Sunday, December 18, 2016

BAH Signals Long After 38.2% Wave 2 Retrace

Booz Allen Hamilton Holding Co. (NYSE: BAH) started a strong breakout from a very lengthy consolidation pattern in early November, 2016.  Five sub-waves completed on 29 November marking the completion of Elliott Wave 1 and were immediately followed by an a-b-c zigzag consolidation that appears to mark Wave 2.  That's where the stock sits as of this writing.

BAH Daily Chart
Following the completion of Wave 1, an extremely high volume gap down formed what appears to be a wave "a" corrective wave, coinciding with news that Booz Allen Hamilton acquired Aquilent (also known as eGov Holdings) for $250 million.  eGov is the digital and cloud architect for the federal government's .gov solutions.  The transaction is expected to close on 31 December 2016.  The addition is expected to add between $30 and $35 million to Booz Allen Hamilton's revenue in 2017, and is expected to increase the company's operating margin in 2018.

Following that announcement, the full a-b-c zig-zag patterns appeared to complete, culminating with a spinning top candle on 15 December.  It should be noted, however, that the c-wave was not a full 5-wave impulse in this time frame, so it's possible that the c-wave has yet to complete.  The rest of the signature implies it has, however we can't say that for certain.

With the exception of the 15 December low, the stock found support on the 20-day EMA.  The low itself bounced off the 30-day EMA as well as the 38.2% retracement line of Wave 1, and the 23.6% retracement line of the full 52-week high-low pattern.  Two additional areas of support at that same level are a horizontal support line that coincides with the previous wave iv, and a diagonal support line that goes back to the 1 April 2016 high. 

We should examine that diagonal support line a bit deeper.  As you can see on the chart, there is a distinct diagonal support line that has at least four touches of the trend and extends from 11 February 2016 through to the start of the latest impulse on 1 November.  That's the base support line we're using that forms the slope of the other two diagonal lines drawn on the chart. 

The line that forms Wave iv resistance and Wave c support is parallel to that base line and is drawn from the first major high following the 52-week low.  Until it touches Wave iv, it meets nothing but dead air, so it's not viewed as an overly significant line, at least until it's combined with all other signals on the chart.

Now look at the uppermost diagonal line.  That, too, is parallel to the base support line, and it has three major touches of the trend in October, November, and December 2015.  Notice that it has formed the resistance line for the b-wave in our current pattern.

Looking next at the Bollinger Bands, we see that the low of what appears to be Wave 2 reversed very close to the lower band.  Of equal note is the volume on that reversal, which barely surpassed the 200-day volume moving average. The spinning top suggests indecision, but the volume pattern tells us that there's really not much supply at this level.  Volume certainly doesn't confirm the range of that candle. 

If, in fact, this is the end of Wave 2, then the next move for this stock should be up.  There are three moves that are possible from here.  One, of course, is that the c-wave is still in progress and we could decline further.  That's the least likely scenario, however, given that the zig-zag pattern has followed a textbook retracement thus far.  The other two moves are both up.  One would see a continuation of the consolidation pattern with an "x" wave.  That would likely take us back to either the top of "b" or the top of "1".  The second is the start of wave 3.  That wave, once it confirms, should draw at least 8 3/4 points, and will likely have five subwaves.  Each of those subwaves will produce valid entry zones.

For now, we're looking to play an upward move using the top of the spinning top from 15 December as the entry and the bottom of that spinning top as the protective stop.  We'll trail our stop if the long setup triggers since we don't yet know if it's an "x" or "3" wave.  Either way, however, the odds favor a long position from here.

Happy Trading.

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