Wednesday, November 30, 2016

XLNX Tests Highs in Cup and Handle Pattern

Xilinx Corporation (NASDAQ: XLNX) completed a double top pattern that extended from August to October, meeting the price target for that pattern in mid-October.  The stock is now tracing an imperfect Cup and Handle pattern and is poised to breakout to the upside.

XLNX Daily Chart
That the pattern is imperfect is evidenced by the steep decline following the double top.  That decline constitutes the left side of the cup, and in an ideal pattern that would be a rounded pattern, not a sheer drop.  The right side of the pattern, however, rising from the low, does form a nice arching bowl, complete with a well-defined handle.

The top of the handle formed at a very strong resistance line, marked with a dotted tan line on the chart.  Yesterday's session signaled a test of that resistance, with a very strong candle on high volume.  The setup has potential of an imminent breakout with a price target of 57.39 for the overall pattern.  There is some overhead resistance at the top of the double top as well as at the 52-week high, so be careful in the early stages of the breakout.  That setup could just as easily produce a triple-top bull trap, so proper risk management is essential.

Here's how we're playing this one:
  • Since there is the potential for a bull trap and the cup and handle pattern is flawed, we're reducing our position size by 1/3.  
  • If the stock breaks to the upside, we'll go long with a 57.39 price target.  Our stop will be just below the low of the handle.
  • If the handle breaks down and the stock moves to the downside on high volume, we'll attempt to catch a short position with a price target of 49.54.  That represents a major support line formed by the bottom of the cup as formed by the true bodies of the candles at the low.
  • There's not enough evidence on the chart to play a triple-top short since that would require a breach of that 49.54 support level.  That's a major support line, so we'll have to watch for confirmation before entering a short at that point.
Risk Management will be critical in this trade.  Remember, we have a major OPEC announcement coming at 10:00 AM EST today, and that may introduce volatility into the market for at least the rest of this trading day.  Money Management is always at the core of our trading strategy, so that, by now, should be second nature.  Still, given some of the uncertainties in this pattern, we think it prudent to reduce position size as a cautious measure.

Happy Trading.

No comments :