Saturday, July 09, 2016

DEI Showing 5th Wave Extension During Uptrend

[Disclaimer: Trading examples used here are not recommendations.  They are intended to demonstrate my personal analysis and style of trading.  Always do your own analysis and tailor strategies to your own risk tolerance.]
Douglas Emmett Inc. (NYSE: DEI) has been in a strong uptrend since early February. This REIT holds 48 office properties and 9 multi-family properties in California and Hawaii. It currently returns a 2.47% yield in quarterly dividends, and has been raising dividends consistently year over year.

A quick analysis of the chart shows that the stock is likely in the 5th wave of the current uptrend.  Initial analysis showed a potential Wave 5 top last week, however yesterday's strong action suggests that Wave 5 may actually be extending.

DEI Showing 5th Wave Extension
If so, we have a potential price target for DEI around $37.50.  That's the height of Wave 1, which - when Wave 3 exceeds Wave 1 - is a probable target for Wave 5.  There's an alternate wave count (not shown) for this impulse, however.  It is indeed possible that Wave 5 completed on 7/5/16.  If so, then 7/7/16 would have marked the end of sub-wave (a), and Friday may have marked sub-wave (b).  If that's the case, then our next direction is down, briefly, with a target of about $35.00.  That would actually be a very good entry point, if it plays out, since this stock is showing a lot of potential in an environment in which REITs are currently thriving.

We are not interested in playing the possible Wave 5 extension, despite an attractive target.  If Wave 5 is extending, then we'll wait for it to conclude and play Wave A to the downside.  That has the potential to move a few points in a retrace of Wave 5 and will offer a better reward to risk ratio.

If, however, we do get a move to the downside early this week that takes us back to the $35 range, then we'll definitely play the bounce off Wave (c).  There's a high probability is this environment that the subsequent impulse wave will be upward, at least until there are signs that the Fed is ready to consider interest rate hikes again, and the next Wave 1 has some excellent upward potential.

If you're adding this one to your watch list, here are a few points to consider:
  • DEI reports earnings before the open on August 2nd.  As always, use caution in that period since the trading session immediately following earnings is typically extremely volatile.
  • While not yet announced, we expect DEI to go ex-dividend around September 27th, and we expect it to pay $0.22 per share.
  • DEI has been consistently raising dividends every year, so look for a potential increase to either $0.23 or $0.24 per share in 1Q17.
  • With a dividend yield of 2.47% currently, and given a projection of share price growth, that yield will decline over the remainder of the year.  This means DEI will be very sensitive to interest rates.  If the prospects for a rate hike in 2016 increase, expect that to have negative drag on DEI's share price.
For the moment, I like the pattern developing here, especially with no overhead resistance.  Just be aware that the first area of significant support is down at $31.95, so once the specter of interest rate hikes again rears its head, there is a fair amount of room for the stock to fall before hit hits major support.

Happy trading.

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