Saturday, December 31, 2016

COL in Year-Long X-Y-Z Correction on Weekly Chart

When I first looked at the daily chart of Rockwell Collins (NYSE: COL) my first impressions drew my attention to the obvious five-wave impulse pattern that just completed, the lazy correction that's currently in flight, and the final candle resting against the lower Bollinger Band.  There appeared to be some decent trade setups being drawn, so I decided to take a closer look.

As I always do, before attempting to decipher the daily chart, I first look at the weekly to see what the stock has been up to in the longer term.  Always remember our strategy:
  1. Use the daily chart for trade setups and exits; 
  2. Use the weekly chart to ascertain the long term trend and behavior of the stock; 
  3. Use the 30-minute chart (or hourly chart if you prefer that one) for timing the entry.
The pattern on the weekly chart was perhaps the most straight-forward pattern I've seen in months.  Take a look:

COL Weekly Chart
Starting with the low the week of 8 August 2011, the Aerospace giant followed a complete five-wave impulse pattern through 18 May 2015.  Wave-II of the pattern was a deep correction (just over 61.8% of Wave-I) whereas Wave-IV was shallow as compared to Wave-III.  The alternation rule was satisfied, and Wave-III turned out to be the longest of the three impulses, so the Wave-III rule was also satisfied.  It was a textbook five-wave impulse pattern.

Since 18 May 2015, the stock traded sideways in a flat correction that retraced almost all of Wave-V.  Now, corrective waves are often extremely troublesome to label, and I really don't enjoy trading them since they have more of a measure of unpredictability than impulse waves.  In this case, however, COL was extremely kind to Elliotticians. 

A flat a-b-c correction completed the week of 8 February, and that was immediately followed by a second a-b-c flat correction that completed the week of 28 November.  Here's where corrective waves can get tricky, however.  The current weekly setup appears to be an X-Y-Z flat correction, and if that's the case, then we should be in Wave-a of the final Z wave.  Corrective waves can be unpredictable, however, and complex corrections (as we're in now) can change character at will.  So while our analysis tells us that we're likely in an X-Y-Z, we do need to be alert for a change in character that signals the start of a new impulse wave.

On the weekly chart, there's a strong horizontal channel that provides viable price targets for our subsequent a, b, and then c waves.  We can expect the current Wave-a to reverse near the lower support line around $81.75.  Be aware of that upward trending 200-week moving average, though.  That may offer support that forces a reversal sooner than anticipated.  Following the reversal, we anticipate Wave-b topping out near the resistance line at $95.20, and then Wave-c completing Wave-z back down near $81.75. 

Note that the upward waves are taking between 6 and 9 weeks to complete, but the downward waves are taking almost double that amount of time.  I find that significant since stocks typically fall much faster than they rise.  It seems there's a bit of demand pushing this stock higher rather quickly whenever we approach the lower resistance line.

Also look at the volume pattern that started with Wave-b of Wave-Y.  There was a significant amount of volume at that Wave-b low and that candle is one of the most bullish on the chart.  That volume was all demand, not supply.  From that point on, you can see that demand was high on the up days, but as the stock drifted lower, supply was quickly evaporating.

Finally, the RSI(9) Oscillator also signals increasing strength. That's a nice bullish channel that's formed, and it matches our assessment that demand is starting to dominate.  What all this means is that the indications are that the next major 5-wave impulse is likely to the upside.  In the larger scheme, this year-long consolidation appears to be a re-accumulation effort, and not a distribution effort.  The large institutions appear to be accumulating shares, not distributing them.

So let's now turn to the daily chart for our setups.

COL Daily Chart
The bold black labels are directly from the weekly chart and fine-tune precisely when each of those waves completed.  Notice that the move up from Wave-b to Wave-c in Wave-Y was a well-defined 5-wave impulse pattern.  That's typical of "c" waves and it adds a measure of confidence to the analysis. 

Wave-a is also typically a 5-wave impulse pattern.  What we've labeled on the chart so far coming off our Wave-Y high appears to be the completion of 5 sub-waves that (if that pattern is complete) likely forms Wave-1 of Wave-a of Wave-Z.  Remember, from the weekly, we have set a target for the completion of Wave-a down at $81.75. 

The next couple of trading days will tell us if Wave-1 is complete.  If it is, then we can anticipate a Wave-2 that will likely rise to the $94.80 - $95.10 range.  There's a nice resistance zone at that level, and it would mark a typical retracement point for a second wave in this pattern.

The move that we want to catch, however, is Wave-3 in this pattern.  That will be a short position, and that move can take us at least as far as the $85.41 mark.  There's a strong support line at that level, and it coincides with the 61.8% retracement level of the b-c impulse wave.

Beyond that, we'll monitor the volume and price behavior to determine if there's a Wave-4 and Wave-5 play available to us.  It's too early to tell right now, although there's enough strength in the analysis to suggest we'll have some good setups in that range.

Notice the RSI(9) oscillator on the daily chart.  While the weekly is showing a strong bullish sentiment, the daily is still showing a strong bearish trend. That is consistent with the current analysis of our Wave-a correction, and it does add support to our view that the short-term direction for this stock is down (after we get the Wave-2 upward correction, of course.)

The last point to which I'd like to draw your attention, however, is the volume pattern that I've highlighted above the chart.  Look at the strength of demand on each of the upward impulses in wave-c.  As we've said, we believe this stock is under re-accumulation, and  that volume signature supports that theory.  Once Wave-a completes, watch the volume carefully on the subsequent Wave-b.  It's possible, given this pattern, that there will not be another Wave-c and we'll take off into the new impulse from that top.  Watch for some significant tests of the lows as we approach the bottom of Wave-a, and pay close attention to the volume patterns during those tests.  Once the institutions believe they've shaken out the last of the weak money, they'll start their next campaign.  The volume signatures at the extremes will tell us when that's about to occur.

Happy Trading. 

Friday, December 30, 2016

QCOM Trading in 5-Point Channel Following Acquisition News

Following reports on 29 September that Qualcomm, Inc. (NASDAQ: QCOM) was in talks to acquire NXP Semiconductors, N.V. (NASDAQ: NXPI), shares of QCOM leapt 5 1/2 points in the day's trading session.  From that date through the present, a five-point channel with a very slight upward slope formed, holding price within that near-horizontal range for three months.

The acquisition itself was formally announced a month later on 27 October, with Qualcomm's official press release.  They paid about $47 billion, purchasing all outstanding shares for $110 per share.  The deal is expected to return $30 billion in revenue annually for the combined company.  The stock did jump another three points on that news, although by the following day it had retreated nicely back into the channel that has been holding it steady all quarter.

QCOM Daily Chart
As of today, the stock is resting once again at the bottom of the channel.  It's also sitting on top of a diagonal support line that goes all the way back to 7 March 2016, so that line may have a bit of strength to it.  The bearish engulfing candle that formed today is somewhat troubling, but candle patterns alone mean nothing without confirmation.  A strong day on Tuesday - remember, the market is closed, Monday - will negate the bearish engulfing pattern and will be a nice setup for a long trade.

Today's candle dipped below the lower Bollinger Band channel but rallied briefly to close back inside the bands.  I've found that to be a somewhat reliable indicator, although I prefer the candle to have a long shadow and short body (if it's dipping below the lower band).  This signal is much weaker given the length of body compared to the full range.  As a result, we do need to see what strength (or weakness) develops on Tuesday before we can safely say this is a good long setup.

