Thursday, December 01, 2016

Baxter International Signals Start of Next Move

One of my favorite swing-trading scans searches for stocks that draw a hammer candle at a major low or an inverted hammer at a major high.  In the context of Japanese Candlestick charting, a hammer is formed when the open and close are both near the top of the trading range for the period.  The low for the day is significantly below both the open and close, and the high for the day is either at the open or close or it's just barely above them.  When you see the hammer on a chart, it truly looks like a good old-fashioned sledge hammer.  The inverted hammer is the opposite.  Just stand that sledge hammer on its head and you have that pattern.

The significance of the two comes when they are at a major low (for the hammer) or a major high (for the inverted hammer.)  In both cases, they signal a high potential for a trend reversal.  In the case of a hammer, you have a stock that has been trending downward.  After the open, the stock plummets even further, but at that point, demand starts to enter the scene and the stock rises to ultimately close near its daily high.  This often happens when the low encounters a major support line, triggering buy stops for bottom feeders waiting to enter the market.  In the case of the inverted hammer, the opposite behavior occurs.  In both cases, confirmation the following period is essential, and for it to be a good signal, the hammer or inverted hammer should occur on high volume.

Baxter International (NYSE: BAX) appeared on my scans last night, tracing a classic hammer pattern on high volume at what appears to be the bottom of an Elliott "C" wave in an A-B-C corrective pattern.

BAX Daily Chart
Here is a chart where the theories of both Elliott and Wyckoff work hand-in hand.  From an Elliott Wave perspective, I show two possible wave counts.  The Fibonacci retracement levels drawn from the count represented in green line up perfectly, in fact, and that's the count that appears to be the more accurate interpretation. 

The most striking characteristic of this chart is the huge volume signature that dominates May, 2016.  From a Wyckoffian perspective, this would indicate a major change in character and would signal the start of the distribution phase in which market insiders begin a lengthy campaign to sell the shares they purchased at wholesale prices during an extended period of accumulation.  The objective of the market insiders at this point is to hold prices in a tight horizontal range while they sell off their shares over time.  This, in fact, is what we see from the chart.  After that climax marked by the top of Elliott Wave 3, we see a somewhat lackluster fifth wave, followed by a very controlled A-B-C flat corrective pattern.  Notice the nice upward push on high volume just after Wave A completed as the market makers needed to push the stock back up to levels where they wanted to sell.

This brings us to our current analysis and yesterday's hammer candle at what may be the end of Wave C.  Notice that the low of the hammer rests on the 38.2% retracement of the entire pattern.  That's a very convenient support level and the volume signature suggests demand came into play at that point, pushing the stock back up fairly close to its open.  As signals go, it would be stronger if the close were above the open, however the lower close does not invalidate the hammer.

What we don't know, at this point, is which way this stock will trade following the completion of Wave C.  There are three possibilities.  The stock could enter a complex correction pattern tracing another A-B-C wave cycle or an X-A-B-C cycle.  In either case, the direction of travel from here is up.  Or, a new Wave 1 pattern in a 5-wave impulse could initiate, driving the stock higher.  Similarly, a new Wave 1 pattern could initiate driving the stock lower.  The hammer suggests that this is the least likely of the scenarios, but again, we need confirmation.  Today's candle will provide tremendous clues as to where this stock is headed.

When looking at the chart, it's hard to miss the curve of that 200-day moving average.  On July 1, 2015, Baxter spun-off Baxalta which resulted in a major distribution to shareholders.  This positive event had a negative impact on some of the technical indicators such as the 200-day MA that still have a look-back to that time period.  In this case, it's best to ignore the 200-day as it's meaningless following that spin-off.

So here's how we plan to play this stock:
  • We will monitor the candle patterns for the next couple of days to determine if Wave C has truly ended.  We will also be looking for confirmation that the hammer signal is valid.
  • If the hammer is valid and we close above the hammer, we will take a long position.  Our price target will be 48.70, marked by the overhead resistance level shown in a blue dotted line.  If we are into an X, A, or 1 wave, then that is the most likely short-term target.
  • If the hammer is invalidated and we subsequently close below the low of the hammer, then we'll stay on the sidelines.  There's a major support line only two points below the low of the hammer, and that does not provide enough reward for a trade to the short side.
This will be an interesting pattern to watch.  There are numerous upside plays here, and overall the company has been performing extremely well.  They've a very long history - several years, in fact - of consistently beating earnings and revenue estimates.  They have a new drug - Prismocitrate 18 - entering Phase 3 Clinical Trials with 160 ICU patients in the US and Canada participating, and they are one of the primary renal care providers in the nation.  All things considered, there is more to the upside than downside with this stock.

Happy Trading.

No comments :