Monday, December 05, 2016

Watching EVHC For Direction Post-Merger

Envision Healthcare Holdings (NYSE: EVHC) and AMSURG completed their merger on 1 December 2016.  The merged entity continues to trade under the EVHC symbol and retains the Envision brand name.  Not surprisingly, the day of the merger generated exceptionally high volume but resulted in a bearish candle in the middle of a consolidation zone that has persisted since mid-August.  We're now watching this stock to see which way it will break now that the specter of the merger itself is behind them.

EVHC Daily Chart
What's interesting, however, are the two daily candles that followed the actual merger.  Both were high range, although the candle on 2 December was one of the longest on the chart.  Interestingly, while it had a large body, the upper and lower shadows were nearly equal in size and, in their entirety, provided some excellent guidance as to the location of support and resistance for the new pattern.

Today's candle was even more telling.  What appeared to be a strong bullish candle at the top, we closed the day after tracing an inverted hammer.  The upper shadow ran into heavy resistance as it penetrated the consolidation zone that ran from March through July 2016, and quickly retreated below the overall high/low 50% retracement level.

Both candles were on higher than average volume, but on the whole the volume was not consistent with the overall size of the candles.  Today's volume, in fact, was higher than yesterday's, giving added strength to the inverted hammer signal.

The synergies and efficiencies of the two merged companies are still a big unknown, and I think we're seeing that in the two post-merger trading days.  We'll be watching this stock for some sign that it will ultimately form an impulse in either direction.  It's entirely possible that the prior consolidation period was used for accumulation by the larger operators, but thus far we haven't seen convincing evidence that they're ready to start a campaign to the upside just yet.

Given the inverted hammer coupled with today's volume signature, we're watching for a play to the short side with a potential pullback target of that dotted red line that forms a convincing diagonal support line.  That yesterday's candle bounced off it did not escape notice, however today's pattern implies that there's possibly one more test of that line to come.

That, in fact, is the way we plan to play this stock.  If we get confirmation of a downward move, we'll play a short position targeting that support line to exit the trade.  What we're really looking for, however, is a retest of that support line.  We'll take a long position there and look for a target at least to the 61.8% full pattern retracement level.  That point looks to be the next resistance test level and it would be a good target to exit a long trade.  A bounce off support will be the lower risk trade of the two, and we'll size our positions and stops accordingly.

This is definitely a stock to add to your watch list.  The wide-range consolidation zones offer excellent swing trading opportunities themselves, and this stock has the potential to move sharply once it begins an impulse wave in earnest.  Keep an eye on the volume activity as well as the breakout levels for a signal as to when this will be a good play to either side.

Happy Trading.

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