Tuesday, December 27, 2016

DVA Sets Up for Either a Wave-(V) Impulse or an X-Y-Z Correction.

DaVita, Inc. (NYSE: DVA) appeared on my narrow range bar scan today, and at first I was inclined to dismiss the chart.  At first glance, it's not a chart that screams "tradable setup," however I decided to take a closer look.  To understand what was happening, I pulled all the way back to the monthly chart, and at that level the full Elliott Wave pattern became obvious.  We've either just completed a Wave-(IV) or that wave is about to become a complex correction with more room to maneuver.  Flipping next to the weekly, my interest was piqued further since very consisted tradable patterns were starting to emerge. Suddenly, what I saw on the daily started to make sense.

Let's look first at the weekly chart.

DVA Weekly Chart
The higher order Wave-(III) on the monthly pattern completed on 27 April 2015.  That pattern drew a complete five sub-wave impulse as well, which is labeled on the weekly.  What we see from there is that a textbook perfect (A)-(B)-(C) zig-zag correction followed.  The question, however, is whether or not that completes Wave-(IV).  From the low of the currently marked Wave-(IV), Wave-(V) should travel at least to $84.50, although there's no technical limit restricting it to that level.

Wave-(II) on the monthly was shallow - almost flat - but spanned three years.  The current Wave-(IV) by contrast has been steep - a full 30 points - and has thus far spanned two-years.  The alternation rule is satisfied since both waves differ in depth and breadth. 

Climactic selling did mark the bottom of the current wave and the ensuing reversal pattern matched the slope and shape of the decline that led us to the low.  In fact, it forms a classic "V" shape formation.  As fourth wave corrections go, however, this wave was steeper than normal.  Typical fourth waves retrace approximately to the top of the prior third sub-wave that lead to the peak.  This wave has traced well below that level, stopping (so far) at the same level as the prior fourth sub-wave's bottom.  It's unusual, but not a rule violation, by any means.

What this implies, however, is that the fifth impulse wave - Wave-(V) on the monthly may already be in progress.  What gives us pause, and we'll talk more about it on the daily, is the potential double top formation we can see from mid-September to late-December.  We need to see if there's too much resistance hitting at this level or if we can push higher.

Now let's look at the daily chart.

DVA Daily Chart
A few more pieces of the puzzle take shape on this chart.  First, we can see that the downtrend off wave (B) included a breakaway gap that was followed by a near vertical drop on confirming volume.  The continuation gap that followed almost looked like an exhaustion gap, especially when the gap was closed on the Wave-b top.  Instead, we completed an a-b-c zig-zag correction in Wave-(C) to bring us to the bottom.  The volume pattern on the daily confirms the climactic action we thought we saw on the weekly chart.

The reversal candle off that bottom was very convincing, as was the extremely high demand evidenced by the volume over that entire week.  Equally telling is that diagonal support line that formed the springboard for that strong reversal candle.  That line is actually the parallel extension of the resistance line above it.  That resistance line extends from three consecutive lower highs back in the July and August time-frame.  Extending it forward, we see that it offered resistance in the current pattern but was finally breached with confirming volume on 8 December.  A pullback tested that line on 14 and 15 December, but it held and now appears to be a support line.

The double top pattern we saw on the weekly chart appears here, as well, so we do need to be aware of it.  Given the diagonal support line and two very strong horizontal support lines that it must traverse, however, the probability that a double top will confirm (i.e. close below the neckline) is lower than it appeared on the weekly chart.

What's probable, at this point, is that the high on 12 December marks the end of Wave-1 as a sub-wave of Wave-(V).  It bounced off a strong resistance line, and then moved into an immediate horizontal pattern that is likely the second of the sub-waves.  This means that a Wave-3 upward move of at least 13 points has much better than even odds of developing.  To enter that trade, however, I'd like to see confirmation with a close above the upper resistance line with confirming volume.

Another interpretation, and the reason I'm hesitant to enter a long trade without that confirmation, is that the a-b-c pattern from Wave-(B) to Wave-(C) could develop into an x-y-z pattern in which we have two more a-b-c corrective waves to draw before Wave-(C) and Wave-(IV) truly complete and Wave-(V) starts.  If that happens, then the next move is down, and likely to at least the current low.  If we close below the major support level at $63, again with confirming volume, then our trade will be to the short side. 

An x-y-z pattern, of course, opens up several very lucrative swing trades before we start the next impulse, so let's not look at a continued complex correction as being a bad thing.  Rather, let's look at it as a prime trading opportunity.  The same is true if we see the upside breakout, indicating that wave-3 of Wave-(V) is in progress.  It's another prime trading opportunity.

Now, if you're a very aggressive trader, you can choose to play a breakout of the horizontal trading pattern we've been in for the past week.  Personally, I don't think the reward to risk ratio justifies it given where we need to place our protective stops on that type of trade, however it can certainly be entertained if it matches your style and risk tolerance.

For now, I'll be adding this to my watch list and waiting to see which wave is signaled.  Based on our analysis, this stock should generate several interesting opportunities throughout 2017.

Happy Trading

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