The RSI(9) oscillator does caution us against taking too bullish a view, however.  It confirms the general weakness of the channel pattern, and it signaled a bearish divergence on the 27 October high. Even the channel engulfing the RSI signals bearish divergence since it's falling while the price channel is rising.

So we currently have these three data points:
    1. Price is resting at both the bottom of a 3-month long channel and right on top of a 9-month long support line.  
    2. Today's candle formed a bearish engulfing pattern.
    3. The RSI(9) Oscillator formed a lengthy bearish divergence pattern.
 Let's turn to the weekly chart to see if it can offer any assistance in deciphering the next move.

QCOM Weekly Chart

Here the overall picture does clear up a bit.  Notice first the fully developed 5-wave impulse that completed on 26 September.  What we don't know, of course, is if that's the end of the pattern or if that's merely the completion of Wave-1 at a higher level.  That the initial impulse ended, though, does eliminate that type of upward pressure on price, and it does indicate that we need to exercise caution on the long side.

What manifests as a near-horizontal channel on the daily chart, however, turns out to be a well-defined descending triangle on the weekly chart.  It looks like we're currently trading at about the 50% point from the initial leg to the apex, and a breakout typically occurs about 2/3 of the way through the triangle pattern.

Like the daily chart, the weekly ended right on top of the triangle base.  Furthermore, the weekly candle was extremely bearish, and it immediately follows the gravestone doji that was drawn last week.  Combined, the two create an extremely bearish signal.  Add to that mix, is this week's close which crossed below the 10-week, 20-week, and 200-week moving averages.

Finally, the RSI(9) Oscillator on the weekly chart is also displaying b bearish divergence and showing significant weakness. The RSI continues to drop and still has a long way to go before it reaches a level that could indicate a potential bottom.

So on top of our daily chart data points, let's add these from the weekly chart:
  1. A long red candle with a very short shadow closed the week following a gravestone doji last week.
  2. The weekly close crossed below three critical moving averages.
  3. The RSI(9) Oscillator showed a bearish divergence and continues to show pattern weakness.
When we combine the data from the daily chart with the data from the weekly chart, we must conclude that there's a significant amount of downward pressure at the moment.  A long trade from here will not likely reach the top of the channel.  Instead, the target would be no further than the top of the descending triangle, or in a shorter term, the top of the horizontal resistance line that cuts through the triangle.  So we're looking at a profit target close to $69.  From here, with a stop below the channel line, we still have a decent 3:1 reward to risk ratio, so if we do get a bullish reversal pattern at the beginning of the week, we can take a long setup if we so desire.  Just keep in mind that there's not a lot of demand manifesting at the moment, so be prepared for a quick exit.

The more likely play is to the short side on continued weakness.  The downside move on a break is close to $7, and with a tight stop, the risk will be fairly low.  Be alert for a strong move breaking the channel bottom. Volume will be higher next week than we've seen for the last couple of weeks, so don't be fooled by a return to normal volume, though.  Look at the volume patterns from a few weeks ago for comparison.  We'll take the setup that the daily chart offers us.  Just be sure to factor the overall risk assessment into the position sizing, and be prepared to exit immediately if the signal turns out to be a head-fake.

Happy Trading.

Despite Good Earnings and Guidance, DKS Continues to Fall

Dick's Sporting Goods, Inc. (NYSE: DKS) reported their third consecutive quarter of strong earnings and revenue growth on 15 November.  That didn't prevent the stock from tumbling 7% on the good news.  While it did return to the pre-earnings high through a healthy December rally, the stock has once again tumbled, leaving both a daily and a weekly chart that shows nothing but short signals heading into the new year.

DKS Daily Chart
Bouncing off an 8 December retest of the 52-week highs, DKS drew three complete impulse waves to the downside, and appears to be trading sideways in Wave-iv as 2016 draws to a close.  Most notably on the daily chart, the very strong downward move on 22 December formed a straight flag-pole for the current horizontal action.

That single-day plummet followed reports from Finish Line and Nike that indicated a very weak retail season heading into Christmas, and virtually the entire retail sector was hammered on the news.  Normally, such an event would be a buying opportunity after three very good quarters and strong forward guidance into year-end.  The chart, however, suggests that there's more downward pressure coming in the short term.

Starting with the Elliott Wave pattern, Wave-iii was longer than Wave-i, so we can use the length of Wave-i as the conservative measure for Wave-v.  That puts us down in the area highlighted in red for a typical Wave-v move in this pattern.

Next, let's check the measure rule for that bear flag that's developing.  On a downward break, it, too, ends up right in the middle of that red area.  Okay, there are two signals giving us the same target.  Are there any more?

Sure enough, there's a third.  From 22 September to 8 December, the chart recorded a double top, and possibly a triple top, if you include the one-day earnings spike.  The neckline has been breached with confirming volume, so this is a valid double-top pattern.  The measure rule for the double top places us, once again, in the middle of that red area.  The short-term downward pressure is mounting.

The current bearish impulse pattern established a strong diagonal resistance line with three obvious tests culminating with the Wave-ii top.  It's likely that the next downward thrust will come off a touch of that resistance line.  Unless the flag pattern changes, that should occur mid-to-late next week at the latest.  Be ready for it, since a failure at that line will be an excellent entry signal.

Be mindful of the diagonal support line coming off the lows from the first top.  We may experience a bit of a pause when we encounter that line on the way down, especially around the 38.2% retrace line or the horizontal support line around 50%.  Wave-v often truncates, so don't hesitate to exit the short trade if we encounter too much support at those levels.

Let's take a quick look at the weekly chart to see what other supporting or refuting evidence may be available.

DKS Weekly Chart
Dick's has been struggling to make much headway for several years, and the pattern shows a long-term corrective pattern in progress.  Now, it's entirely possible that the week of 19 January started an impulse wave.  We don't yet show it on the chart, but from that point, your eye can easily draw a Wave-1 completion at 14 March, a Wave-2 completion at 27 June, and a Wave-3 completion at 19 September.  (Remember, this is a weekly chart, so those dates represent the start of the week in which the wave completed.)

With such a wave count, it would mean we're currently in a Wave-4 correction on the weekly chart.  The area in red would be  a deep correction, however it does not violate any of the wave rules.  If this plays out, there may be a longer term long trade in the offing, once the downward targets are completed.

Notice the number of tops that formed a diagonal resistance line.  With four touches of that line, each ending with a long-wick candle for that week, that resistance line appears extremely strong.  Once an uptrend resumes, we can expect another test of that resistance line.

The weekly chart confirms the short-term development of that double top was saw on the daily.  Note that, on the weekly chart, it also draws a target range (in red) that matches what we found on the daily.  Also note that the RSI(9) oscillator signaled a bearish divergence with that double top pattern and is still signalling weakness in the overall chart.

So for the moment, we're looking at DKS as a short candidate.  An aggressive entry will be a bounce off the diagonal resistance line on the daily chart.  A conservative entry will be a close below the bottom of the flag pattern on the daily chart.  In either case, the price target will be in the red area marked on the chart.

Longer term, once that target is met, we'll assess a long trade that could take us back up to the diagonal resistance line we discussed on the weekly chart.  That's likely a few weeks away, however, so let's not get ahead of ourselves.  Of course, we do need to be alert for the possible failure of the current pattern.  Simply because we are preparing for a short entry does not mean that a long setup won't manifest.  We'll certainly play it long if that strength manifests.  I suspect, however, that we won't see that kind of strength in the retail sector until Friday, 13 January with the Retail Sales report released at 08:30 AM EST on that date.  That report will be a major mover (in either direction) for the retail sector, so be aware of it in any trades that may span that date.

