Sunday, December 11, 2016

MSI Showing Weakness On 52-Week High

Motorola Solutions, Inc. (NYSE: MSI) reached a 52-week high in trading on Thursday, 8 December 2016.  The pattern leading to the high coupled with the reversal on Friday, however, signals potential short-term weakness that may well be tradeable.

MSI Daily Chart
The candle drawn on Thursday's high was a doji, and it did so on extremely weak volume.  A doji of this shape - only a two cent difference between open and close, with a long tail and short wick - is, in and of itself, and extremely unreliable signal.  The pattern represents indecision.  It's a day where neither the bulls nor the bears were able to take control.  The long lower shadow tells us that there was an attempt by the bears to take the market lower, however that was beaten back and the stock closed essentially right where it opened.  The extremely low volume also tells us there was very little interest in the stock, either way.  There was neither demand nor supply, indicating that the smart money was sitting in "wait and see" mode.

The next day - Friday - drew a long bearish candle.  We now have a multi-day pattern to analyze.  The short uptrend from last week ended with a strong bullish candle on Wednesday.  Thursday's doji gapped up at the open and left a long shadow.  Friday resulted in a long bearish candle that retraced most of Wednesdays white candle.  That pattern is known as an Evening Star Doji and is one of the stronger short-term bearish reversal patterns we follow.  The key, here, is short-term. 

Let's now turn our attention away from the candle pattern and see what other information we can glean from the chart.

First, let's look at the RSI(9) oscillator.  The peak of this oscillator in the short-term pattern we're studying occurred, not on a high, but on a strong bullish candle the day before a high on 15 November.  The next day traced what was then a 52-week high, but the RSI retreated slightly.  Our most recent 52-week high this past Thursday drew an even lower RSI peak.  What we're seeing is a bearish divergence in the RSI.  The stock has traced higher highs but the RSI has traced lower highs.  It's a signal of impending short-term weakness.

Next, notice the upper green dashed line.  This was drawn from a high on 6 September through the high on 16 November.  Notice that it also formed resistance in the 3-day Evening Star Doji pattern that ended trading this week.  We now have two forms of resistance that are impeding upward progress - this upward diagonal resistance line and the 52-week high horizontal resistance line.

Let's now consider what volume is telling us.  I always include two moving averages on volume: A 200-day simple moving average line that is very smooth, and sets a baseline for long-term volume patterns, and a 50-day exponential moving average that gives us a measure of how volume has behaved in the last quarter.

The stock's rise started on 4 November 2016, and did so on volume significantly above the 200-day moving average.  That was a confirmed bullish move.  Volume, however, has been average at best since then, and only once touched that 200-day average in the current upward move.  The 52-week high and the day following that high were well below even the 50-day average.  Interest in moving this stock has waned.  Volume is currently not confirming any move, which is a major caution sign for continued upward movement.  There must be demand in order to move a stock higher.  Conversely, stocks can decline - and decline rapidly - on either high supply or lack of demand.  What we're seeing at the moment may be an indication that demand has, at least for the moment, dried up.

So where does that leave us?  Well, for the moment, this is not a stock that I would play to the upside.  Not, at least, until we see some signal that demand has re-materialized and the Evening Star Doji is violated.  Notice the short-term Fibonacci Retracement drawn from the 2 December low to the 52-week high.  (The numbers are to the left of the pattern.)  A violation of the 23.8% retracement level would be a short entry I'll consider.  A price target range in such an entry is highlighted in green, ranging from the 76.4% to 100% retracement levels of the pattern.  A protective stop would be just above the high of Friday's candle.

There are several areas between entry and target that could require a quick exit.  As in most patterns, the 50% and 61.8% retracement levels can form support.  Any pause at those levels would require an exit.  There is also that diagonal dashed red support to consider.  That line proved to be major support during the prior short-term pullback, so we need to be aware of it as our trade develops.

Notice, too, that before we get to our price target region, we must also traverse the 10-day and 20-day moving averages.  Now, a reversion to the mean theory would favor a return to at least the 20-day.  Be aware, though, that either of them could provide support, causing a decline to stall at that level.  Again, if the trade weakens, then it's time to exit.

The final major point of concern is at 14:00 EST on Wednesday, 14 December.  The US Federal Open Markets Committee (FOMC) is widely expected to announce an increase of 0.25 points to short-term Fed interest rates.  That increase is already factored into the market, however that announcement will also include forward guidance and a general assessment of the US and world economy.  Predicting how the market as a whole, never mind individual stocks, will react to a FOMC announcement is a task best left to players of Three Card Monte.  Personally, I plan on extreme volatility on the afternoon of the announcement, and I assess the status of any open positions heading into the 14:00 announcement to determine if I'll close them or ride either the wave or the rip tide.  More often than not, I'll close the position.  I can always reopen it if conditions warrant after the announcement.

Bear in mind that the current signal is a short-term trade.  If it manifests, we expect to be out of the trade in one to three days.  The overall stock does not suggest long-term weakness, and neither does the overall market.  Plan your position sizing and your risk management strategy accordingly.

Happy Trading.

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