Wednesday, December 28, 2016

JNPR Stalling After Multiple Upgrades

A series of analyst upgrades in November and December provided a bit of a boost to Juniper Networks (NYSE: JNPR), already rising thanks to an excellent third quarter earnings release and improved forward guidance.  Mind you, I take analyst upgrades with a grain of salt, since they are more often than not a means of manipulating interest one way or another in the stock.  It's important to remember that the large institutional traders are buying when the retail trader is selling, and vice versa.  So when the institutions are suggest you buy, it's a pretty good indication that they're getting ready to sell.  That's not cynicism talking, it's simply the reality of how the market works.  It's good information to have for swing traders, of course, since we're more than willing to ride the wave of public euphoria up, and then ride it back down on the backs of those institutions that are now selling off the top.

Let's take a look at the daily chart and see what trades may be in the offing.

JNPR Daily Chart
 The after-hours earnings release on 25 October produced a breakaway gap that ended an 8-month consolidation pattern.  The stock found support at the top of that horizontal pattern in a classic pull-back that was a very nice entry signal long for anyone following the stock back then.

Several times over the next month, momentum started to wane, and each time one or more analyst would release an upgrade.  A short-term Elliott Wave pattern started to emerge, and two waves appear to be complete.  Interestingly, from a Wyckoffian perspective, the bottom of Elliott Wave 2 just touches the support line that would be formed by Wyckoff's "Automatic Reaction" bouncing off a selling climax last February.  The breakout in October followed by the pull-back to that horizontal support level is classic of a Wyckoffian break-out and is further confirmation that the large institutions are pushing the stock higher.  Or, they were in October and November, at least.

Here's where things start to get a bit fuzzy, however, since there's a bit of uncertainty in the count of the third Elliott Wave.  What I have labeled is the most probable count as I see it.  It looks to me like Wave-3 is subdividing into a five-wave impulse with the fourth of those sub-waves being in flight now.  If the count I show is correct, then wave-iii is just shy of the height of wave-i and therefore wave-v will be shorter than iii.  I show the maximum height of wave-v (and therefore wave 3) on the chart.

An alternate count, however, which I don't show, would have a wave-i end on 16 November, wave-ii would be the short horizontal pattern that follows, wave-iii is where I label wave-i, wave-iv is where I label wave-ii, and the final wave-v is where I label wave-iii.  In that alternate count, Wave-3 is complete as of 8 December, and the ensuing horizontal pattern would be part of Wave-4.

There's definite merit to the alternative count, however for our purposes, it honestly doesn't matter.  In both cases, the next impulse wave is up, and in both cases, the target area is roughly the same.  What we're looking for in this case is a break above the nearest overhead resistance with confirming volume.  At that point, we'd enter a long position, keep a very close daily trailing stop, and ride it until we're stopped out of the trade. 

There are a couple of signs of weakness on the chart that are of concern, hence the need to keep the protective stop rather tight.  First, we can see that On Balance Volume has turned down, and it started to hook down right after the top on 8 December.  That's an indication that demand has waned and supply is coming into play.

Second, until 8 December, the RSI(9) oscillator was supporting the bullish direction the stock was traveling.  The RSI peak on that date, however, marked a bearish divergence, indicating that momentum was on the decline.  Now, a bearish divergence in the RSI doesn't necessarily signal an immediate reversal.  Rather, it warns us that demand for the stock has weakened, and support for the stock at that level may diminish.

Finally, we have the 8 December candle itself.  The range was long, but the wick comprised over 50% of that entire range and was longer than the main body of the candle.  Volume on that day was well over both the 50-day and the 200-day moving average, and may be an indication of a buying climax.  We have to use caution, of course, assessing the volume pattern in the past week since it always tapers off dramatically around Christmas and New Years.  The 8th, however, was early enough that volume was still a meaningful indicator.

The bottom line is that the wave count suggests that there's another upward wave to go, regardless of how we handle the count.  Indications are that the institutions have been trying to push the stock higher, however there are also indications that the retail market isn't fully on board.  We're currently trading in a tight range between strong support and resistance lines that go back well into 2015.  Based on our wave count, we are expecting a trade to the upside.  We'll take that trade if we get a close above resistance on confirming volume.

On the flip side, if demand continues to weaken, we may see a break to the downside.  A close below the support line with confirming volume will be a signal to enter short.  Whether or not we take that trade will depend on the overall market mood, however at the moment, we're prepared to do so.  A likely target to the downside is around $24, which is the support line that would be formed from the consolidation pattern of the past year.

We'll have to see how this stock behaves after the first of the year.  Watch for a directional break with confirming volume and play that accordingly. 

Happy Trading.

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