ALSN in Wave 2 Setting Up Long Trade For Wave 3

Allison Transmission Holding (NYSE: ALSN) drew a well-defined five-wave minor impulse pattern to form what appears to be a complete Wave 1.  That wave culminated with a very bearish candle on 8 December 2016, although volume did not confirm a longer-term reversal signal. 

ALSN Daily Chart

In addition to the Elliott Wave pattern that continues to develop, a very narrow bullish channel (in dashed green) is providing a bit of support as Wave 2 plays out.  The diagonal resistance line is a much stronger signal, however, so I'm not putting too much stock in that support line.  There is, however, a weak horizontal support line at the 23.6% retracement level of the full wave that may carry more weight.  That's also at the 50% retracement level of the wave v impulse adding further credence to support at that level.

The overall second wave pattern is sitting at the mid-point of the Bollinger Band channel and is just below the 10-day simple moving average.  Given the overall strength of the stock since 21 October, that line has a much higher probability of holding than it does of being violated.

There is a significant amount of strength showing in the RSI(9) pattern.  The upward bull channel it signals confirms the overall move of the stock price.  The drop below the oscillator's  21-day moving average coincided with the completion of Wave 1 (and had we been watching this stock, that would've been a great four-day trade setup) however the oscillator has already curved north and is converging on it's moving average once again.

While the current setup implies a Wave 3 should soon follow, and that Wave 3 should be at least a 7 1/4 point move, it must be noted that the weekly chart is showing a very long-term double top that setup on 29 December 2014.  Since the stock only went public in March 2012, I'm not overly concerned about the strength of that extremely long-term pattern, since it's likely the passage of time (for our trading horizon, at least) has likely negated it.  Still, it does signal some reason for caution.

The key for us is how this current wave 2 will play out.  This could develop into an a-b-c corrective wave, or wave 2 may be completing as it stands.  Either way, however, the most probable direction from this point (with our trade horizon) is up, and that's how we will play it.  We'll set a long entry range between 34.41 and 34.46.  Our initial protective stop will be 33.44 (just below the pattern low.)  Since this could be the start of Wave 3, we'll follow our stops up on a daily basis, hoping to catch the uptrend until we are stopped out of the position on strong weakness.

Entering at this point is somewhat aggressive, however given all of the convergence at this support level, we feel the aggression is justified.  A more conservative play would wait for a close with confirming volume above 35.06, however for a solid swing trade we feel that would be giving up too much potential ground in the short term.  Which strategy you choose to employ depends, of course, on your own risk tolerance and your own personality as a trader.

Happy Trading.