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.

Monday, February 06, 2017

OMC In Descending Triangle on Daily

Omnicron Group, Inc. (NYSE: OMC) attracted my attention with a Zero Line Reversal (ZLR) trigger yesterday followed by a MACD(5,34,5) bullish cross-over today.  That combination suggested movement may be imminent, and therefore the chart was worth a closer look, and indeed, that closer look was certainly warranted. 

OMC Daily Chart
It was the extremely strong move today on very high volume that triggered the cross-over.  The chart pattern, though, is what's intriguing.  Since November, 2016, the stock has formed a descending triangle and today's price action places the close directly on the resistance line. We will watch tomorrow's action closely since we'll either see a breakout of the triangle - a long we would want to trade - or a bearish reversal back into the center of the pattern.

With horizontal support and resistance straddling today's long candle, a potential trade in either direction is likely early this week.  Normally, a descending triangle tends to break to the downside, and the fact that we entered this triangle from the bottom increases those odds, but when we look at the weekly and monthly charts, we'll see that the intermediate and longer term patterns favor just the opposite.

OMC Monthly Chart
The Elliott Wave count on the monthly chart shows an impulse pattern that started back in the early 1990s.  After trading sideways for just over a decade, Wave-III began after the Financial Crisis and is currently in it's 5th sub-wave.  Remember, third waves extend frequently, so we can't assume this is the last sub-wave before another correction.

The monthly pattern is riding the rails along the resistance line in a channel that dates back to 2009. Not surprisingly, if Wave-III is truly approaching its terminus, the RSI(9) oscillator is showing a bearish divergence.  Still, from a monthly perspective, we're not yet seeing signs of the reversal that will mark the start of Wave-IV, although all of the Elliott Wave targets have been satisfied.

OMC Weekly Chart
The bearish divergence is also present on the weekly chart, so the ensuing downtrend may come sooner, rather than later but again, we're not yet seeing signs of the reversal that would mark Wave-III's demise.  What does stand out on the weekly that is not evident on the other charts, though, is an ascending wedge pattern that is rapidly nearing its apex.  An ascending wedge is a bearish pattern that typically breaks to the downside.  The Elliott Wave count on the weekly suggests we still have three waves remaining, however that wedge looks like it will force a decision within the next few weeks. 

The current direction on the weekly, however, is up, not down, and that's what we truly needed to learn from the two longer term charts.

We already alluded to how we plan to trade this stock.  We'll take a long position on a breakout to the upside - something which is poised to occur in the next day or two.  Our protective stop will be just below the triangle support line and our price target will be just above $92.  If, however, we get a bearish reversal, tomorrow, we'll hold off entering any positions until we get a subsequent break either above or below the triangle.  It's the triangle pattern we're looking to play in this stock, so let it show us which way it wants to run.

Happy Trading.

Sunday, February 05, 2017

NI Forms Horizontal Wave-B Channel

Frequently, the first major warning sign of an impending breakdown in a specific stock comes from the volume signature, to see the full picture we typically need to step back to either the weekly or the monthly chart.  Often the daily noise masks what's really occurring and only on the longer time frame charts will it clearly manifest.  That is certainly the case for Nisource, Inc. (NYSE: NI).

NI Monthly Chart
Looking first at the monthly, we see a very strong 5-wave impulse leading to a Wave-I top in July 2016.  Traders watching the volume patterns, though, were warned of the impending top as early as September, 2015.  Any interest at all in the stock fell off the cliff right at the end of Wave-4, and it's been flat ever since.  This will become even more evident when we examine the weekly chart, but for now, just be aware that the first warning signs started there.

The RSI(9) suggests that the decline is not yet over.  When we compare the price lows of Wave-A and Wave-4 with the corresponding RSI level, we see a distinct bearish divergence.  This strongly suggests that the correction currently in flight will have a relatively lengthy run.  The MACD(5,34.5) would agree, having rolled over into a bearish crossover just after the Wave-5 top.  The shape of that crossover is one that suggests it has a lengthy run ahead of it.

NI Weekly Chart
We'll turn now to the weekly chart.  You can see change in volume signature here, as well, and you can also get a much better feel for just how long that disinterest has persisted.  The entire 5th wave was accompanied by lackluster volume.  Encouragingly, though, the subsequent correction is also generating very little interest. 

The bearish divergence in the RSI is evident on the weekly chart as well, again confirming the conclusion that the correction has a ways to go.  Of interest, however, is the bullish crossover in the MACD.  That's a good indication that Wave-A did end where we suspected, and that we're now into the Wave-B pullback.  The MACD has been a good indication of major wave initiation, so watch for a bearish crossover to signal the start of Wave-C.

The bottom of Wave-A retraced 50% of Wave-5, so it's likely that Wave-C will take us at least to the 61.8% level or lower.  That 61.8% line sits just above a good support line that marks the Wave-i top, so we'll be watching for signs of a MACD bullish crossover around that level.  Of course, we won't know at the time if that's a Wave-III start or a Wave-X start, but either way it will be a tradeable up-wave.

NI Daily Chart
We come at last to the daily chart.  When this first popped up on our scans, this weekend, it looked like it had potential for an imminent trade setup.  Our analysis, however, shows that not to be the case.  The Elliott Wave count is both consistent and defensible.  I did wonder if the lengthy channel we're not exploring could be a wave iv in the current Wave-A, but I really can't find a legitimate count that would produce that result.  So the conclusion I do reach is that Wave-A ended in November and we're well into a flat Wave-B corrective pattern.

