Marriott Running Out of Gas in Wave 3

Marriott International, Inc. (NASDAQ: MAR) broke out of a ten-month long horizontal consolidation on 26 October 2016, beginning a healthy climb to a 52-week high and peaking on 16 December.  The rise continued despite a very disappointing earnings release on 7 November in which the hotel giant beat EPS by only $0.02 and missed on revenue by $380 million.  In fact, the stock didn't even appear to pause to read the announcement, surging north on both the 8th and 9th of November before taking a brief two-day breather. 

MAR Daily Chart

What we see from the pattern, however, is a five-wave impulse that started after tight one-month consolidation period that preceded the upward climb.  The volume pattern in the days leading up to the breakout and the compactness of that consolidation from late September to late October 2016 are indicative of significant institutional interest.  Once the institutions decided to accumulate, there was very little - including disappointing earnings - that would stop the upward thrust of the stock.

Wave 1 ended on 14 November after completing five well-defined sub-waves.  Wave 2 was brief and flat, although it did include an a-b-c sub-wave correction.  We're now well into Wave 3.  Now, following the pattern from Wave 1, it looks like there are two possible wave counts in progress.  One - the one I marked - shows sub-waves i, ii, and iii complete with iv in progress.  There's another possible count that I didn't include, however, and that's for the points currently labeled ii, iii, and iv at the top of the chart to really be an (a)-(b)-(c) corrective pattern that will complete wave ii.  Which count turns out to be correct will be determined as the rest of the pattern plays out.  From a directional perspective, it doesn't matter.  The next direction is up.  Where it does matter, however, is from a move magnitude perspective.

If the count I've marked is the correct one, then wave iii is much shorter than wave i, meaning wave v has no breathing room at all.  It must, by definition, be shorter than wave iii in this scenario, which means it will barely pass the 52-week high before the impulse is over.  Tiny, indeed.

If, however, the alternate count is correct, then we've yet to see the wave iii move, and that has plenty of headroom for full development.  The problem is, we can't know for certain, so we need to turn to other signals for guidance.

You'll recall that I've said on numerous occasions that I don't trade based on indicators.  There are numerous trading systems that rely exclusively on indicators, and I've tried a number of them. They don't, however, fit my trading style, and I've never really been successful relying just on the indicators to enter or exit a trade.  I'd much rather read the chart and use the indicators to add additional pertinent data into my analysis.

There are four indicators that I typically use to increase the data at hand, and you see all of them on the chart included in this article.  The first is above volume, and it's the On Balance Volume indicator.  I use the slope of the indicator to tell me if the stock is being accumulated (rising slope) or distributed (falling slope.)  You can see that the slope has been up throughout this move although there's a slight hook down for the last couple of days.  No surprise there, so no additional data comes into the equation.

The next is right below the chart, and that's a 9-period RSI (Relative Strength Index) overlaid with a 21-period Exponential Moving Average of the RSI.  I use the EMA as a signal line, and it gives me a pretty good view of the direction the stock is likely to take for the next few days.  As you've seen in other posts, I also use the RSI as a divergence indicator.  The RSI is considered a momentum indicator and the formula for the index is designed to measure the strength of recent moves, either up or down.

You can see on the chart that the RSI first dropped below the 21-day EMA on 19 December - a bearish signal - and then crossed below the 70 mark on 21-December.  That's a second bearish signal, and it's also one that many traders use to either enter short positions or close long positions.  Today's long bearish candle is no surprise given the number of stops that must have been tripped in the process.  The bottom line, though, is the RSI is warning us that momentum has waned and a period of weakness may be in the offing.

The third indicator on the chart is the Slow Stochastic.  Remember that the Slow Stochastic is a smoothed version of the Fast Stochastic, but I find that it provides a more accurate view with less false moves.  The two settings I use is a 14-period %K line and a 3-period %D line.  Similar to the RSI, the %K crossed below the %D on 20 December.  That's an extremely bearish indication since the Stochastic is designed to track the closing price as it relates to the overall range.  As prices start to close near the bottom of its daily range, the indication is that demand is waning and a further decline is likely.

Equally significant is today's cross of the %K line below the 80 mark.  Just like the RSI, traders use that cross-over as a signal to enter short or close long positions.  When both the RSI and Stochastic are in agreement like this, it's an extremely bearish signal.

The final indicator I use, and you can see it on all my charts, is the Volume by Price indicator.  Those are the horizontal bars you see to the left of the price chart.  They provide a very good graphical indicator of the amount of support or resistance a stock may have at a given level.  For example, look at the length of those bars between 65 and 70.  There's a significant amount of interest there - or at least, there has been in the past.  Now, compare that to where we're trading right now.  There's historically been very little if any interest at this level.  In other words, there's not much holding the stock up, right now.  At this level, it's like trying to walk across as chasm on a bridge made of balsa wood.  Tread lightly, or you're crashing to the canyon floor.

What I'm seeing is a chart that's telling me that Marriott is running out of steam at this level.  For the moment, I don't see much demand either holding the stock up or attempting to push it higher.  Now, that may change after the first of the year, but for the present, I'm not looking at entering a long position.  Not, at least, until I see some indication the smart money is still interested in this stock.  Instead, what I'll be looking for is a sign that the floor's about to drop out.  If that happens, I'll look at a short position to ride this stock back down to the first major support level at $78.  That signal will come on a close below $82.70 with supporting volume.  Until something changes, I have this stock on my list for potential short trades, not long trades.

Happy Trading.