Saturday, December 31, 2016

COL in Year-Long X-Y-Z Correction on Weekly Chart

When I first looked at the daily chart of Rockwell Collins (NYSE: COL) my first impressions drew my attention to the obvious five-wave impulse pattern that just completed, the lazy correction that's currently in flight, and the final candle resting against the lower Bollinger Band.  There appeared to be some decent trade setups being drawn, so I decided to take a closer look.

As I always do, before attempting to decipher the daily chart, I first look at the weekly to see what the stock has been up to in the longer term.  Always remember our strategy:
  1. Use the daily chart for trade setups and exits; 
  2. Use the weekly chart to ascertain the long term trend and behavior of the stock; 
  3. Use the 30-minute chart (or hourly chart if you prefer that one) for timing the entry.
The pattern on the weekly chart was perhaps the most straight-forward pattern I've seen in months.  Take a look:

COL Weekly Chart
Starting with the low the week of 8 August 2011, the Aerospace giant followed a complete five-wave impulse pattern through 18 May 2015.  Wave-II of the pattern was a deep correction (just over 61.8% of Wave-I) whereas Wave-IV was shallow as compared to Wave-III.  The alternation rule was satisfied, and Wave-III turned out to be the longest of the three impulses, so the Wave-III rule was also satisfied.  It was a textbook five-wave impulse pattern.

Since 18 May 2015, the stock traded sideways in a flat correction that retraced almost all of Wave-V.  Now, corrective waves are often extremely troublesome to label, and I really don't enjoy trading them since they have more of a measure of unpredictability than impulse waves.  In this case, however, COL was extremely kind to Elliotticians. 

A flat a-b-c correction completed the week of 8 February, and that was immediately followed by a second a-b-c flat correction that completed the week of 28 November.  Here's where corrective waves can get tricky, however.  The current weekly setup appears to be an X-Y-Z flat correction, and if that's the case, then we should be in Wave-a of the final Z wave.  Corrective waves can be unpredictable, however, and complex corrections (as we're in now) can change character at will.  So while our analysis tells us that we're likely in an X-Y-Z, we do need to be alert for a change in character that signals the start of a new impulse wave.

On the weekly chart, there's a strong horizontal channel that provides viable price targets for our subsequent a, b, and then c waves.  We can expect the current Wave-a to reverse near the lower support line around $81.75.  Be aware of that upward trending 200-week moving average, though.  That may offer support that forces a reversal sooner than anticipated.  Following the reversal, we anticipate Wave-b topping out near the resistance line at $95.20, and then Wave-c completing Wave-z back down near $81.75. 

Note that the upward waves are taking between 6 and 9 weeks to complete, but the downward waves are taking almost double that amount of time.  I find that significant since stocks typically fall much faster than they rise.  It seems there's a bit of demand pushing this stock higher rather quickly whenever we approach the lower resistance line.

Also look at the volume pattern that started with Wave-b of Wave-Y.  There was a significant amount of volume at that Wave-b low and that candle is one of the most bullish on the chart.  That volume was all demand, not supply.  From that point on, you can see that demand was high on the up days, but as the stock drifted lower, supply was quickly evaporating.

Finally, the RSI(9) Oscillator also signals increasing strength. That's a nice bullish channel that's formed, and it matches our assessment that demand is starting to dominate.  What all this means is that the indications are that the next major 5-wave impulse is likely to the upside.  In the larger scheme, this year-long consolidation appears to be a re-accumulation effort, and not a distribution effort.  The large institutions appear to be accumulating shares, not distributing them.

So let's now turn to the daily chart for our setups.

COL Daily Chart
The bold black labels are directly from the weekly chart and fine-tune precisely when each of those waves completed.  Notice that the move up from Wave-b to Wave-c in Wave-Y was a well-defined 5-wave impulse pattern.  That's typical of "c" waves and it adds a measure of confidence to the analysis. 

Wave-a is also typically a 5-wave impulse pattern.  What we've labeled on the chart so far coming off our Wave-Y high appears to be the completion of 5 sub-waves that (if that pattern is complete) likely forms Wave-1 of Wave-a of Wave-Z.  Remember, from the weekly, we have set a target for the completion of Wave-a down at $81.75. 

The next couple of trading days will tell us if Wave-1 is complete.  If it is, then we can anticipate a Wave-2 that will likely rise to the $94.80 - $95.10 range.  There's a nice resistance zone at that level, and it would mark a typical retracement point for a second wave in this pattern.

The move that we want to catch, however, is Wave-3 in this pattern.  That will be a short position, and that move can take us at least as far as the $85.41 mark.  There's a strong support line at that level, and it coincides with the 61.8% retracement level of the b-c impulse wave.

Beyond that, we'll monitor the volume and price behavior to determine if there's a Wave-4 and Wave-5 play available to us.  It's too early to tell right now, although there's enough strength in the analysis to suggest we'll have some good setups in that range.

Notice the RSI(9) oscillator on the daily chart.  While the weekly is showing a strong bullish sentiment, the daily is still showing a strong bearish trend. That is consistent with the current analysis of our Wave-a correction, and it does add support to our view that the short-term direction for this stock is down (after we get the Wave-2 upward correction, of course.)

The last point to which I'd like to draw your attention, however, is the volume pattern that I've highlighted above the chart.  Look at the strength of demand on each of the upward impulses in wave-c.  As we've said, we believe this stock is under re-accumulation, and  that volume signature supports that theory.  Once Wave-a completes, watch the volume carefully on the subsequent Wave-b.  It's possible, given this pattern, that there will not be another Wave-c and we'll take off into the new impulse from that top.  Watch for some significant tests of the lows as we approach the bottom of Wave-a, and pay close attention to the volume patterns during those tests.  Once the institutions believe they've shaken out the last of the weak money, they'll start their next campaign.  The volume signatures at the extremes will tell us when that's about to occur.

Happy Trading. 

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