Monday, December 19, 2016

IP Has Room to Upside Once A-B-C Zig-Zag Wave Completes

International Paper (NYSE: IP) continues to show strength, trading in a bullish channel since its bottom on 25 January 2016.  Much of the activity throughout the year, however, contained a significant amount of overlap despite the overall upward trend.  That overlap, by definition, marks a corrective pattern, not an impulse pattern.  Thus, the true impulse wave did not appear to start until a November 4 rebound off strong support.

IP Daily Chart
The orange line near the center of the chart shows both that significant area of support as well as the overlap the occurred in early November that implies the true impulse wave had yet to begin.  While it's possible for the eye to imagine an impulse starting at the low in January, too many Elliott Wave rules would have to be ignored for that move to be considered a valid wave count.  Rather, the current indication is that the corrective waves ended on 4 November 2016.

It's also possible to consider a count that starts on 28 June, however we'd have to ignore the overlap on 3 November.  It would also imply a Wave 2 that, in time, was not proportional to Wave 1, at least on a daily chart, and that violation is troubling.  So based on that, we're looking (at least for now) at an Elliott Wave impulse pattern that started on 4 November.

Thus far, that impulse has drawn three complete waves culminating in the 52-week high on 12 December.  For the past week, the stock appears to be drawing an a-b-c zig-zag correction that would mark Wave iv.  If that plays out, the bottom of Wave c (which is currently developing) would be an excellent entry point for a long position.

Wave iii is longer than Wave i, so the standard rule of thumb in measuring Wave v is to use the height of Wave i as the target.  That gives us a potential upside move of 5 points as measured from the bottom of Wave iv (which includes the bottom of Wave c.)

There are some areas that look promising for that bottom and subsequent entry point.  The 10-period SMA is diverging significantly from the 20-period EMA.  Reversion to the mean tells us that we will close that gap.  Notice, too, that there are two upward trendlines offering support.  The uppermost of those support lines intersects the 23.6% retracement line of the full impulse.  That in itself is an extremely attractive target for entry, although it's a bit deep for Wave c.  The more likely location will be the 20-period EMA.  As price declines a bit for Wave c development, that line will begin to flatten, will likely converge with price about mid-way between the 23.6% retracement and the horizontal support line that developed in this short-term corrective pattern.

Ignoring the high volume spike resulting from Friday's quadruple witching, we can see that volume and price bars have been consistent throughout this impulse wave with demand having a bit of an edge over supply.  Candle ranges have narrowed as Wave iv developed.  That's normal in this type of a consolidation, but it's also a caution.  We will likely see a rapid price bar expansion when Wave c completes and it may be very easy to miss the move that triggers the start of Wave v. 

We need to remember, though, that fifth waves are often truncated.  So while the price target is about a five-point move, it's not uncommon for a fifth wave to fall well short of that target.  As a result, we discourage any attempt to chase a fifth wave move.  If we're not filled at the level that we set, then we'll skip the trade entirely.  Reward to risk on a fifth wave tend to be tight under normal circumstances, so there's no point in reducing it further by accepting a less than desirable entry point.

For now, we're adding IP to our watch list.  We'll attempt to catch the end of wave-c and ride it to the long side through wave v.  Since that will mark the end of Wave 1 (by our count, at least) we'll see what opportunities arise in Wave 2.  The wave we truly want to catch, however, is the subsequent Wave 3.  That, however, is a trade for sometime in 2017, not today.

Happy Trading.

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