|BBBY Daily Chart|
The RSI(9) oscillator appears to agree with continued weakness, although it's not doing so with much enthusiasm. There's a bearish divergence line along the highs, however that prognostication likely completed with the strong downward move after 12 December. The lows, however, are flat. That's slight bearish since the last low on the chart was higher than the prior one, but as divergences go, it's a pretty flimsy signal.
Volume is also giving us a bit of a warning sign. The rising volume into earnings coupled with the extreme volume on earnings day is symptomatic of climactic action. Indeed, in the days after the earnings announcement, the stock traded sideways, not down. Volume on the two up-days was high, while volume on the last down day was low. Look at the volume today (29 December.) That's higher than average volume on an up-day with a very narrow range candle. A lot of shares changed hands, today, but the stock didn't go very far. That's indicative of institutional activity since retail traders can't generate that kind of volume.
The bottom line here is that the daily chart shows a potentially bearish pattern - the bear pennant - but all other signals are warning us that there may not be much more room to the downside. With that in mind, we'll take a look at the weekly chart and see if it can shed any more light on the situation.
|BBBY Weekly Chart|
I show the Fibonacci target levels with the numbers directly below the low of the neck. With that final thrust down on 31 October 2016, the 61.8% extension was reached, and that's a very frequent target level for the Head and Shoulders pattern. While it could still trade up to the remaining 38.2%, that's not something I'd factor into any additional analysis. We'll consider this pattern complete as it is, and the price target as met.
What we can glean now from the weekly chart is that we've been in a relatively tight consolidation pattern since February. A bearish diagonal trend-line was breached during earnings week, however the trend-line was a bit weak, so I don't think I'd give it much weight.
It's possible that the leg down from the right shoulder was a Wave-1 impulse, and if that's the case, then the horizontal pattern that followed would be Wave-2. If that's the case, then there's plenty of room to the downside from here with two more impulse waves to follow. These are long-term patterns on this chart, though, and are well outside our trading horizon. What may be of significance, though, is that - in an X-Y-Z correction (which the pattern appears to be drawing on the weekly chart) the next leg from here is up. That would be a potential 4 to 6 week move - longer than our trading style - but it does give us some direction as to what BBBY may be headed from here.
What seems obvious is that there's a lot of demand coming into play as the stock reaches the bottom of the current pattern. If we do trade to the short side, we need to ensure that it's with very tight protective stops. The 31 October lows may very well be the low - or very near the low - of the consolidation pattern.
We'll watch the daily chart's bear pennant carefully. To enter a short trade, we need to see volume confirm the move. We also need to be cognizant of a potential bear trap. The weekly chart is warning us that an apparent break to the downside may actually be an institutional move to scoop up sell stops just below the pennant low.
An upside break may also be a profitable play. If it breaks to the upside (with confirming volume) the bullish diagonal resistance line is a likely target. That line runs through the middle of the gap, but when we look at the number of touches that line has endured since it formed on 23 June, we have to respect the strength and significance of that resistance level.
Watch the development of this pattern over the next couple of trading days. Being nimble in this case, would be wise. It can break in either direction, and we need to ensure we have a strategy that accounts for both.