Wednesday, February 15, 2017

Rising Wedge Signals Trouble For PAA

Despite a bullish channel pattern on the weekly chart, Plains All American Pipeline L.P. (NYSE: PAA) is showing all bearish signals across multiple time frames from the daily through to the monthly charts.  For our analysis, we'll start with the broadest view on the monthly.

PAA Monthly Chart
Since inception, PAA drew a strong 5-wave impulse leading to what appears to be a Wave-I top in September, 2014.  Wave-II appears to be in progress now, forming what is shaping up to be either a zig-zag or a flat correction.  Wave-A retraced over 61.8% of Wave-I, however, which is an extremely deep corrective pattern.  From its current position, Wave-C is somewhat limited to the downside, otherwise the entire wave count will be invalidated.  (Wave-II cannot retrace 100% of Wave-I to be a valid count.)

The RSI(9) oscillator does signal a bearish divergence on both the highs and the lows, however, so continued weakness appears to be in the offing.  From the overall monthly pattern, we do expect a Wave-C to the downside, however given the volume signature in December 2015 through February 2016, we believe significant demand exists between $15.00 and $17.00, so it's not likely for Wave-C to travel below those levels.  Watch for a shallow correction from the current level.

PAA Weekly Chart
On the surface, the weekly chart would appear to offer a contrary interpretation.  A strong, tight bullish channel marked price starting in February 2016 and continuing through to the present.  Note, though, that price has traveled horizontally since November 2016 and has been riding the support line for most of 2017.  On Balance Volume is rising, however price is not rising in conjunction with the indicator.  Both the RSI(9) indicator and the MACD(5,34,5) have rolled over into a bearish configuration.  Similarly, the 200-day moving average is above price, has rolled over, and is now descending.  These are all indications that a downward price move is pending.

PAA Daily Chart
That brings us to the daily chart.  The most recent trend, starting in September 2016, formed a rising wedge pattern.  That, as we've discussed in other posts, is a bearish signal.  Price tends to break downward from a rising wedge pattern, although the price target from such a pattern is somewhat unpredictable.

The other major warning sign is a diagonal trend line that starts in April 2016 and had seven firm touches before being penetrated to the downside on 12 January 2017.  Since then, it has acted as resistance with three touches. 

Volume since the first of the year has been bearish as well.  Notice the extremely weak volume over the first week of February, and notice the falling volume in general for all of 2017.  Interest in the stock appears to be waning, and demand is required to drive price higher. 

From a fundamental perspective, we see that PAA lowered its dividend from $0.70 to $0.55 in October, 2016.  This is accompanied by nine consecutive quarters of missed revenue, and 5 out of 10 quarters of missed earnings.  "Troubled" would be the best way to describe the company.  Trading at a P/E of 78.38 - nearly triple its nearest competitor - it's hard to envision much in the way of an upside, even with the favorable energy infrastructure outlook fostered by the current US Administration.

The only play we see for PAA is to the short side.  We are looking at two possible entry points.  The first is a short trade on a close below the support line of the wedge.  In that case, we'll place a protective stop just above the horizontal resistance line around $33 and we'll set a price target at the horizontal support line around $25.

The second potential play is if price rises a bit further within the wedge.  In that case, we'll watch for a reversal at one of the three major resistance lines: the diagonal resistance line (in red), the blue horizontal resistance line, or the top of the wedge.  A reversal at either of those points will signal a short entry with a protective stop above the next highest resistance line.  Again, our target will be the horizontal support line around $25, although we'll watch for an early exit if the wedge support line appears to hold.  Watch this one carefully since the breakdown, when it comes, may be swift.

Happy Trading.

Monday, February 13, 2017

MGM Near Rounded Bottom Breakout

MGM Resorts International (NYSE: MGM) formed the left lip of a rounded bottom pattern the week of 3 March 2014.  From there, the pattern developed with near perfection, including a classic bump mid-way through the pattern that would have been an ideal swing trade opportunity had this stock been on our radar at the time.  The right lip of the pattern formed the week of 21 November 2016, and the consolidation period that is still running is typical of this type of formation.

