Friday, December 30, 2016

Despite Good Earnings and Guidance, DKS Continues to Fall

Dick's Sporting Goods, Inc. (NYSE: DKS) reported their third consecutive quarter of strong earnings and revenue growth on 15 November.  That didn't prevent the stock from tumbling 7% on the good news.  While it did return to the pre-earnings high through a healthy December rally, the stock has once again tumbled, leaving both a daily and a weekly chart that shows nothing but short signals heading into the new year.

DKS Daily Chart
Bouncing off an 8 December retest of the 52-week highs, DKS drew three complete impulse waves to the downside, and appears to be trading sideways in Wave-iv as 2016 draws to a close.  Most notably on the daily chart, the very strong downward move on 22 December formed a straight flag-pole for the current horizontal action.

That single-day plummet followed reports from Finish Line and Nike that indicated a very weak retail season heading into Christmas, and virtually the entire retail sector was hammered on the news.  Normally, such an event would be a buying opportunity after three very good quarters and strong forward guidance into year-end.  The chart, however, suggests that there's more downward pressure coming in the short term.

Starting with the Elliott Wave pattern, Wave-iii was longer than Wave-i, so we can use the length of Wave-i as the conservative measure for Wave-v.  That puts us down in the area highlighted in red for a typical Wave-v move in this pattern.

Next, let's check the measure rule for that bear flag that's developing.  On a downward break, it, too, ends up right in the middle of that red area.  Okay, there are two signals giving us the same target.  Are there any more?

Sure enough, there's a third.  From 22 September to 8 December, the chart recorded a double top, and possibly a triple top, if you include the one-day earnings spike.  The neckline has been breached with confirming volume, so this is a valid double-top pattern.  The measure rule for the double top places us, once again, in the middle of that red area.  The short-term downward pressure is mounting.

The current bearish impulse pattern established a strong diagonal resistance line with three obvious tests culminating with the Wave-ii top.  It's likely that the next downward thrust will come off a touch of that resistance line.  Unless the flag pattern changes, that should occur mid-to-late next week at the latest.  Be ready for it, since a failure at that line will be an excellent entry signal.

Be mindful of the diagonal support line coming off the lows from the first top.  We may experience a bit of a pause when we encounter that line on the way down, especially around the 38.2% retrace line or the horizontal support line around 50%.  Wave-v often truncates, so don't hesitate to exit the short trade if we encounter too much support at those levels.

Let's take a quick look at the weekly chart to see what other supporting or refuting evidence may be available.

DKS Weekly Chart
Dick's has been struggling to make much headway for several years, and the pattern shows a long-term corrective pattern in progress.  Now, it's entirely possible that the week of 19 January started an impulse wave.  We don't yet show it on the chart, but from that point, your eye can easily draw a Wave-1 completion at 14 March, a Wave-2 completion at 27 June, and a Wave-3 completion at 19 September.  (Remember, this is a weekly chart, so those dates represent the start of the week in which the wave completed.)

With such a wave count, it would mean we're currently in a Wave-4 correction on the weekly chart.  The area in red would be  a deep correction, however it does not violate any of the wave rules.  If this plays out, there may be a longer term long trade in the offing, once the downward targets are completed.

Notice the number of tops that formed a diagonal resistance line.  With four touches of that line, each ending with a long-wick candle for that week, that resistance line appears extremely strong.  Once an uptrend resumes, we can expect another test of that resistance line.

The weekly chart confirms the short-term development of that double top was saw on the daily.  Note that, on the weekly chart, it also draws a target range (in red) that matches what we found on the daily.  Also note that the RSI(9) oscillator signaled a bearish divergence with that double top pattern and is still signalling weakness in the overall chart.

So for the moment, we're looking at DKS as a short candidate.  An aggressive entry will be a bounce off the diagonal resistance line on the daily chart.  A conservative entry will be a close below the bottom of the flag pattern on the daily chart.  In either case, the price target will be in the red area marked on the chart.

Longer term, once that target is met, we'll assess a long trade that could take us back up to the diagonal resistance line we discussed on the weekly chart.  That's likely a few weeks away, however, so let's not get ahead of ourselves.  Of course, we do need to be alert for the possible failure of the current pattern.  Simply because we are preparing for a short entry does not mean that a long setup won't manifest.  We'll certainly play it long if that strength manifests.  I suspect, however, that we won't see that kind of strength in the retail sector until Friday, 13 January with the Retail Sales report released at 08:30 AM EST on that date.  That report will be a major mover (in either direction) for the retail sector, so be aware of it in any trades that may span that date.

Happy Trading. 

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