HFC Showing Strength After Wave "a" Completes

After six months of trading horizontally near the bottom of its historical range, HollyFrontier Corp (NYSE: HFC) drew a two-month long 5-wave impulse that peaked on 8 December.  This opens the door for several potential trade opportunities that we'd like to examine in a bit more detail.

HFC Daily Chart

Bear in mind that HollyFrontier is primarily a refining company.  As a result, their margins are inversely proportional to crude oil prices.  As crude prices rise, their margins decline, adding pressure to their bottom line.  Similarly, if prices rise to the point that they begin to impact demand for the refined product (e.g. gasoline) that will add negative pressure to their revenue stream.  As we head into 2017, there are two counterweights in the crude-oil tug-of-war.  On the one hand, we have an OPEC deal to cut production, thus adding upward pressure on crude oil prices.  Opposing that is a rising US dollar coupled with future interest rate hikes on the horizon further increasing the value of the currency.  That places downward pressure on crude oil prices since oil trades in US dollars worldwide.  Thus tug-of-war will impact all refiners, including HFC, as the new year progresses.

Turning now to the chart, we can see that HFC started an impulse wave with a very long bullish candle on 9 November.  This, sudden enthusiasm may, in part, be attributed to an optimistic view of environmental deregulation under the incoming administration that will positively impact industries such as oil exploration and production.  Regardless of the cause, however, the impulse started on 9 November.

Since then, the stock has traced a full five-wave pattern, and appears to either be in the midst of - or having just completed - wave "a" of a three-wave corrective pattern.  Thus far, that wave has retraced 38.2% of wave "v", which is a normal retracement level for an a-b-c flat correction.  Equally significant is the fact that wave "v" completed at the 38.2% retracement level of the much larger high-to-low 52-week pattern.

There are two strong support/resistance lines on the chart that are drawn in thick dashed blue lines.  The thinner dashed blue line is another resistance line, however it's not as strong as the others.

Of particular interest are the three dashed green lines.  The current five-wave impulse created a well defined bull channel that, for the moment, at least, appears to be holding.  There is also a line that appears to be significant that is drawn from the two peaks in March and April.  Notice how that formed a brief level of resistance on 5 and 6 December, and it's now forming a bit of support for the completion of Wave "a".

The RSI(9) pattern is also supportive of the short-term bullish channel.  While the RSI has dropped below its 21-day EMA - a bearish signal - it's still not showing any signs of divergence from the price chart, although the current low in the RSI is a bit lower than I'd like to see for true confirmation of the bullish trend.

So what can we expect from here?  Well, it appears that we've either completed or are about to complete an "a" wave.  The most probably move from here is a "b" wave that will retrace at least 61.8% of the "a" wave, and could extend to as much as 138.2% of that "a" wave.  That is potentially a wave we can trade, although we do need to keep our stops extremely close.  Because it tends to fall short of the height of wave "a" the reward on a "b" wave trade is relatively low.

The "c" wave that follows is a very popular wave to trade for Elliotticians.  A typical "c" wave will approximate the length of wave "a" as measured from the top of wave "b".  This makes the profit target predictable, and the stop loss is already pretty tight since violating the top of "b" invalidates the trade and we want out immediately.

Once that "c" wave completes, we will have another potential opportunity, provided it's followed by an impulse wave.  (Note that the impulse wave can be either up or down.  Either way, we can trade it.)  What I would hesitate to trade is if the "c" wave is followed by another corrective wave pattern.  That can be extremely choppy and unpredictable, so if that develops, I'll just add the stock to my watch list and wait for the impulse that will inevitably follow it.

Whether or not the subsequent impulse is up or down will very likely depend on HFC's ability to achieve their fourth-quarter objectives of 440,000 to 450,000 barrels per day, as well as their ability to achieve longer term objectives of doubling their refining capacity to one million barrels per day.  They've outline a number of initiatives that will drive that growth, and the impulse that just completed was reflective of that optimism.  If they're able to demonstrate progress, and if their current operations continue to run trouble-free, then the impulse that just completed may well become a larger Wave 1 in a broader 5-wave impulse.  If that occurs, we'll have many more short term opportunities to trade.

For now, let's add HFC to the watch-list, and lets attempt to capitalize on the developing "b" and "c" waves.  By the time they complete, we should have a much clearer view as to whether an impulse will follow and which direction that impulse will flow.

Happy Trading.