The next major direction we can anticipate is a Wave-C move that should be to the down side.  I hesitate playing anything to the upside in this stock unless we see a sudden change in the volume signature that would indicate demand is once again coming into dominance.  What I'm watching is the intersection of the current channel with that diagonal resistance line.  There will be some downward pressure as we approach that convergence, but until then, there's nothing setting up that draws our interest.  We need Wave-C to initiate to find a good reward to risk play, so we'll exercise patience and await that development.

Happy Trading.

Saturday, February 04, 2017

MS Breakout on Daily and Weekly Charts

Financial stocks received another boost this week with definitive signs coming out of Washington that some of the regulations imposed by Dodd-Frank will be brought back under control.  Between the promise of higher interest rates and the indication that financial regulations will be loosened, the climate continues to support growth for the top financial industry firms. 

The regulatory impact is not trivial.  In 2014 alone, the top six banks in the US spent over $70 Billion on regulatory compliance (Pymnts.com: Regulations, Regulators And The High Cost Of Banking Compliance) and that number continues to grow.  Indeed, unchecked regulations are the greatest risk faced by top financial firms in 2017.  Attempting to unravel the ridiculously complex 22,000 page Dodd-Frank fiasco is a major step in the right direction.

The executive action taken this week by President Trump to target excessive and complex financial regulations (NY Times: Trump Moves to Roll Back Obama-Era Financial Regulations) was well received in the industry, and it's against that backdrop that we begin our analysis of Morgan Stanley (NYSE: MS)

MS Monthly Chart
The monthly chart for MS shows just how much the financial industry has suffered since the peak in early 2000.  The post-9/11 recession took its toll, and the financial crisis in 2008 sent most of the top names in the industry into penny-stock territory.  The recovery from those basement level prices continues to be slow.  For MS, they also come with a few warning signs. 

Notice the lengthy descending triangle pattern forming on the monthly chart.  Now, that pattern will likely take several more years to run its course, but it does not bode well for any truly long-term investments.  Even the current up-trend is at risk since price is now trading on the resistance line while volume and range are decreasing.  The likelihood of a pullback on the monthly is high.

The RSI(9) oscillator on the monthly chart would agree.  Comparing the highs in mid-2015 to the high traced over the prior month, we see a bearish divergence forming in the RSI.  This, again, signals longer term weakness that will ultimately initiate a pullback.

MS Weekly Chart
The weekly chart, which gives us a more intermediate-term picture, is a bit more optimistic.  From an Elliott Wave perspective, Waves-I and II are complete and Wave-III is in progress.  Now, there are two possible counts for the current wave, and in retrospect (after annotating the daily chart) I really should have gone back to the weekly to show the alternate count.  Rather than Wave-1 completing in November, 2016, it would appear Wave-1 completed in August and Wave-3 completed in November.  That does make a difference, since it leaves only one wave remaining to complete the impulse, although it's entirely possible for Wave-5 to extend one or more times.

The RSI(9) oscillator shows continued strength through the entire move, although that strength is starting to wane as the horizontal consolidation runs its course.  This consolidation on the weekly takes on the appearance of a bull flag, however, with the near vertical weekly move that started the week of 7 November.  The price target for that flag would be $49.60, marking the 61.8% extension of the flagpole.  Note that the target falls just shy of the conservative price target for Wave-5, which is $50.85. 

The weekly close on Friday marks a breakout from that consolidation flag pattern. It comes, on the weekly, however, following a bearish cross-over of the MACD(5,34,5) momentum indicator. The strength of the breakout, therefore, needs to be treated with caution.

MS Daily Chart
So this brings us to the daily chart and our short-term swing-trade strategy for MS.  As on the weekly, we see the breakout from the two-month horizontal consolidation pattern.  (Notice that it hardly resembles a flag at this level, however, and we would not trade it as such for a swing-trade.)  Volume was very strong on the breakout day, adding confirmation to the breakout.

On Balance Volume continues to rise as it did throughout the horizontal consolidation, providing clues that the stock is under accumulation.  That's not surprising, given the prospects for the financial sector as a whole as we discussed earlier. 

The Elliott Wave count shows wave-4 at or near completion. One aspect of the count that troubles me, however, is that waves 2 and 4 do not appear to alternate.  Well, 4 is much choppier than 2, however for alternation we typically see one of the waves cutting a deep pullback while the other is shallow.  That's not the case here, so there is the potential for a pullback before Wave-5 begins in earnest.  Be aware of the possibility and plan accordingly.

Looking at the MACD, we see a Zero Line Reversal followed immediately by a bullish crossover.  Both of these are very strong bullish signals in the context of the current chart.  The RSI(9) is confirming price action and displaying no signs of a divergence either way.

With this in mind, our trading strategy for MS is as follows.  We'll play the breakout that occurred on Friday, and take a long position just above the high of Friday's candle.  We'll place a protective stop just below the low of Friday's candle which coincides with the middle of the horizontal channel.  (If we trade that deep into the channel, it negates the breakout signal, and we will want out of the trade immediately.)  Our price target will be $49.59, the target set by the weekly chart's bull flag.  As always, we'll exit the trade immediately if price action appears to turn against us. 

Happy Trading.