Monday, December 26, 2016

Pullback in JBHT Offers Potential Long Entry

If ever there was a company that stood to benefit from the proposed corporate tax policies of the incoming Trump Administration, J. B. Hunt Transport Services, Inc. (NASDAQ: JBHT) would certainly stand near the top of the list.  With over $638 million in annual pre-tax income, this large-scale transportation and delivery services giant is forecasting an effective corporate tax rate for the year at a whopping 38%. 

A quick glance at the chart is enough to tell us that the prospect of lower corporate taxes in 2017 has attracted major interest in the stock.  Despite a $0.06 miss in earnings on 17 October, the stock surged $21.55 in the wake of the November US presidential election.  Not only do investors anticipate a significant tax benefit for JBHT, but they also anticipate an improvement in the shipping industry as a whole as manufacturing in general realizes a healthy boost to the bottom line.

JBHT Daily Chart
The long term uptrend for JBHT actually started in March, 2009.  Since then, the stock gradually stepped its way upward to where it sits today, just off its all-time high.  Since we did have to determine the origins of the January to April uptrend on the daily, we went back to the weekly chart and determined that this pattern was part of an (A)-(B)-(C) corrective wave of the higher order trend. For our purposes, we're relatively safe assuming a start of the next uptrend where (C) is labeled.

We can see that, despite disappointing earnings, JBHT recorded a full 5-sub-wave impulse that culminated at the all-time high on 9 December 2016.  It's equally important to note that the RSI(9) oscillator has not wavered since the completion of Wave iii on 14 November.  The oscillator maintained its position near its maximum possible value throughout the uptrend, only retreating after the bearish candle that bounced off the 52-week high.

The retreat from that high appears to be setting up as a classic a-b-c correction, although it's too early to tell how far into that correction we may be sitting at the moment.  It's not uncommon for such a retracement to travel almost to the top of the prior wave iii, and that level would not-so-coincidentally match the 38.2% retracement of the full impulse.  So be aware that we have plenty of room to the downside in the short term.

Volume patterns also warn us of potential short term trouble.  The amount of sustained volume in the six-days after the top tells us that a tremendous amount of profit-taking occurred at that level. That's not surprising, of course, given that it's an all-time high following a 22-point run.  Of course traders were taking profits!  What we have to see now, though, is if demand will drive us higher or if there's more supply waiting to be unloaded.  Time will tell.

I'm currently not comfortable with the a-b-c labeling in that pullback.  At least, I'm not comfortable with the "c" label, just yet.  "b" was a bit shallow, but it would not be unusual for "c" to travel as far as "a" as measured from the top of "b".  That would bring us right to that 38.2% line.  In fact, that's one of the short term scenarios for which we are preparing.

There is a bit of support building where the stock currently sits, and that coincides with the 23.2% retracement line.  If that line is breached with confirming volume, however, we will certainly enter a short trade and ride it down possibly as far as the 38.2% line.  The odds are pretty good that such a trade will develop.

Notice the two dashed green diagonal support lines that are drawn below our current position.  The first is a line parallel to what proved to be a very consistent resistance line.  There's not yet any evidence that this line will serve as support, however, so while it's drawn there, we'll ignore it until it proves significant.  The other line, drawn with a more shallow slope, extends from the origin of the trend to the bottom of wave ii.  It is very common for that trend-line to form the support off which wave iv will bounce.  Notice where it intersects the 38.2% retracement line.  That intersection is 6 trading days from now, and it would require the exact same slope that wave "a" also used in its 6-day retreat.  We can't ignore the potential for that type of setup, and if it occurs we'll certainly take advantage of it.

Longer term, we likely have all of a Wave 3 impulse to trade.  We'll be watching for a reversal that signals the start of that wave since it could very well produce another 22 or more points to the upside when it triggers.  Areas that I'm watching for that reversal are the 30 period EMA (in pink), the diagonal lower trend-line (in light green), the lower Bollinger Band, and the 38.2% retracement line.  While it's possible for the reversal to occur right from here, I'd like to see a close above the top of "b" on confirming volume before committing to a long play this early.  I'll take it if it comes, of all the scenarios we see in the short term, that's the least likely.  Regardless, we'll play the setup that is offered.

Happy Trading.

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