Tuesday, December 27, 2016

TRIP Setting Up Horizontal Channel After Post-Earnings Bottom

TripAdvisor, Inc. (NASDAQ: TRIP) suffered a serious fall after a disappointing Q3 earnings announcement on 9 November.  Shares fell 14% in after-hours trading when the company posted a $15.3 million miss in revenue and an adjusted EBITDA that fell 12% year-over-year.  Following a 9-month tight horizontal consolidation, the drop on the 9th looked amazingly like a break-away gap to the downside.

TRIP Daily Chart
The earnings call made it crystal clear that TripAdvisor views the redesign of their mobile apps and the emphasis on their Instant Booking feature as the key to strengthening the company's troubled revenue stream.  To that end, they announced on 20 December the introduction of a partnership with Expedia to include a selection of the latter's hotels in TRIP's Instant Booking solution. It will, of course, take several quarters to realize the benefits or liabilities of such an agreement.

Traders shrugged off the news with a two-candle bearish engulfing pattern that wiped out all of the days gains that immediately followed the announcement.  A more positive reaction would have seen bullish follow-through after the white candle on 20 December.

The pattern that developed following the 9 November earnings crush shows a bearish channel with the stock currently trading near its center.  The mid-point of the Bollinger Bands continues to provide resistance, and that's precisely where it's trading as I prepare this column.

An Elliott Wave impulse pattern appears to be nearing completion if it hasn't completed already.  Wave-iii is a short wave - shorter than Wave-i - so the truncated Wave-v may have ended on 22 December.  This does create a bit of uncertainty regarding where TRIP will travel next. 

When you consider the tight channel this stock followed from February to May, we can see the possibility of a similar channel forming now as the market digests the potential impact and growth of Instant Booking.  I'm fine with that, if it develops.  That nice 5-point channel from early 2016 produced numerous lucrative swing-trades, so it wouldn't break my heart to see another one form now. 

The RSI(9) Oscillator shows a bullish divergence emerging out of the post-earnings carnage.  This implies that all of the damage may have been done, and the stock's decline is, at least for the moment, at an end.  The Bollinger Bands suggest a bit of resistance that coincides with the 23.6% retracement level of the short-term pattern.  A stronger resistance line exists at the 38.2% level, however, so we need to be careful entering any short positions without confirmation before we reach that point.

Based on the stock's prior behavior, we're adding this to our channel watch list.  The first play will come when we see where this channel wants to form on the high side.  The areas where we will be watching for a playable reversal are first at the resistance level starting to form by points (a) and (c).  That's around $49.50. The second possible reversal point is the 23.6% level of $50.31, and the third is the 38.2% level at $53.21.  A reversal pattern at any of those points will trigger a short setup.

The bottom of the channel will depend on which setup occurs.  If it's the lower two levels, then we'll look for the bottom around $45.63.  It's likely that we'll be able to play several swings in this type of a channel, should it manifest.  If, however, the reversal occurs at the 38.2% level, then we're more likely to see $49.50 form the lower channel boundary.

The standard caution applies, here.  We must be certain we do not enter a trade based on wishful thinking.  The chart suggests a channel will develop, and we're preparing several entries if that does happen.  With trading, of course, anything else is equally possible.  We need to ensure we enter on valid reversal patterns and not enter a trade based solely on the whimsy of false hope.  Remember that a close with volume either above the 38.2% line or below $45.63 will negate the channel trades.  Also, since we're playing a channel, we will want to trail out stops, allowing us to be stopped out of the position in each case.  One of these trades will experience a breakout of the channel, and this methodology allows us to capture that breakout. 

Watch for the reversals at the key areas, and only enter the position once those reversals occur.  Also remember that we will likely miss some of the entries.  That's fine, and it's normal when trading channels.  Follow the strategies with which you are most comfortable using for reversals, and don't stress over missed opportunities.  There is always another opportunity waiting in the shadows, tomorrow.

Happy Trading

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