NTRS Forms Bullish Pennant On High Volume Flagpole

Northern Trust Corporation (NASDAQ: NTRS), a Chicago based financial services holding company, formed a well-defined pennant after tracing a strong 4-bar flagpole on high volume.

NTRS Daily Chart

In addition to the classic pennant formation, the current uptrend completed three waves and is currently in the fourth.  Note that, for a short term price analysis, we're looking at the last of the impulse patterns starting on July 6th, not the major impulse that started at the low on February 11th.  The longer term wave is certainly a valid one, however the time horizon for the next wave in that analysis is longer than our preferred holding period.  So, for now, we'll focus only on the shorter wave analysis.

Starting with the flagpole, we will use 76.4% of the height of our pole as the measure for our price target.  Using this standard, the target for our pennant in an upward breakout is 88.71.  If, however, the pattern fails and breaks out to the downside, we will use the first major support line at 75.84 as our target.  Remember, at this point we don't know which way this pattern will break, although the volume signature at present is pointing us towards an upside breakout.

Our Elliott Wave analysis also points towards a fifth wave upward breakout with a target of 90.29.  Now, that target would take about two months to play out and would likely be a five sub-wave pattern itself, so while we're using it to confirm the potential strength of an upward breakout, the time horizon is too long for our preferred holding period of under a week.  Rather, we'll stick to the pennant targets since we can anticipate a swift short-term spike towards either of our targets.

Looking at key dates for this stock, we can ignore earnings within our holding period.  They next report on January 18th and we'll be out of any position long before then.  The other key date, however, does impact the analysis, however.  NTRS goes ex-dividend tomorrow (November 30th) with a $0.38 dividend.  For you dividend players, that means you need to own the stock at the close today, and the pay-date for this dividend is January 1, 2017.  It's important to factor in that dividend in our chart analysis, however, since those 38 cents will be taken off the stock price tomorrow at the open.

Here's how we're playing this stock:

• On a break to the upside, we will go long, setting a price target of 88.71.  Our stop will be just below the low of the pattern.
• On a break to the downside, we will go short, setting a price target of 75.84.  Our stop will be just above the high of the pattern.
• In both cases, "a break" indicates a close either above or below the pattern with volume that confirms the move.
• Also in both cases, we will trail our stops seeking first to reduce and then to eliminate risk.

It's important to watch the volume signature on this breakout.  The flag and pennant patterns are extremely popular, and they are therefore prime targets for market makers seeking to take out entry stops, thus trapping the trader on the wrong side of the intended direction for the stock.  We can see that this stock was marked up rapidly on very high volume over a period of four days.  Equally interesting and important, however, are the two down-days in the pennant. Notice the volume on both days.  (Ignore the volume on 11/25 - that was an early close on the day after Thanksgiving, so it tells us virtually nothing.)  The candles across the pennant have been very consistent in range, as has the volume signature.  Price is being held at this level by the market specialists, although it's too early to tell if this is in preparation for another accumulation phase or a setup for distribution.  We need the breakout to tell us that.  Watch the chart, study the volume, and ride on the coattails of the market makers when the breakout occurs.

Happy Trading.