Happy Trading. 

Thursday, December 29, 2016

Bed, Bath, and Beyond Punished After Third Straight Earnings Miss

The third quarter earnings release on 21 December for Bed, Bath, and Beyond (NASDAQ: BBBY) was anything but pretty.  The troubled owner of over a half-dozen names including Christmas Tree Shops and the Bed, Bath, and Beyond retail store posted an earnings miss of $0.13, and a revenue miss of $50 million.  In the last twelve quarters, only two have been positive reports.  The stock plunged 10%, following what may turn out to be a breakaway gap, and has since formed what appears to be a bear pennant, signalling more trouble may be ahead for the already battered stock.

BBBY Daily Chart
The two-day flagpole and subsequent pennant signal another down more in the short term, and that move would have a conservative price target in the $36.50 range.  The signal for a short entry would be a close below the horizontal pennant bottom with confirming volume.  The only support to speak of below that pennant is the low of the prior move, which ended on 4 November.

The RSI(9) oscillator appears to agree with continued weakness, although it's not doing so with much enthusiasm.  There's a bearish divergence line along the highs, however that prognostication likely completed with the strong downward move after 12 December.  The lows, however, are flat.  That's slight bearish since the last low on the chart was higher than the prior one, but as divergences go, it's a pretty flimsy signal.

Volume is also giving us a bit of a warning sign.  The rising volume into earnings coupled with the extreme volume on earnings day is symptomatic of climactic action.  Indeed, in the days after the earnings announcement, the stock traded sideways, not down.  Volume on the two up-days was high, while volume on the last down day was low.  Look at the volume today (29 December.)  That's higher than average volume on an up-day with a very narrow range candle.  A lot of shares changed hands, today, but the stock didn't go very far.  That's indicative of institutional activity since retail traders can't generate that kind of volume.

The bottom line here is that the daily chart shows a potentially bearish pattern - the bear pennant - but all other signals are warning us that there may not be much more room to the downside.  With that in mind, we'll take a look at the weekly chart and see if it can shed any more light on the situation.

BBBY Weekly Chart
The first thing that leaps out on this chart is the distinctive Head and Shoulders pattern that spanned mid-2012 through the end of 2015.  Both shoulders are well formed, and the neckline is as close to horizontal as you're going to get.  Chartists are well aware that the Head and Shoulders pattern is a major reversal pattern, so longer term traders - those that play on the weekly charts - would have traded this to the short side with several potential entry points depending on the type move they were trying to capture.

I show the Fibonacci target levels with the numbers directly below the low of the neck.  With that final thrust down on 31 October 2016, the 61.8% extension was reached, and that's a very frequent target level for the Head and Shoulders pattern.  While it could still trade up to the remaining 38.2%, that's not something I'd factor into any additional analysis.  We'll consider this pattern complete as it is, and the price target as met.

What we can glean now from the weekly chart is that we've been in a relatively tight consolidation pattern since February.  A bearish diagonal trend-line was breached during earnings week, however the trend-line was a bit weak, so I don't think I'd give it much weight.

It's possible that the leg down from the right shoulder was a Wave-1 impulse, and if that's the case, then the horizontal pattern that followed would be Wave-2.  If that's the case, then there's plenty of room to the downside from here with two more impulse waves to follow.  These are long-term patterns on this chart, though, and are well outside our trading horizon.  What may be of significance, though, is that - in an X-Y-Z correction (which the pattern appears to be drawing on the weekly chart) the next leg from here is up.  That would be a potential 4 to 6 week move - longer than our trading style - but it does give us some direction as to what BBBY may be headed from here.

What seems obvious is that there's a lot of demand coming into play as the stock reaches the bottom of the current pattern.  If we do trade to the short side, we need to ensure that it's with very tight protective stops.  The 31 October lows may very well be the low - or very near the low - of the consolidation pattern.

We'll watch the daily chart's bear pennant carefully.  To enter a short trade, we need to see volume confirm the move.  We also need to be cognizant of a potential bear trap.  The weekly chart is warning us that an apparent break to the downside may actually be an institutional move to scoop up sell stops just below the pennant low. 

An upside break may also be a profitable play.  If it breaks to the upside (with confirming volume) the bullish diagonal resistance line is a likely target.  That line runs through the middle of the gap, but when we look at the number of touches that line has endured since it formed on 23 June, we have to respect the strength and significance of that resistance level. 

Watch the development of this pattern over the next couple of trading days.  Being nimble in this case, would be wise.  It can break in either direction, and we need to ensure we have a strategy that accounts for both.

Happy Trading.

AAL Preparing for Wave 5 Impulse

When we last discussed American Airlines Group (NASDAQ: AAL) on 8 December 2016 (The Grape's Vine: Bearish Harami and RSI Divergence Urge Caution with AAL) the stock was signalling weakness at what appeared to be the top of Elliott Wave 3.  All indications at that point were for a consolidation in Wave 4.  That analysis turned out to be correct, and the remainder of December was spent in a flat a-b-c consolidation.

AAL Daily Chart
At present, Wave-4 is trading right at the 23.6% retrace line of Wave-3.  This is a nice, shallow retracement as compared to the steeper Wave-2 pattern, so the alternation rule is satisfied.  It's also important to note that the of of the current Wave-4 pattern is right at a short-term support line formed by the top of the prior Wave-iii, and it's also sitting on top of the 30-day Exponential Moving Average.  Those three support levels, when combined, form a much stronger level of support than each of them would individually.

Continuing the Elliott Wave analysis, Wave-3 is longer than Wave-1, so we don't have to worry about any rule constraints that may hinder Wave-5 development.  Now, Wave-3 was an extended wave, so it's unlikely that Wave-5 will also be extended.  There's no rule preventing it, but it would be an uncommon occurrence should it occur.  Suffice it to say that I'm not counting on it in the reward to risk calculation.

As we expected - and documented in the 8 December post - the RSI(9) oscillator did indeed form a bearish divergence.  In fact, that has developed very neatly into a bearish channel that may prove to be a good entry indicator. 

Also of note, On balance Volume started to rise steadily off its lows in the middle of Wave-3, and it continues to do so.  The lows were reached at the bottom of Wave-ii, and the indicator has climbed ever since.  Even the Wave-4 consolidation did little to halt the upward climb of OBV.  This is a pretty good indication that the stock is under accumulation.

The weekly chart does little to change our current view of the stock:

AAL Weekly Chart
The Elliott Wave count is much clearer and virtually indisputable on the weekly.  Additionally, there appears to be a bull flag in development on the weekly chart, adding some strength to the projections of an upward move.  The bull channel in which the entire impulse is trading also shows plenty of room for growth.

From the weekly chart, it's easier to confirm that Wave-3 is longer than Wave-1, and from there, the projections for Wave-5 are easier to visualize.  Now, please keep in mind that, of all of the waves, Wave-5 is certainly the most fickle.  By the time we reach the fifth wave in the impulse, the institutions and the specialists already have their full allotment of shares, so the buying that's pushing the stock higher at this point is primarily public enthusiasm.  That can deteriorate rapidly, which is why it's not at all uncommon to see a truncated Wave-5 that doesn't meet the optimistic projections Elliott Wave theory would like us to believe.

So how are we trading this stock?  Well, keep in mind that tomorrow is the last trading day of the year, which means I do not plan to open any new positions in 2016.  Whether or not I open any on January 3, the first trading of the year, is doubtful as well.  We need to see how the start of the new tax year is going to manifest since there may well be a lot of profit taking in early January as traders anticipate a better tax rate structure under the incoming administration.  So the earliest I'm looking to open a new position is 4 January 2017.

