and it has been tested on five separate occasions.   The series of lower highs extend back to that same time period and the resulting pattern is a descending triangle.  Now, one word of caution is in order regarding that triangle.  There's a bit more white space in the pattern than I really like to see.  Based on that, I wouldn't trade that pattern alone, however there is sufficient other evidence on the chart to overcome that pattern issue.

Volume on the declines is rather pronounced.  That was especially true after the February announcement, but we can also see that the On Balance Volume has been trending negatively since 2015.  Money, it appears, is flowing out of this stock, and not into it.  Now, we do have a word of caution, here, because that volume pattern in conjunction with the price sitting on long-term support for three weeks is also consistent with a selling climax followed by an accumulation pattern.  Be on the lookout for signs of major buying by the larger institutions, since we really don't want to be trapped by one final shake-out before the price is pushed higher.

There is not much insider action on this stock; the last reported transaction was a 500 share sale in September 2017 reported by director Margaret Montana.  That was only 1/8th of her total share holdings, and was largely insignificant.  There are, however, a large number of institutional share holders with a significant number of shares in their portfolios.  If we see major movement towards accumulation, it will come from one of them, and will only be evident through a study of the price and volume action.

Looking at the RSI(9), there are some hints that that may, in fact, occur.  Notice the lows of the RSI(9) each time support was reached, and compare that with the RSI(9) in this current move back to support.  Notice that we don't reach those same levels.  Now, it's not quite pronounced enough for me to declare it definitively as a bullish divergence, but the cautionary message is still quite clear.  The downward thrust may, indeed, be weakening and we may be exhausting the number of sellers willing to dump this stock.

The other indicators we're watching are much more bearish.  The MACD(5,34,5) executed a bearish crossover in conjunction with the February announcement.  The relative strength vs the S&P, which has been dismal for the last couple of years, continues its steady decline and is well below a current resistance level.  The JDK RS Ratio is hooking downward (and is already in under-perform territory) and the JDK RS Momentum indicator is declining.

So, how are we going to play this stock?  Once again, we'll let volume be our guide.  A close below that support line with confirming volume would be a sign to go short.  Now, be careful.  Given the strength of that support line - it's lasted 3 years and been tested at least 5 times, remember - it's highly probable that we'll experience a pull-back to that line.  So, if we do go short, they will be very short-term trades designed to protect profits and exit very quickly.  The potential for a bear trap here is extremely high, and we don't want to be the ones gnawing off our own paws.

If, however, we take out the prior week's highs, again, on convincing volume, we're not opposed to a long position.  The top of that descending triangle will provide major resistance, of course, so we'll be looking to exit as we approach that level. 

SHLX reports earnings before the open on 27 February, and it's not our intent to hold any positions in either direction going into the close on Monday.  The next dividend date isn't until April, so that won't factor into any short term trades for the foreseeable future.

This is a stock to add to the watch list.  There are numerous potential trades setting up in the short term, and looking at the patterns, we may find some low risk opportunities to both the long and the short side over the next few weeks.  As always, watch the volume signature for confirmation when assessing the probabilities.

Happy Trading.

Saturday, February 17, 2018

LYV Flirts with Breakout at 52-Week High

Live Nation Entertainment (NYSE: LYV) spent the last two trading days of the week teasing traders with the potential for a breakout above the 52-week high after spending over two months in a horizontal corrective pattern.  That pattern appears to be a Wave-4 in the longer term cycle that started at the end of 2012.  While a 5th wave has the potential to run 20 points or more, there's sufficient reason to watch for a head-fake before jumping in.

LYV Daily Chart
Friday's doji just barely topped the prior day's close.  While the high did briefly pierce the resistance line marking the top of the channel, it was short-lived and the stock settled for just a three cent gain on the day.  The 5-day run up from the bottom of the channel was impressive (from a candle-pattern perspective) but the volume signature for that entire week was extremely lackluster.  It's not a pattern we'd want to see in anticipation of a breakout.

A similar issue appears in the RSI(9).  That hook at the end of the RSI is a warning sign, and we've yet to see any sign that the RSI is signalling strength.  When we look at the JDK RS-Ratio and Momentum indicators, it's the same story.  RS-Ratio is rising but RS Momentum is weakening.  That's a major cautionary tale in itself.

Notice that the start of the week resulted in a bullish crossover on the MACD(5,34,5) and that crossover was preceded by a resistance breakout of relative strength vs the S&P.  Both of those are positive signals, but they outweigh neither the volume pattern nor the RSI(9) warning.

Longer term, we expect LYV to breakout and produce a nice Wave-5 bullish run.  The short term, however, may be more of a head-fake.  LYV is scheduled to report earnings after the close on Tuesday, 27 February - just over a week away - and the forecasts are not good at all:

LYV Earnings Forecast from NASDAQ
Volume is the key in this week before earnings.  A breakout on week volume is a nice bull trap.  It would be a potential short play, but we'll avoid any long positions one week volume.  The same is true for a downward move on week volume.  If there's no conviction to the move, we'll stay away from it.  What I'll be watching for in the run-up to 27 February is a volume confirmed move that shows which way the major players are trading.

We'll be keeping an eye on the options action as well.  Right now, there's a tremendous amount of open interest in the at-the-money March 16 47 Calls and the out-of-the-money March 16 44 Puts.  We'll be watching closely for a surge in options activity surrounding any volume-confirmed move.

Also be cognizant of the overall market direction.  Following the correction we experienced two weeks ago, we've seen a rebound back to the 61.8% Fibonacci level between the highs and lows of the corrective pattern.  It's likely that the corrective wave is not yet over, so watch for potential weakness over the next week.  I still expect this to be at least a Zig-Zag corrective wave, and if that's true, we'll again retest the bottom of that first corrective drop.  Avoid taking a long position if the market indicates it's again marching towards that corrective low.

As to LYV, add it to your watch-list and be sure volume confirms any move that prompts you to open a position.  It should be a volatile week in the run-up to their earnings announcement.

Happy Trading.

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.