MGM Weekly Chart
Price was rising steadily into the pattern in 2014, as is typical 62% of the time.  The horizontal consolidation we are currently experiencing will mark our entry, should this stock break to the upside as is expected.  More on that when we analyze the daily chart, however.

To get a price target for the pattern, we'll take the low of the pattern from the height of the left rim and then use the 61.8% extension measured from our right rim breakout point.  That gives us a potential target of $36.87 and a nice 3:1 reward:risk ratio.

MGM Daily Chart
The daily chart offers additional evidence of the potential move.  From the pattern low in February 2016, coinciding with the bottom of the "bump" on the weekly pattern, the upward impulse pattern has drawn at least 3 full waves, with wave 4 either in progress or having just completed.  It's wave-5 that we intend to ride for this trade.  The price target obtained on the weekly is within range of a wave-5 target and, in fact, falls about a point shy of that target.  So we can stick with it as a decent measure.

The consolidation that appeared on the weekly forms a tight channel with a slightly downward bias on the daily.  It has numerous touches both top and bottom, making it an extremely reliable formation.  Notice, too, the diagonal trend-line that extends up from the bottom of Wave-2.  We traded briefly below that trend-line, but with today's close, price is once again above it.  We don't yet know if that line will be significant, but with at least four touches, we can't ignore it.

We'll be playing this stock as a traditional breakout, albeit from a rounded bottom.  Our entry will be long on a close above the current channel.  The protective stop will be just below the support line of the channel, and our price target will be $36.87.

The only caution is that earnings are reported before the open on 16 February.  Per our trading plan, we cannot enter a position this close to an earnings date, so we'll have to wait until Friday for an entry, assuming price hasn't outrun us by then.  It's entirely possible, though, that earning could be the catalyst for the move, so be ready to play it after the turbulence that typically marks an earnings day.

Happy Trading.

Wednesday, February 08, 2017

PHM Weekly Descending Triangle and Daily Bull Flag

Two seemingly contradictory signals are flashing on the daily and weekly charts for PulteGroup, Inc. (NYSE: PHM).  We'll start our analysis with the weekly chart, since that gives us a broader perspective on the intermediate term trend. 

PHM Weekly Chart
I had to step back to the monthly chart (not shown) in order to put this pattern into context, and it turns out that what we see on the weekly is, indeed, the start of what appears to be a five-wave impulse.  The first motive wave lasts about 18-months, ending in May, 2013.  What follows is at least a double flat correction.  Whether or not that turns into a triple remains to be seen.  For now, Wave-2 appears to be still in flight, although there are hints in the last two weeks that Wave-3 may have started.

The interesting pattern throughout Wave-2, however, is a descending triangle.  The number of touches on the top resistance line are significant, with six touches completing as of two weeks ago.  The support line is much weaker, although it, too, is well defined.  It's important to note that descending triangles break to the downside over 70% of the time, however a downside break in this case would be inconsistent with the Elliott Wave structure.  We'll have to watch that, since it may force us to reconsider our wave count.

I've also shown a diagonal support line coming out of the last Wave-A bottom.  Whether or not that support has teeth remains to be seen, but I show it just in case.  Notice, too, that OBV remains flat, although there have been signs of strong demand entering the scene in recent weeks.

PHM Daily Chart
That pattern that caught my eye, however, is evident on the daily chart.  Following a five-day upward thrust, a tight bull flag pattern formed the last week of January and continues through to the present.  Using 61.8% of the flagpole height as our price target, we have a potential upward breakout target of $23.32.  That'll give us a 3:1 reward to risk ratio, so it's worth further analyzing the chart.

We're seeing strength in the RSI(9) oscillator, especially as compared to the last major high on the chart.  The overall RSI has flashed a bullish divergence at least since the beginning of December.  The same is true for the OBV which shows an extremely strong rise coinciding with the flag pole development.  The demand signature for those five days is especially strong.

In fact, the only cautionary tale on the chart thus far is the bearish crossover in the MACD(5,34,5) indicator.  Watching the pattern, however, it's easy to predict that a breakout of the flag will coincide with a bullish crossover, and that's a signal for which we'll be watching.