Strength breaking the diagonal line forming along the highs of the last six trading days (not drawn, but I'm sure you can see that line) will be the signal to go long.  To be conservative, we're going to target the 61.8% extension line (shown on the weekly chart) in our reward to risk calculations.  Given the strength of resistance at the double-top pattern on the weekly back in January through March 2015, there is a good probability that AAL will reach that level again, however we don't want to count on that in our calculations.  We will trail our protective stops rather loosely, since we do want to catch as much of the Wave-5 move as possible, until we hit that 61.8% line.  At that point we'll tighten them and continue to follow the stock up until we're stopped out of the position.  AAL reports earnings on 27 January, and they're not expected to trade ex-dividend until early February, so there's nothing imminent that could derail the analysis, barring the unforeseen, of course.

It's time now to start assessing our trading strategy for the first week of the new year, but as I've said, it's too late in 2016 now for me to consider new positions until we see what the new tax year will bring.

Happy Trading.

ServiceNow Struggling to Break Out of Wave 4

ServiceNow (NYSE: NOW), yet another technology professional services and cloud provider, posted what appeared to be a beat on earnings and a beat on revenue for the eighth consecutive quarter.  The result, however, appears to be an exhaustion gap and an immediate decline into an Elliott Wave 4 correction.

NOW Daily Chart
 The reason for the near immediate selling may be found in this statement in the company's third quarter earnings press release:  "Our financial measures under GAAP include stock-based compensation expense, the amortization of debt discount and issuance costs related to the convertible senior notes, amortization of purchased intangibles, legal settlements, business combination and other related costs, and the related income tax effects of these adjustments. We believe the presentation of operating results that exclude these items provides useful supplemental information to investors and facilitates the analysis of our core operating results and comparison of operating results across reporting periods."

While the non-GAAP earnings posted a positive EPS of $0.24, beating estimates by $0.03, the GAAP earnings posted a negative EPS of $0.22.  In other words, when you consider their actual expenses using generally accepted accounting principles, they lost $36.3 million.  That would easily explain the exhaustion gap and the subsequent troubles the stock has endured since their 26 October announcement.

Looking a bit closer at the chart, we see that the current uptrend started on 8 February 2016, coming off the 52-week low.  The impulse included three complete Elliott waves, with Wave-1 and Wave-3 sub-dividing into five impulse waves, and Wave-2 sub-dividing into a three-wave a-b-c correction.  The uptrend produced a bullish channel, although the boundaries of that channel were violated in both directions on several occasions. 

The exhaustion gap that ended Wave 3 produced a double top with a retest of the high on 25 November.  That double top was confirmed in Wave 4 with a breach of the neckline on 1 December, and the price target was met on 2 December.  That move down was swift and decisive.  In fact, from 28 November to 2 December, the pattern displays a significant change of character, and signals a fundamental sentiment shift that we'd do well not to ignore.

The current phase certainly appears to be a complex correction in Wave 4.  Right now, the 200-day moving average is providing support and the 10-day moving average is providing resistance. With those two lines converging, something will have to give shortly.  Note, too, that the initial tend-line formed by the impulse channel was breached decisively on 1 December.  Since then, a new support trend-line appears to have formed connecting back to the Wave 2 lows.

The RSI(9) oscillator isn't offering much directional guidance at the moment.  Rather, it has simply confirmed each of the prior moves, but does not currently show any divergence in either direction.  I do show three trend-lines in the RSI since a breach of those lines may prove to be the directional signal we need.

With the complex correction either in flight or having just completed, we need to be mindful of the ensuring Wave-5 development.  Wave-4 has already retraced 61.8% of Wave-3, and in so doing it dropped below the top of Wave-1.  That's a violation of the Elliott Wave guidelines, and purists will discard the count because of it, however it's been my experience that it's a guideline that's broken frequently.  So I use that point more as a reference point for a potential reversal, but I don't stress over a breach of that line.

It's important to note that, in the current impulse, Wave-3 ended shorter than Wave-1.  That means that Wave-5 must be shorter than Wave-3.  (That rule is inviolate.  For a valid Elliott Wave count, the third wave cannot be the shortest of Waves 1, 3, and 5.)  I've marked the maximum height permitted for Wave-5 on the chart in a thick red line. 

Can we realistically expect to hit that target given the negative indicators we're seeing on the chart?  Not likely.  A truncated Wave-5 that hits the 61.8% extension is a more realistic target, and that's what we'll use in our reward to risk calculations.

Given the way the stock has behaved since 28 November, we will consider a close above the 10-day EMA as a valid buy signal. That's especially true if we can get some confirming volume, and with traders getting back to work on 3 January, that's a distinct possibility.  Our objective is to catch the Wave-5 ride, and that could be a nice 12-point swing from where we are now.  As a result, we're not going to be too aggressive with our protective stops, but will keep them below major support levels along the way.  For now, that means a stop below the channel support line.  We'll move it up as appropriate, again giving the stock room to breathe.  We expect Wave-5 to sub-divide into 5 impulse waves, as well.

NOW reports their 4Q earnings after the close on 25 January.  We expect Wave-5 to complete by then, or possibly as part of those earnings.  Either way, 25 January 2017 is our deadline to be out of this stock.  We won't hold it across that earnings announcement since we saw what a seemingly good report on 3Q did to it.  Now, holding this stock for up to three weeks is much longer than our typical holding period, however given the potential to ride that final push before a distribution phase makes it an attractive prospect.  Of course, you many also choose to play the stops tight and attempt to catch the three impulse sub-waves in Wave 5.  That's more a matter of style and your availability during the trading day, however.  Given that we expect it to be a short wave, I'm not convinced the slippage in this case is worth hopping in and out.  It's one of the rare cases where I'll try to catch the breakout of Wave 4 and ride the entire Wave 5. 

Happy Trading.

Wednesday, December 28, 2016

JNPR Stalling After Multiple Upgrades

A series of analyst upgrades in November and December provided a bit of a boost to Juniper Networks (NYSE: JNPR), already rising thanks to an excellent third quarter earnings release and improved forward guidance.  Mind you, I take analyst upgrades with a grain of salt, since they are more often than not a means of manipulating interest one way or another in the stock.  It's important to remember that the large institutional traders are buying when the retail trader is selling, and vice versa.  So when the institutions are suggest you buy, it's a pretty good indication that they're getting ready to sell.  That's not cynicism talking, it's simply the reality of how the market works.  It's good information to have for swing traders, of course, since we're more than willing to ride the wave of public euphoria up, and then ride it back down on the backs of those institutions that are now selling off the top.

Let's take a look at the daily chart and see what trades may be in the offing.

JNPR Daily Chart
 The after-hours earnings release on 25 October produced a breakaway gap that ended an 8-month consolidation pattern.  The stock found support at the top of that horizontal pattern in a classic pull-back that was a very nice entry signal long for anyone following the stock back then.

Several times over the next month, momentum started to wane, and each time one or more analyst would release an upgrade.  A short-term Elliott Wave pattern started to emerge, and two waves appear to be complete.  Interestingly, from a Wyckoffian perspective, the bottom of Elliott Wave 2 just touches the support line that would be formed by Wyckoff's "Automatic Reaction" bouncing off a selling climax last February.  The breakout in October followed by the pull-back to that horizontal support level is classic of a Wyckoffian break-out and is further confirmation that the large institutions are pushing the stock higher.  Or, they were in October and November, at least.

