Monday, July 11, 2016

ALK Signaling Short Near Resistance and 30-day EMA

When a stock is clearly trending, I am primarily a pull-back trader.  There are several pull-backs for which I set my scans:
  • Pull-back to a 10-day Simple Moving Average.  This type allows you to capture a brief pause in stocks that are quite often in an extended Wave 3.  While slightly higher in risk, they also let you catch some excellent moves that other pull-back strategies miss.
  • Pull-back to a 20-day Exponential Moving Average.  The 20-day EMA is an extremely popular line watched by enough technical traders to make this a very consistent entry point.  
  • Pull-back to a 30-day Exponential Moving Average.  This is quite often a decision point for a stock.  If it bounces off the 30-day EMA, you often have a nice move back in the original direction.  If it breaks through and holds, you often have either a consolidation develop or a trend reversal.
  • Pull-back to a resistance line.  While I'm not a fan of breakout strategies (the percentage that form either a bull trap or a bear trap are too high for my taste,) I do like playing bounces off support and resistance.  That's especially true if it's the first touch of that line after the completion of a different pattern or trend.
While running some intra-day scans today, several airline stocks popped up as potential shorts with pull-backs nearing the 30-day EMA and also nearing a major line of resistance.  Alaska Airlines (NYSE: ALK) is one such airline stock giving a "short" signal as it nears both the 30-day EMA and a very strong line of resistance.

ALK signaling short near EMA(30) and strong resistance
There are a number of confirming signals appearing on this chart:
  • There is a double top (not labeled) that formed between December and May.  The neckline was finally broken in June, and we've had a pullback to that neckline.  The price target for that pattern is around $48.  
  • Since late April, the stock has been in a downtrend, and has completed 3 of the 5 impulse waves.
  • Wave 2 was a flat correction, and Wave 4 is a zig-zag with a steep retrace of the prior wave.  In fact, it's at about the 50% retrace level as of today.
  • Waves 2 and 4 show alternation as required by Elliott Wave Theory.
  • The candles over the last two days show a failure to drive the stock higher.  On both days, the stock finished flat with a very long wick above the candle body.  That's a very bearish indicator.
  • There is overhead resistance right above the current level that was a very strong support level for well over a year.  (Remember, support becomes resistance, and vice versa.)
  • The price has stalled between the 20-day EMA and the 30-day EMA.
  • Wave 4 has traced a well-defined A-B-C correction.
  • Price has stalled just after penetrating a bearish trend-line connecting the start of the move with the top of Wave 2.  (Remember, I'm not a breakout trader.)
Because the market has been strong recently, we'll want to see confirmation of the down move before going short.  What I'll be looking for at this point is a clear bearish candle with a close below the open in the bottom 25% of the daily range, coupled with a close back below that bearish trend-line referenced earlier.

There are some cautionary notes to factor into the trade:
  • Wave 3 is shorter than Wave 1.  This forces Wave 5 to be the shortest of the three waves. 
  • ALK releases earnings before the open on Thursday, 7/21.  We'll want to be out of any trades no later than the close on 7/20.
  • While not yet announced, we expect ALK to go ex-dividend around 8/13, paying $0.275 per share.
Since we need confirmation, we don't yet know our entry price.  We do, however, know the target range.  Because of the Wave 3 constraint, we can only target a range of $50.38 (76.4% of Wave 3) to $47.21 (100% of wave 3.)  The greater challenge with this trade, however, will be time.  The rate of movement for this stock at the moment puts us around $54 when we need to exit before earnings.  That will need to be factored into our risk vs reward calculation, and it's why I prefer not to enter a trade within ten days of earnings.  Still, if ALK provides a strong signal tomorrow, I may well take the trade for some very short term action.  It will all depend on tomorrow's candle.  

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