|CE Daily Chart|
More telling is the volume accompanying the flag itself. Notice the lack of supply accompanying the minor declines in price into the 23.6% retracement level. That level may serve as support for the flag, although there's a better support level hovering at the 61.8% retracement level. From an Elliott wave perspective, there are two potential wave counts from the current pattern. In the first situation, it's possible that a 5-wave impulse has completed and we're now into an "A" wave retracement, although the shallowness of the retracement currently rules out that interpretation. If it is, however, then a 61.8% retracement would be the norm. On the other hand, this could be an extended wave "1" formation, in which case we're in sub-wave "iv" of that impulse. If that's the case, then a shallower retracement to 38.2% is more likely, and it's the one currently supported by the last week's candles.
Which count is correct, once the stock resumes an upward move, is irrelevant from the swing trade perspective. Either way, the next wave will be an upward wave, and that's the wave on which we intend to capitalize. What does matter, however, is the potential profit, and our initial analysis is focused on that bull flag. The pole length is 7.15, and we'll use the 76.4% value (5.46) to estimate our profit from the breakout point. Currently, that would be 84.06, although the longer the flag takes to break, the lower that target will be. No matter, the profit potential remains the same.
Now, everything's not rosy on the daily chart. Look at the last three major upthrusts on this chart. All three of them have traced pretty much the same length, and all three have pretty much the same slope. The prior two ended with a consolidation period that looks suspiciously like the consolidation we've seen in the last week. Now, the reason we have cause to believe that this one may be different and may be the start of a new major bullish impulse is that the flagpole started with a breakout over a major resistance level formed by three separate peaks and a horizontal channel. The pole also did so on very high volume, so there was a lot of institutional support for this surge. The volume pattern implies this one is different.
The weekly chart, however, also urges caution. Let's look at it.
|CE Weekly Chart|
The base of the channel is clearly defined, and that represents the lowest level of support for long-term investors. The upper bounds of the channel, however, are a bit more ambiguous. The uppermost line connects the two highest spikes, and if our daily scenario plays out, that will likely be the upper resistance level that will constrain our trades. The middle line represents the initial upper boundaries of the channel, and you can see that a breach of that boundary is quickly followed by a retreat.
Therein rests the concern. We penetrated that boundary three weeks ago, and have remained above it - barely - for two weeks. This warrants scrutiny. If we are truly in the start of a new bullish impulse, then that line will become support. If, however, the price retreats and stays below that line, then our play will be a short through to the bottom of the channel.
The weekly chart provides a long-term view of the trend, and also provides insight into strong support and resistance lines that will impact the daily chart. In this case, the breakout above the three peaks that formed through 2015 and early 2016 is significant. What has yet been seen, however, is if that breakout is a bull trap, if there will be a pullback to test that line, or if we're heading north without pause.
So here's how we intend to play this:
- If we close above the bull flag on higher than average volume, then we will go long. Our stop will be just below the low of the flag and we will adjust that stop daily to first reduce risk and then to eliminate it. Our price target will be 5.46 above the flag top, wherever that happens to be when it's breached.
- If we close below the bull flag on higher than average volume, and the middle channel line on the weekly chart is breached, then we will go short. Our stop will be just above the high of the flag, and our price target will be the bottom of the flagpole at 71.94. Depending on volume patterns, we'll consider taking partial profits at the support line of 72.96.