Wednesday, December 21, 2016

Long Shadow Doji a Bullish Signal for SPR

Spirit AeroSystems Holdings, Inc. (NYSE: SPR) ended a 7 1/2 month horizontal consolidation on 21 September, 2016.  Since then, the stock has marched steadily northward, culminating in a 52-week high on 8 December.

SPR Daily Chart
The steep slope that marked this major move included a continuation gap on 1 November. True to form, that gap appears to have marked the mid-point of this first major impulse wave.  The five-day consolidation that followed marked an excellent entry-point for those of us that trade off gaps.  The strength of the support level at the gap itself turned out to be significant in this move.

The uptrend ending 8 December drew a complete five wave impulse.  Of note, however, is that both wave 3 and wave 5 recorded five complete sub-waves.  The confidence level in the current Elliott Wave count, therefore, is extremely high.

What captured this stock in the various scans I run nightly is the long shadow doji that pierced the lower Bollinger Bands before retreating to close near the mid-point of the bands and just above the 20-day exponential moving average.  I've found those very long shadow candles at significant levels to be very reliable, and thus include them in my scans.

Today's doji may have completed an A-B-C zig-zag correction coming off Wave 5 and the 52-week high.  Of note, the low of the shadow bounced off the 23.6% retracement of the full move as well as the lower Bollinger Band and the 30-day EMA.  Clearly it hit a lot of support.  Volume, today was higher than the last few days, however it was not in keeping with the full range of today's candle.

When you examine the volume signature following the 52-week high, those three red smoke stacks stand out like sore thumbs.  A lot of supply entered the equation at that level.  It's not surprising, really, given the 19-point run in two-months. There has been a lot of profit taking since the high.  Today's pattern, however, suggests that supply may have been exhausted.  The candle suggests a bullish move from here, and if the recently completed 5-wave impulse marks the end of the first wave of a higher order pattern, there may well be a lot more room to run.

In a strong bull market (as we're currently experiencing) it's very common for a stock to hit a 52-week high, pull back about 5%, and then make a second charge to a new high.  We've seen that 5% pullback in SPR, so a move back to the upside may well be profitable from here.  A rule of thumb target on the second move is a target above the current high that matches the size of the pullback.  If that plays out, we're looking at a move of about $3.25 beyond the 52-week high, or about a $6.50 move from here.  The major caution, of course, is that we could hit a ceiling at the prior high, thus forming a double top.  Watch for it, and exit if we don't penetrate immediately.

Spirit AeroSystems has certainly done its part in promoting the upward push.  They initiated a stock buyback program in 2014 and has thus far returned over $1 Billion to shareholders, buying back 16.6% of their outstanding shares.  The holding company also paid out its first ever dividend of $0.10, further boosting value to shareholders.  As a major supplier, the company services both Boeing and Airbus, setting itself to benefit both in the US and abroad.  From a fundamentals perspective, there's nothing preventing this stock from achieving a target consistent with two additional major impulse waves.

The only note of caution has to do with the calendar, not the chart.  We've entered the end-of-year cycle where volumes begin to diminish rapidly.  Many traders are winding down for the year and the market is closed for the Christmas observance on Monday.  (Christmas falls on Sunday this year, so in the US it's observed on Monday.)  There's also the possibility of a sell-off after the first of the year in anticipation of a more favorable tax structure in 2017 following the inauguration of the Trump administration.  Based on this, I'm not looking at any trades longer than one to three days in duration.  We'll see what the market decides to bring us after the first of the year.

As to Spirit AeroSystems, the setup I'm seeing is to the long side, and that's how I plan to trade this short-term.  Now, a close below $58 will change that view, and at that point we'd be looking at a potential short trade (assuming the market is conducive to downside trades.)  Watch the signals carefully for the remainder of the year, since the lower than normal volume can send some mixed messages and, as always, trade the market you see, not the one you want to see.

Happy Trading.

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