Saturday, December 03, 2016

PTC In Strong Bull Channel Showing Signs of Distribution

When Parametric Technology Corporation (Nasdaq: PTC) missed earnings by $0.10 per share, and missed revenue estimates by $8.79 million, one would reasonably expect a downturn in stock price, or at least a lengthy consolidation period while the new data were processed and factored into future estimates.  Instead, the response was, "Damn the torpedoes; full speed ahead," albeit on higher volume and increased daily ranges.

PTC Daily Chart
You will often read that technical analysis is more art than science, and nothing illustrates that better than this chart.  You will notice that the charts I post rarely include the more popular indicators such as a MACD histogram, an RSI(14) oscillator, or a Stochastics oscillator.  The reason is simple.  The more I trade, the less I care about technical indicators and the more I care about only two data elements: price and volume.  Aside from the moving averages you see on this chart - which I do reference to help clarify trend - there are only two technical indicators besides the price and volume bars. 

You'll see an orange line representing "On Balance Volume" overlaying the volume histogram.  Again, it's used (in my case) to help identify volume trend.  Is high (or low) volume an indication of accumulation or distribution?  That's all I care about in that case.

You'll also see the bars extending from the left side of the chart.  That's a "Volume by Price" indicator that depicts the amount of support or resistance has thus far occurred at a specific price level.  It helps identify how strong a particular support or resistance line may be.

That's it.  My trading does not rely on technical indicators, it relies on chart analysis and attempting to decipher what the market specialists are doing so we can trade alongside them, and not opposite them.  My experience has been that trading solely on indicators is one of the easiest ways to lose money, and my personal preference is to do just the opposite.

So let's take a look at PTC and try to decipher what's going on.

This stock appeared on my radar today following the hammer candlestick (circled in green) that closed the stock's trading for the week.  That the hammer followed two wide-range down days is significant, so that meant giving this chart a closer look.

At a casual glance, we can see that the stock underwent a major change of character starting October 24th.  Volume started to increase and the stock declined significantly on increasing range.  It bottomed before the close on the 26th, and this is where we have the first major indication that the smart money has an interest in this stock.

PTC released their earnings after the close on the 26th. That entire three-day decline was in anticipation of the earnings announcement, not as a result of it.  As we stated at the start of this article, PTC missed on both earnings and revenue.  The stock, therefore, should continue heading south when the market opens the next day, right? 

Wrong.  In fact, PTC gapped UP at the open by $2.45!  It then soared upward another $1.50 before finally settling back to close at $45.59, representing a 4.7% gain on the day following a bad earnings announcement.  It then continued to gain for two more days before a three-black-crows candle pattern drove it back to the low traced on the 26th.  But look at the volume on those three days as compared to the actual ranges of the bars.  Now look at the volume on the four up days that followed.  Clearly, the volume is contradicting the move down.

So what happened?  Well, we know that this stock started to climb steadily higher following a low on February 8th.  The move has been steady but daily ranges have been narrow, and the large volume days had come with the stock opening and closing in a tight range.  What this means is that there was heavy institutional buying.  Market specialists were accumulating this stock long before the public became interested in it. 

In fact, as the public started to jump on the bandwagon, what do we see? Two consecutive down-gap days, only one on higher volume, in late June as the specialists move price back to a level at which they prefer to accumulate shares. 

So that brings us to the current situation.  What do we believe is happening?  Well, based on the patterns we're seeing unfold, it appears that those same market specialists are preparing to take their profits.  It's been a nice ride, and the stock has almost doubled in price since the accumulation campaign started.  What we see at the end of October is the first of the tests to see how much demand remains, and as we saw November 4 through 10, there was quite a bit.

November 30 and December 1, the next two down days on significant volume, represent the start of the next test.  Those two days occurred without any negative news, so there was no fundamental reason for the decline.  Rather, it's part of the distribution phase test as the market specialists sell their shares to a public that is very impressed by that lengthy bullish channel that dominated 2016.

Notice the hammer candle that formed yesterday.  The range was very narrow, however volume was above average.  Demand still came into the stock on decent volume and notice that it came in right at the 61.8% retracement level of the last upward move.  Notice, too, that it did not penetrate the 50% retracement level.  Are the large institutions done?  Probably not.  They accumulated shares for 8-months, and it's going to take more than a month to distribute them.  More likely, we're in for a period of consolidation before the next move.

Can this pattern be traded?  In the very short term, yes, but it won't be for the faint of heart.  If price breaks the 50% retracement, there's a good probability that it will bounce back up to the overhead resistance line set by the pattern highs.  Odds that it will penetrate that level diminish rapidly, however.  The caution flag here, though, is that this does appear to be a distribution campaign, so the insiders are counting on the public buying, here.  At some point - it could be next week, it could be next month, or it could be next quarter - the distribution campaign will conclude and the market specialists will cease holding the stock at its current levels.  When this stock finally plummets, that rate of decent will be extreme. 

Should you chose to trade this pattern, be sure to watch the volume signatures as compared to the daily candles.  The combination will offer the best clue as to whether another test of the low will be offered or whether the bottom will fall out swiftly. My preference here is to play the short side, not the long.  We'll wait for the stock to approach the top of the channel pattern - adjusting that channel if it switches to a horizontal pattern - and take short positions on short-term reversal candles with confirming volume signatures.  This way, when the rug is finally pulled, we'll be on the right side of the trade, and not holding a long position as the stock dives past our stops.

Chart reading is very much like detective work.  Look for the clues being offered and attempt to glean what the smart money is attempting to do.  It's more work than simply watching for a cross on an oscillator, but it will improve your capital protection and your risk management significantly.  That, after all, is the key to profitability.  Protect your capital and manage your risk. 

Happy Trading.

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