|BK Daily Chart|
Based on our Elliott Wave analysis, Wave 3 has not yet completed. Thus far, we've traced three complete sub-waves and are in the midst of sub-wave (iv). There's still one more upward move coming in Wave 3, and that's the wave we hope to catch.
Two price targets come into play to the upside. First, we have a flag pattern that's been in play for over a week, and that target is 50.36 on an upward breakout. (One caution to note, however, is that the time-duration of the flag is becoming troubling. The proportion of flag to pole is very close to invalidating the pattern. Keep an eye on this if it goes on much longer.)
The second pattern to consider is the Elliott Wave price target. Thus far, Wave 3 has not yet reached the full length of Wave 1. Typically, Wave 3 is the longest of the three impulse waves of the five wave set, although it doesn't have to be by rule. The actual rule states that Wave 3 cannot be the shortest of waves 1, 3, and 5, but it doesn't have to be the longest of the three. Based on that, we set our initial target to the actual length of Wave 1, recognizing that it's possible for Wave 3 to fall short of that without violating the rule. For our flagpole target to be valid, in that case, we need wave 3 to rise 11.85 from the height of Wave 2. A rise of only 10.45 is needed to satisfy that requirement.
Now, our current sub-wave is a bit of a problem since Wave (iii) falls just short of Wave (i). That means that Wave (v) must be shorter than Wave (iii.) Fortunately, the flagpole target is a full 2 points below that level, so a truncated Wave (v) will still be able to hit our price target. Thus far, the pattern we're seeing appears valid on multiple counts.
Let's take a look at some other aspects of the chart to see what they're telling us. Look, for instance, at the bullish channel that formed at through each of the waves as drawn in tan dotted lines. The upper channel line, when extended out to the right, now intersects our flag pattern precisely where we're trading today. That line may well form a support line if the stock breaks to the upside.
The other interesting characteristics we see are the two spinning top candles that formed yesterday and today. (We'll ignore the doji that formed on the day after Thanksgiving since it was a short, low volume trading day.) The spinning tops indicate indecision in this context, meaning this stock can break in either direction. Volume has been consistent throughout the flag pattern, however. We'll have to wait to see which direction the market decides to take this one, although the overall chart increases the probability of an upside break.
Here's how we're playing this one.
- If it breaks to the upside - meaning, it has closed above the flag pattern with confirming volume - we will go long, setting a price target of 50.36. Our stop will initially be below the pattern low.
- We will trail our stop to reduce and then to eliminate risk.
- If the stock breaks to the downside, we will stay on the sidelines. The pattern in general suggests high risk associated with a downside break, so we won't be looking to play a short on this one.