Here's where things start to get a bit fuzzy, however, since there's a bit of uncertainty in the count of the third Elliott Wave.  What I have labeled is the most probable count as I see it.  It looks to me like Wave-3 is subdividing into a five-wave impulse with the fourth of those sub-waves being in flight now.  If the count I show is correct, then wave-iii is just shy of the height of wave-i and therefore wave-v will be shorter than iii.  I show the maximum height of wave-v (and therefore wave 3) on the chart.

An alternate count, however, which I don't show, would have a wave-i end on 16 November, wave-ii would be the short horizontal pattern that follows, wave-iii is where I label wave-i, wave-iv is where I label wave-ii, and the final wave-v is where I label wave-iii.  In that alternate count, Wave-3 is complete as of 8 December, and the ensuing horizontal pattern would be part of Wave-4.

There's definite merit to the alternative count, however for our purposes, it honestly doesn't matter.  In both cases, the next impulse wave is up, and in both cases, the target area is roughly the same.  What we're looking for in this case is a break above the nearest overhead resistance with confirming volume.  At that point, we'd enter a long position, keep a very close daily trailing stop, and ride it until we're stopped out of the trade. 

There are a couple of signs of weakness on the chart that are of concern, hence the need to keep the protective stop rather tight.  First, we can see that On Balance Volume has turned down, and it started to hook down right after the top on 8 December.  That's an indication that demand has waned and supply is coming into play.

Second, until 8 December, the RSI(9) oscillator was supporting the bullish direction the stock was traveling.  The RSI peak on that date, however, marked a bearish divergence, indicating that momentum was on the decline.  Now, a bearish divergence in the RSI doesn't necessarily signal an immediate reversal.  Rather, it warns us that demand for the stock has weakened, and support for the stock at that level may diminish.

Finally, we have the 8 December candle itself.  The range was long, but the wick comprised over 50% of that entire range and was longer than the main body of the candle.  Volume on that day was well over both the 50-day and the 200-day moving average, and may be an indication of a buying climax.  We have to use caution, of course, assessing the volume pattern in the past week since it always tapers off dramatically around Christmas and New Years.  The 8th, however, was early enough that volume was still a meaningful indicator.

The bottom line is that the wave count suggests that there's another upward wave to go, regardless of how we handle the count.  Indications are that the institutions have been trying to push the stock higher, however there are also indications that the retail market isn't fully on board.  We're currently trading in a tight range between strong support and resistance lines that go back well into 2015.  Based on our wave count, we are expecting a trade to the upside.  We'll take that trade if we get a close above resistance on confirming volume.

On the flip side, if demand continues to weaken, we may see a break to the downside.  A close below the support line with confirming volume will be a signal to enter short.  Whether or not we take that trade will depend on the overall market mood, however at the moment, we're prepared to do so.  A likely target to the downside is around $24, which is the support line that would be formed from the consolidation pattern of the past year.

We'll have to see how this stock behaves after the first of the year.  Watch for a directional break with confirming volume and play that accordingly. 

Happy Trading.

Tuesday, December 27, 2016

DVA Sets Up for Either a Wave-(V) Impulse or an X-Y-Z Correction.

DaVita, Inc. (NYSE: DVA) appeared on my narrow range bar scan today, and at first I was inclined to dismiss the chart.  At first glance, it's not a chart that screams "tradable setup," however I decided to take a closer look.  To understand what was happening, I pulled all the way back to the monthly chart, and at that level the full Elliott Wave pattern became obvious.  We've either just completed a Wave-(IV) or that wave is about to become a complex correction with more room to maneuver.  Flipping next to the weekly, my interest was piqued further since very consisted tradable patterns were starting to emerge. Suddenly, what I saw on the daily started to make sense.

Let's look first at the weekly chart.

DVA Weekly Chart
The higher order Wave-(III) on the monthly pattern completed on 27 April 2015.  That pattern drew a complete five sub-wave impulse as well, which is labeled on the weekly.  What we see from there is that a textbook perfect (A)-(B)-(C) zig-zag correction followed.  The question, however, is whether or not that completes Wave-(IV).  From the low of the currently marked Wave-(IV), Wave-(V) should travel at least to $84.50, although there's no technical limit restricting it to that level.

Wave-(II) on the monthly was shallow - almost flat - but spanned three years.  The current Wave-(IV) by contrast has been steep - a full 30 points - and has thus far spanned two-years.  The alternation rule is satisfied since both waves differ in depth and breadth. 

Climactic selling did mark the bottom of the current wave and the ensuing reversal pattern matched the slope and shape of the decline that led us to the low.  In fact, it forms a classic "V" shape formation.  As fourth wave corrections go, however, this wave was steeper than normal.  Typical fourth waves retrace approximately to the top of the prior third sub-wave that lead to the peak.  This wave has traced well below that level, stopping (so far) at the same level as the prior fourth sub-wave's bottom.  It's unusual, but not a rule violation, by any means.

What this implies, however, is that the fifth impulse wave - Wave-(V) on the monthly may already be in progress.  What gives us pause, and we'll talk more about it on the daily, is the potential double top formation we can see from mid-September to late-December.  We need to see if there's too much resistance hitting at this level or if we can push higher.

Now let's look at the daily chart.

DVA Daily Chart
A few more pieces of the puzzle take shape on this chart.  First, we can see that the downtrend off wave (B) included a breakaway gap that was followed by a near vertical drop on confirming volume.  The continuation gap that followed almost looked like an exhaustion gap, especially when the gap was closed on the Wave-b top.  Instead, we completed an a-b-c zig-zag correction in Wave-(C) to bring us to the bottom.  The volume pattern on the daily confirms the climactic action we thought we saw on the weekly chart.

The reversal candle off that bottom was very convincing, as was the extremely high demand evidenced by the volume over that entire week.  Equally telling is that diagonal support line that formed the springboard for that strong reversal candle.  That line is actually the parallel extension of the resistance line above it.  That resistance line extends from three consecutive lower highs back in the July and August time-frame.  Extending it forward, we see that it offered resistance in the current pattern but was finally breached with confirming volume on 8 December.  A pullback tested that line on 14 and 15 December, but it held and now appears to be a support line.

The double top pattern we saw on the weekly chart appears here, as well, so we do need to be aware of it.  Given the diagonal support line and two very strong horizontal support lines that it must traverse, however, the probability that a double top will confirm (i.e. close below the neckline) is lower than it appeared on the weekly chart.

What's probable, at this point, is that the high on 12 December marks the end of Wave-1 as a sub-wave of Wave-(V).  It bounced off a strong resistance line, and then moved into an immediate horizontal pattern that is likely the second of the sub-waves.  This means that a Wave-3 upward move of at least 13 points has much better than even odds of developing.  To enter that trade, however, I'd like to see confirmation with a close above the upper resistance line with confirming volume.

Another interpretation, and the reason I'm hesitant to enter a long trade without that confirmation, is that the a-b-c pattern from Wave-(B) to Wave-(C) could develop into an x-y-z pattern in which we have two more a-b-c corrective waves to draw before Wave-(C) and Wave-(IV) truly complete and Wave-(V) starts.  If that happens, then the next move is down, and likely to at least the current low.  If we close below the major support level at $63, again with confirming volume, then our trade will be to the short side. 

An x-y-z pattern, of course, opens up several very lucrative swing trades before we start the next impulse, so let's not look at a continued complex correction as being a bad thing.  Rather, let's look at it as a prime trading opportunity.  The same is true if we see the upside breakout, indicating that wave-3 of Wave-(V) is in progress.  It's another prime trading opportunity.

