GE showed up on my radar a bit late, so a potential good trade opportunity was missed. Despite that, it still provides a good lesson in items to watch when analyzing a chart for a short term swing trade.
|GE Daily Chart|
For openers, we can see that there has been a considerable amount of overlap in trend patterns on this chart going back to the beginning of the year. By definition, when there's overlap of multiple waves, then we are in a consolidation pattern, not an impulse pattern. So let's keep that in mind.
We can see that the pattern leading down to the flagpole was a 5-wave pattern. Now, a case could certainly be argued that the two waves prior to that could have been an "A" and "B" wave, which would make the prior wave a "C". This means we are now in one of three possible waves - an "X", a new "A", or the start of a new impulse wave, making this Wave (1). For the moment, it's irrelevant since all three of those tend to be 5-subwave patterns. For the purposes of this analysis, we can treat them equally.
An area of concern on the chart coincides with where our stock is trading right now. Look at that month-long consolidation period, and look at the strength of the Volume at Price indicator at that level. We can anticipate a period of consolidation here before the stock decides to either continue its upward climb or retrace back to the start of the flagpole.
Another warning sign comes on the breakout itself. Volume was extremely light, so there wasn't a lot of enthusiasm for the upward push. The day after the breakout, there was a very narrow bar, again on light volume. I'm not seeing a lot of demand driving the price upward.
Thus far, GE has retraced 61.8% of the prior wave, which again forms a natural resistance zone, and there is also horizontal resistance waiting for us at the 76.4% level. That level corresponds to a failed retest of the prior day's high on April 1, 2016.
Our price target lines up very well with the 52-week high that actually precipitated the stock's decline on July 20th. That increases our confidence that our target is a good level to either exit the stock completely, or to at least take partial profits and tighten the stops.
So here's how we're watching this stock and potentially playing it. Today is an early close, and volume will be extremely light. I won't be entering any position today. My normal trading window is from about 10:15 to 15:30 Eastern Time. This avoids the extreme volatility of the open and the close and helps prevent entry at a time where market makers are gunning for stops and limits. It also allows us to see where the market makers are positioning themselves since we want to be on the same side of the trade as they are. So with a 13:00 close today, I'm sitting this one out.
I'll be watching that resistance line carefully. If we see penetration of that line with some gusto, then we'll hop into a long position. Stops, however, will be extremely tight since I expect at least one more retest of that resistance line before we head north towards the price target.
A play to watch is for consolidation at the 76.4% level followed by a retest of the resistance line. If the stock shows a bullish candle pattern on that retest, then that would be the perfect opportunity to jump in, setting a stop just below the low of that resistance pattern. But we need a bit of patience, since it may take another week or so for that pattern to play out.
The dotted horizontal lines are the Fibonacci Time Zones. Zone 0-1 marks the time it took for the flagpole to complete. We're using that as a reference to see just how much enthusiasm there is for an upward thrust, and we're also using it to gauge the width of any subsequent consolidation periods.
There are no earnings announcements on the horizon, nor is a dividend imminent. We have time to watch this stock play out and to see which pattern ultimately comes into focus. For now, the play is long, however a failure to break through that resistance line could rapidly change that perspective. Keep an eye on this one and see which way it breaks.