|BOFI Daily Chart|
At least two classic Elliott Wave patterns have completed. Wave 2 was a well-defined A-B-C flat correction, and from there we're either in the early stages of a Wave 3 or we've just completed Wave 3. We don't yet know, although other indicators on the chart suggest Wave 3 is over and we're into Wave 4.
Resistance at the high of yesterday's candle appears significant, as does the higher than average volume we recorded on the long red candle that developed. That pattern increases the significance of the doji star that completed the day before, and is a decidedly strong bearish reversal pattern.
The stock is currently trading at an extreme level above its 10, 20, and 30-day moving averages. In fact, it's the furthest the stock has ventured from its moving averages on this entire chart. Reversion to the mean implies a retreat is imminent, at least back to the 10-day, although a retreat to the 20-day is more common.
The RSI(9) oscillator is drawing a bearish divergence, not only on the highs, but also on the lows. While the stock was recording higher lows, the RSI was drawing lower lows. Now, you'll find some traders that would also place credence in the double top pattern on the RSI. Personally, I ignore chart patterns like that in the oscillators. Patterns such as double tops, head and shoulders, trend-line breaks, etc. work on the price charts simply because traders set open and close orders at those levels and they become self-fulfilling prophecies. That type of stop and limit order potential isn't present with the oscillators to any great degree - at least, not in an automated fashion - so, in my view, the appearance of patterns in oscillators is an interesting trick of the mind, but it's not a trade setup.
The exception to that is the concept of divergence. The oscillators we use are showing the strength or weakness of trading behavior, so it is certainly significant when an oscillator is not matching the highs and lows being drawn by the stock price. Divergence doesn't immediately result in a buy or sell order, but it does provide warning signs that a change in trend may be in the offing.
You'll notice that I'm also showing the Slow Stochastic (14,3) oscillator on this chart. Again, the Slow Stochastic is showing us trend strength or weakness based on the theory that stocks tend to close near their daily highs in an uptrend and near their daily lows in a downtrend. In this case, we see that the oscillator just crossed its signal line to the bearish side, and did so above the so-called "overbought" line of 80. The concept of overbought and oversold in these oscillators is an unfortunate misnomer, but since that's the common term for the lines, I use them here. What's important in this case, is that the crossover signals short-term weakness. Nothing more. In fact, you can see that the other two most recent crossovers above 80 were only one or two day moves. I don't trade on oscillator signals alone, and I don't recommend anyone else do so, either. They are simply additional data points in our overall analysis arsenal.
Returning to the chart, the key here is the evening star (bearish reversal) and the Elliott Wave count (signalling a potential Wave 4 correction.) The probability here is a move to the downside. I've highlighted the target area in green, and that's our short-term play. Wave 4 should not penetrate the top of Wave 1, so once we hit that area we'll be looking for a bullish reversal and will attempt to play that move as well. Now, Wave 3 is shorter than Wave 1, so we know Wave 5 will be shorter than Wave 3. (Wave 3 can't be the shortest of 1, 3, and 5.)
Be aware of external events that can impact the market, this week. The December FOMC meeting is tomorrow, and the market widely expects the Fed to increase interest rates in their 14:00 EST announcement. That's factored in, and it's part of the reason financial stocks have done so well for the last month. Pay extremely close attention to both the announcement letter and Fed Chair Janet Yellen's post-announcement press conference, however. The market, tomorrow, will move based on the forward guidance she sets. We will be listening for any signal as to the number of rate hikes anticipated in 2017 as well as any statements around anticipated inflation levels and economic growth under the new Administration. Tomorrow's is a press conference we as traders cannot ignore. Be prepared for volatility in the closing hours, tomorrow.