Now, if you're a very aggressive trader, you can choose to play a breakout of the horizontal trading pattern we've been in for the past week.  Personally, I don't think the reward to risk ratio justifies it given where we need to place our protective stops on that type of trade, however it can certainly be entertained if it matches your style and risk tolerance.

For now, I'll be adding this to my watch list and waiting to see which wave is signaled.  Based on our analysis, this stock should generate several interesting opportunities throughout 2017.

Happy Trading

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

LLY Forms Pennant Above Support After Exhaustion Gap

We last discussed Eli Lilly (NYSE: LLY) on Thanksgiving Day, the day after the stock plunged following some bad news about Solanezumab's trial failures: The Grape's Vine: "Solanezumab Failure has Eli Lilly Down But Not Out"  The upside trades we discussed in that column are playing out as expected, and the stock is once again poised for another entry.

LLY Daily Chart
The gap down that first caught our attention in November now appears to be an exhaustion gap.  At the time, of course, it had the potential to be a breakaway gap, but as you can see from the subsequent price action, that did not manifest.  In fact, price has now broken back above the low of the pattern preceding the gap, so for all intents and purposes, that gap has been closed.

Notice that the pattern that developed after the gap down was more of an ascending triangle than the flag or pennant we discussed, however the consolidation was what we expected.  It finally broke to the upside with confirming volume on 15 December, and the four-day vertical move created a very nice flagpole for the pennant that has since developed.  That pennant is where we sit, today.

The first indication of the potential for an upside break came from the RSI(9) oscillator.  Even on that extreme low following the gap, the RSI formed a bullish divergence that was our clue that the strength lay to the upside.  Notice, too, the diagonal resistance line formed by the two prior lows.  A break above that line as well as a break above the strong horizontal resistance that had developed would be significant.  That's exactly what happened, and the volume at the time shows very strong demand coming off those lows.

The pennant that is now in progress sits at two very important levels.  First, the base of the pennant sits right on top of a very strong support line.  That line extends across much of 2016, and it's important to note that there was a high amount of demand in play when that line was crossed on 16 December.  Second, the mid-point of the pennant is the 38.2% retracement level of the entire 52-week high to low pattern.  That retracement level is typically the first area where it's possible for a stock to retreat, so we do need to watch for that type of a reversal. 

Take note of the diagonal resistance line (in dashed green) extending from the two prior pattern highs.  At the moment, that line looks fairly week, however the longer the pennant takes to develop, the stronger that line may become.  Also be aware that I drew it through the tops of the pattern.  An alternate drawing would have it brush the top of the bodies of those candles, and in that case it lines up almost perfectly with the hypotenuse of the pennant.  That diagonal pennant line my have some teeth to it.

Conventional wisdom states that a bull pennant breaks to the upside, and that's what we show here with our price targets.  I've drawn the Fibonacci extensions for the height of the flagpole, measure up from the mid-point of the pennant. When trading such a pattern, I set a conservative target at the 61.8% extension level, and will tighten my stops significantly when the stock touches that line.  From there, I'll follow the stops up on a daily basis until stopped out.  Notice, in this case, that the 61.8% extension sits just below a major resistance line (in dark dashed blue).  Equally significant, the 61.8% retracement of the entire 52-week high-low pattern sits right between the 76.4% and 100% extensions of the price target.  We are likely to see considerable consolidation in that range, should we indeed break to the upside.

The other point to consider, although it's not drawn on the chart is that, from the 23 November low, the stocks continues to draw a well-defined 5-wave impulse pattern.  Wave-i completed 24 November, wave-ii completed 8 December, Wave-iii completed 19 December, and Wave-iv is in-flight now.  This still leaves Wave-v which, based on the current pattern, would bring us at least to the 50% extension level as a minimum projection.  (Wave-iii is longer than Wave-i, so there's not upward limit to the length of Wave-v.  The typical Wave-v in this setup would travel at least as long as Wave-i, which is the conservative target we set.)

So that's the play we're watching for LLY at the moment.  A close above the pennant will setup a long entry with a protective stop just below the strong horizontal support line.  Our conservative target is 77.54 and from there we'll follow our stops up on a daily basis until stopped out of the trade.

A close below the support line on confirming volume, however, invalidates the pennant setup.  We see much greater risk to the short side given all other indications on the chart, however, so this is not a stock we're looking to trade short at this time.

Happy Trading.

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.

Is Correction Over or Just Begun for Activision-Blizzard?

Activision-Blizzard (NASDAQ: ATVI) has had a rough couple of months.  The producers of the MMO giant "World of Warcraft" and the single-player "Call of Duty" franchise achieved their 52-week high on 25 October 2016, but that was before a string of disappoints lopped a full 50% off their rise from the 12 February 2016 52-week low.  Some interesting trading opportunities should arise as the home gaming market sorts itself out.

ATVI Daily Chart
So what exactly happened to Activision-Blizzard?  Well, the bad news really started after the close on 3 November.  The company released third quarter earnings, beating EPS by $0.07 and reporting revenue of $1.57 Billion, which was in-line with consensus estimates.  What sent shares tumbling after-hours and in the weeks that followed, however, was some extremely disappointing holiday period guidance in which they:
  • Raised guidance for full year revenue to $6.45 B non-GAAP.  Consensus was for $6.56 B.
  • Raised guidance for full year EPS to $1.92.  Consensus was for $1.98.
  • Raised guidance for the fourth quarter revenue to $1.86 B.  Consensus was for $2.45 B.
  • Raised guidance for the fourth quarter EPS to $0.40.  Consensus was for $0.79.
Naturally, on such disappointing guidance compared to analyst expectations, shares tumbled.  The news didn't improve heading into the pre-Christmas rush, either.  Reports surfaced on 9 December that sales of the company's flagship "Call of Duty" was in serious decline.  CNBC cited NPD's market research regarding November sales of Call of Duty: Infinite Warfare that showed sales declining 50% year over year as compared to the 2015 release of "Call of Duty: Black Ops III."

NPD also reported a continued decline in overall console sales as well as a continued decline of 18% in video game sales and a 28% decline in PC game sales.  Sales of Sony Corp's (NYSE: SNE) Playstation 4 and Microsoft's NASDAQ: MSFT) led the decline in console sales.

The bottom line is that the stage is set for a disappointing fourth quarter when ATVI reports after the close on 9 February 2017.  The question now, though, is whether all of the bad news has been factored into the price or if there's another move waiting in the wings.

The stock is currently trading at the 50% retracement line as measured from the 52-week low to the 52-week high.  That range is especially significant since it marks the entire previous 5-wave impulse.  Now, a 50% retracement is a bit steep, but it's not beyond typical.  The magic number for traders is typically the 61.8% retracement line since we often use that measure as the boundary between a correction and a fundamental change in trend.  Thus far, we've not yet reached that point.

In fact, it's important to note that the poor sales news did not have much of an impact on price, and the stock continued a short term horizontal pattern right into the pre-Christmas close.  Whether or not this means price has bottomed remains to be seen.

Looking now to the chart, we can see a bearish channel that recorded five touches to date along the support line.  Only now is it approaching the resistance side of the channel, and the direction this stock takes from here will likely be driven by what happens when that line is encountered.

The current bearish impulse started at the 52-week high on 25 October as noted previously.  Elliott Wave 1 in the downtrend recorded five sub-waves, and Wave 2 included a classic a-b-c correction.  Here's where the Elliott Wave count starts to get challenging.  Wave 3 appears to be in progress, and to date has completed three sub-waves.  Sub-wave iv is either complete or in progress, but the conclusion is not yet certain.

If this count is correct, then wave 3 must complete to the downside, probable at or just below that major horizontal support line drawn in bold dashed blue.  That implies a short wave v, which is appropriate since wave iii is shorter than wave i.

Of course, this downtrend is likely a corrective pattern, not a true impulse pattern.  If that plays out as an A-B-C zig-zag or flat correction, then our Elliott Wave count is wrong.  We'll have to wait for the market to show us which count is correct.

What adds a measure of doubt to our count is the pattern that formed in the RSI(9) oscillator.  First and foremost, there is a distinct bullish divergence of the lows.  The upward slope of the lows in the oscillator is obvious while the stock itself was recording markedly steeper lows in price.  That's a major sign that the downward pressure on the stock may be abating.  Second, though, is the pattern itself.  The RSI(9) oscillator formed an ascending triangle in conjunction with the horizontal price pattern formed by the stock.  The stage is set for a breakout of the oscillator (in either direction) just as price encounters that diagonal resistance line formed by the channel.

So how are we playing this one?  Well, given the amount of time between now and the next earnings release, coupled with the potential for additional negative news related to the console and PC gaming markets, I'm not looking at an upside play for ATVI.  One may develop, of course, but for me there's too much risk to the long side to make it worth playing.  Rather, I'll be watching for a potential move back to the downside, and will attempt to ride that if it occurs.  The trigger for me will be the behavior at the channel's resistance line.  If we bounce off that, I'll take the short position.  Similarly, a close below the horizontal resistance line with confirming volume will also signal a short entry.

Surprisingly, the short float is only 3.7% with 2.2 days to cover.  If there's a break to the downside, we may see a fair number of short players jump on board, and that will add some short term pressure on our ride down.  The upside pressure, on the other hand, is minimal given the small percentage that would have to cover on an upside move. The bottom line here is we'll add this to our short sale watch list and see how it develops.

Happy Trading.

Sunday, December 25, 2016

Has DRI Bottomed After Two Mixed Quarters?

Darden Restaurants (NYSE: DRI) continued to defy gravity after two consecutive quarters of missed revenue.  The owner of Olive Garden, Capital Grille, Longhorn Steakhouse and other well known chains posted earnings on 20 December.  While they beat EPS again, revenue was a miss by $10 million for the second consecutive quarter.  What appears to be the saving grace for the restaurant giant is strong same-store sales growth, with all but Season 52 posting positive numbers for the quarter. 

The company also reaffirmed their Fiscal Year 2017 guidance of EPS between $3.87 and $3.97, up from the current $3.44.  Given the current chart pattern and the Elliott Wave count we'll discuss in a bit, that increased guidance is of significance.  Let's take a look at the chart.

DRI Daily Chart
Let's take a look at that long black candle on 4 October, 2016.  That coincides with last quarter's earnings release in which Darden also beat on EPS but missed by $10 million in revenue.  Shareholders shrugged off the news, and DRI - which had traded in a very tight consolidation for the previous three months - continued its sideways movement.  There wasn't a hint of selling despite the negative revenue miss.

Less than a month after mixed earnings, Darden begins a strong upward climb, completing five sub-waves between 26 October and 12 December.  This is where the Elliott Wave count gets interesting, however.  The five-wave impulse is fairly straightforward, and while other counts are possible, the one marked i though v is the most likely given the pattern.  I'm comfortable with that count. 

From 12 December to the close on 23 December, a possible a-b-c correction played itself out.  The bottom of c ends just above the 38.2% retracement of the entire wave.  It also ends just above the prior wave iii top and is just over a 61.8% retrace of wave v.  This means that it's a deep but consistent zig-zag pattern.  I'm also comfortable with that count.

So what's the challenge?  Well, the challenge is where Darden may go from here, and how we should play it.  That's always the challenge, when you stop to think about it.  We are always forced to trade to the right of the final bar; we must always trade into what has yet to happen.  The past is crystal clear, but the future?  Not so much.

Notice the long wick candle I have highlighted on 20 December.  That's the candle that drew after this quarter's earnings announcement.  Volume was typical of an earnings release, and just like last quarter, the stock made no headway in either direction despite the mixed report.  The decline over the next three days was subtle and somewhat negligible given the current price. 

This brings us to the question at hand.  Has DRI bottomed and is it ready for another impulse wave,   or have the large institutions lost patience with the revenue misses and is DRI poised to plummet?  Consider the following signals on the chart:
  • The RSI(9) Oscillator continues to signal a strong bearish divergence. The divergence started with the Wave iii completion high on 15 November and it has yet to abate.  This is a definite bearish indicator.
  • A trend-line drawn from the start of the impulse wave, through the wave ii low ends right at the current low of our possible wave c.  It has provided strong support through the impulse and has yet to be breached.  This is a bullish indicator.
  • Friday's candle is a hammer at what may be the wave c low.  Now, this signal would be much better on higher volume, however the volume on the close before Christmas was extremely low across the board.  We're forced to ignore volume due to the date.  The hammer in this position, with a long shadow that touches the support line, is a bullish indicator.
  • The Elliott Wave count suggests the completion of an a-b-c correction following a five-wave impulse.  This could result in the start of a new impulse, or it could evolve into an x-y-z corrective pattern.  Either way, the most likely direction from here is up.  This is a bullish indicator.
  • There is a very viable resistance line drawn parallel to the current support line we discussed earlier.  That resistance line takes us well above the 52-week high and is not a factor in the short to medium term horizon.  This is a bullish indicator.
  • The short range candle on 16 December was accompanied by very high volume.  This candle bounced off the 23.6% retracement level.  This is a bullish indicator and may represent the amount of demand that exists at this level.
  • The nearest horizontal support coincides with the 61.8% pattern retracement.  Other than the diagonal trend-lines, there's not much support upon which we can depend without a very deep correction in the stock price.  This is a bearish indicator.
  • The short float is 8.65% and days to cover is 6.3.  If a downward move does not manifest, the amount of short covering we can expect will add a fair amount of upward pressure on the price.  This is a bullish indicator.
So how do we play this pattern?  Well, for openers, despite the RSI divergence, our bias is to the upside.  What we are looking for at this point is a bullish reversal pattern in the short term that holds us above the support line.  On such a pattern, we would enter long and set a price target that coincides with the top of wave b.  Our protective stop will be just below the green support line.

A downside break, however, would be signaled by a close below the support line, preferably with confirming volume.  In that case, we would enter short with a protective stop just above the green line that would suddenly represent resistance.  Our price target to the downside will be the horizontal support line just above that 61.8% retrace.  Be aware, however, that DRI trades ex-dividend on 6 January 2017, and the $0.56 dividend is significant enough that we don't want to be in a short position at the close on that date.  (We don't have that same concern on a long trade.)  So for the moment, there's a brief window in which a short trade would be viable. 

Keep in mind that volume next week will be low, so we will not be able to rely on volume confirmation as we normally would.  It won't negate the signals, however the additional uncertainty increases risk, and we'll adjust our position sizes down a bit as a mitigator.  Let's see how this one develops.

Happy Trading.

Is Southwest Poised to Soar or Crash and Burn?

Like most stocks appearing on our radar, this week, Southwest Airlines, Co. (NYSE: LUV) experienced a steep climb off significant lows for much of the fourth quarter only to stall in the final ten-days before Christmas.  In part, that's due to the type scans I execute when searching for candidates, however it appears to match the overall trend of the market as a whole.  Momentum definitely waned through the second half of December.
LUV Daily Chart
Southwest is clearly on the cusp of a move.  The direction of that move, however, is not yet clear.  We can see that there was historical resistance at these levels, going back to the 7 December 2015 shooting star high.  The decline that followed that one was significant, and it set the stage for the broad trading range LUV has endured ever since.

That trading range was finally violated after a tight congestion pattern in November.  The breakout was a high range white closing Marubozu candle on 7 December 2016.  Notice, however, that volume did not confirm that breakout.  It barely reached both the 50 and 200 day volume moving averages.  Sure enough, there was very little follow-through on the breakout.  The stock did amble upwards a bit from there, however the longest body turns out to be a bearish signal with a long wick at the high set a year earlier.  The volume that accompanied it may be symptomatic of climactic action.

The volume signature in general shows a loss of interest at this level.  Now, some caution is required since volume in general wanes significantly over the last two weeks of the year.  For now, though, we really can't ignore the sharp volume decline starting 19 December.

There are several trend-lines that appear significant (all marked in dashed green lines,) however, and all of them offer support at this level.  Let's review the three of them moving from top to bottom.

The uppermost trend-line is a good example of a pivot line where resistance transformed to support.  The short-term resistance line started in late November and only had two touches, however it did follow the slope of the pattern right up until the 7 December breakout.  After that, it provided support on the first downward retest and has followed the slope of the gradual uptrend that marked the remainder of the period.  If we experience a downward breakout, this line may offer a support and consolidation area.

The middle trend-line (counted from the starting point, not its current location) is also a pivot line.  Serving as resistance, this line has multiple touches going back to early September.  The test of the line on 24 October resulted in a steep exhaustion gap down that actually generated the beginning of the current uptrend.  Notice how the line was finally penetrated with confirming volume on 14 November.  From there, it's provided support with two additional touches before the final breakout.  This line may provide another significant area of support in the event of a downward breakout.

The final trend-line marked in the darker dashed green line is drawn from the bottom of the current trend through the bottom of Elliott Wave 2.  It's a very steep slope, thanks to the near-vertical wave 1, and given that slope it's not likely to offer much in the way of support.  We may find out shortly since the low of the candle on 23 December rests right on this line.

An additional support line for which we must account is the 10-period EMA (Exponential Moving Average.)  Notice how the lows have ridden this moving average through much of the current impulse wave.  A close below that moving average may well signal a significant downturn.

The range between $48 and $47 will likely be an area of consolidation should we break to the downside.  Two significant Fibonacci retracement lines from two different points of origins provided  either support or resistance in that range already, and there's recently been a lengthy consolidation period within that range.  If playing a downward break, that range must represent a conservative price target since it may be difficult to breach in a short-term pattern.

One final datum point to consider is the bearish divergence pattern in the RSI(9) oscillator.  That divergence is not the result of the low-volume influence in the last week before Christmas.  Rather, it started with the bearish spinning top on 15 November that marked the top of Elliott Wave 1 in this count.  This divergence adds strength to the assessment that momentum has waned.

I should note that there's an alternate Elliott Wave count that could end up being correct.  In that count, what's currently marked Wave 1 would actually be a Wave 3 completion, and 15 December would be the top of Wave 5.  That would mean that we're currently in the midst of a post-wave 5 corrective pattern.  At the moment, either count could be correct, hence the uncertainty as to LUV's direction from here.

Southwest next reports earnings before the open on 26 January 2017.  Their October release explains a bit of the uncertainty in direction from here.  The computer troubles they experienced took a significant bite out of their quarterly revenue, and Hurricane Mathew didn't help matters, either.  The compressed holiday season will impact all airlines this year, and in the markets served by Southwest the final arbiter may well be Mother Nature.  Southwest has some interesting plans for 2017, including the introduction of flights to Cuba and a new route from LAX to Mexico.  They are also replacing their aging 737 fleet with the newer 737 Max aircraft, and a new reservation system is going live in the new year. 

The company outlook for 2017 is rather optimistic, however our interests are short-term, not long.  What we are watching is two-fold.  A close above the high set on 7 December 2015 with confirming volume will be our signal to enter long.  At that point, we'll be setting a price target equal to the length of our labeled Wave 1 as measured from the bottom of Wave 2.  That would still give us at least a $3.75 move from that breakout point, with a stop just below the tops of the current consolidation range.

A downward break, on the other hand, would be marked by a close below the EMA(10) line, again on high volume.  We'll have to tread carefully with that, however.  To enter a short position here, the overall market will need to also signal short.  There's too much support nearby, and the target range of $48 is a bit too close at the moment, so the reward vs risk analysis will likely prohibit a short entry.  What it will do, however, is demonstrate which Elliott Wave count is correct, so while it may inhibit a short entry now, it will likely provide several additional trading opportunities that will prove lucrative.

Let's add this stock to our watch list and see what develops.  Remember, however, that we need volume to confirm the move, and volume may be hard to come by until after the New Year.

Happy Trading. 

Saturday, December 24, 2016

Schlumberger Stuggling Near 52-Week Resistance

Following their 52-week low on 20 January 2016, Schlumberger Ltd. (NYSE: SLB) labored in fits and starts to finally reach a 52-week peak on 1 December.  For the rest of the month, however, the energy giant repeatedly tested the highs only to be beaten back with bearish long-wick candles.

SLB Daily Chart
Multiple signals on the daily chart suggest that a breakout one way or the other is imminent.  At first glance, the pattern is somewhat encouraging.  The short-term pattern from 30 November draws a distinct bullish diagonal support line matching the 10-day Exponential Moving Average.  SLB traced daily lows along that trendline at least eight times in the past three weeks, yet the trendline has held throughout.  That, certainly, is a bullish signal.

The counterpoint, however, is at the top of that pattern.  That trendline originates at a 10 October 2016 top and with four distinct touches.  It was only penetrated briefly on one occasion. The two trendlines together form a rising wedge. Still slightly bullish, but short term at best.

Volume starts to paint a troubling picture, however.  The highest volume in the last three quarters comes on a very bearish shooting star candle on 1 December.  That combination is representative of a buying climax, potentially signalling the end of this uptrend.  Indeed, the next two high volume days, although technically up days, are also very bearish signals.  Since the first test of the 52-week high on 12 December, volume has declined consistently.  There's little to no demand entering the trading scene through a second test of the high on 22 December.

Now look at the three peaks of 18 August, 19 October, and 30 November.  How's that for a perfect triple top setup?  That SLB traded a mere 3% above the high of the triple top while volume continued to decline is yet another bearish signal.  It's easy to interpret this pattern as a sign that the smart money is gradually distributing their shares in preparation for a significant decline.  How significant?  Well, the target would be an 8-point decline from the break of the upward sloping neckline drawn along the pattern bottoms.  That's a full 7 points from where SLB is trading today and would represent a healthy correction.  Given the negative view SLB took of the energy outlook through 2016, such a correction is not out of the question.

Finally, look at the RSI(9) pattern.  From the 2 November pattern low to the 23 December close, the RSI drew a consistent bull channel that matched the price pattern channel drawn by the stock.  The tests of the 52-week high, however, form a bearish divergence in the RSI indicating increasing weakness.  Just as price sits on an upward sloping support line, so too does the RSI.  Watch for a confirming break in both price and RSI to signal the start of a potentially significant decline.

Certainly a solid break on confirming volume above the 52-week high would create a long trade setup, and we would not skip that if it occurs.  The likely move, given the signals on the chart, are two the downside, however, and for that setup we're watching for a southerly break of the upward sloping support line, again with confirming volume.  We are prepared to play whichever trade sets up.

Happy Trading