Trading this stock is relatively straightforward.  It's a classic bull flag trade, so we'll go long on a breakout of the flag.  Our protective stop will be just below the flag, and our target is $23.32.  If we see a bullish crossover of the MACD prior to breakout, we'll take that signal and enter long at that point.  You can see on the chart that it's been a reliable signal for this stock, so it'll be worth the risk to play the potentially early entry.

The next earnings date isn't until April, and the next ex-dividend date is expected to be in March, so there's nothing artificial in the way of a trade.  We'll play this one as it develops.

Happy Trading.

Tuesday, February 07, 2017

LPX In Tight Horizontal Channel

One glance at the monthly chart for Louisiana-Pacific Corp. (NYSE: LPX) reveals a chart that has been in a corrective state for virtually its entire trading history.  The small-cap building products manufacturer is gradually improving its balance sheet while also growing market share for its SmartSide product family - a realistic-looking wood-grain siding alternative that purports to be lighter and more durable than other traditional artificial siding products.  This has not been enough to garner interest capable of pushing the stock into a typical 5-wave impulse, however, and as a result, it continues to oscillate in an endless corrective wave cycle.

LPX Weekly Chart
The weekly chart shows a lengthy up sloping channel that is showing no signs of ending its nearly two-year run.  Volume is starting to diminish, however, which does not bode well for any attempt to mount an upward surge.  It takes demand to drive a stock higher, and thus far, we're not seeing much of it.

On Balance Volume on the weekly remains flat, and there's no hint of a divergence either way in the RSI.  Thanks to the undulating nature of the channel, the MACD(5,34,5) has been a rather decent indicator of the turning points, however, so we'll certainly keep an eye on that going forward.

LPX Daily Chart
Now, it's the daily chart that caught my attention in the first place.  The higher lows starting in February, 2016 do form a good support channel, and we note that on the chart, however it's the very tight horizontal channel that formed in December that most interests us.  Just look at the number of three and four day swing trades that channel has produced since the channel formed.

Interestingly, the MACD appears to be providing a very consistent signal for directional shifts going back at least to the November time frame.  Until that changes, we'll continue to take our cues accordingly. 

Where we expect some deviation in the pattern is where we see the diagonal support line now intersecting our channel.  This suggests that our horizontal channel may turn into an ascending triangle.  If that happens, of course, we'll need to watch for a breakout play to either side.  Currently, the intermediate trend is up - and an ascending triangle tends to break to the upside - but that could easily change on a whim.

LPX reports earnings before the open tomorrow, so we'll need to watch what those earnings do to our pattern.  Consensus estimates are for $0.19 EPS and $539.90 Million in revenue for the quarter.  Annual estimates are for $0.84 EPS and $2.26 Billion in revenue.  The pattern for this stock over the past year, though, has been for price to form a spinning top on earnings day, but not do much of anything else.  We'll see what tomorrow brings.

How we trade this stock will depend on the pattern that emerges post-earnings.  Until we see evidence that the MACD is no longer reliable, our trades will be long on a bullish crossover and short on a bearish crossover.  Our exit strategy will be to trail a stop $.05 below the low each day and ride it until stopped out.  Our protective stop will be set to just above or just below the signal candle depending on whether we are taking a long or a short position. 

If the ascending triangle does form, of course, we'll change strategies to a triangle breakout and play that accordingly.  Until then, let's enjoy the oscillation this stock is currently providing.

Happy Trading.

Monday, February 06, 2017

OMC In Descending Triangle on Daily

Omnicron Group, Inc. (NYSE: OMC) attracted my attention with a Zero Line Reversal (ZLR) trigger yesterday followed by a MACD(5,34,5) bullish cross-over today.  That combination suggested movement may be imminent, and therefore the chart was worth a closer look, and indeed, that closer look was certainly warranted. 

OMC Daily Chart
It was the extremely strong move today on very high volume that triggered the cross-over.  The chart pattern, though, is what's intriguing.  Since November, 2016, the stock has formed a descending triangle and today's price action places the close directly on the resistance line. We will watch tomorrow's action closely since we'll either see a breakout of the triangle - a long we would want to trade - or a bearish reversal back into the center of the pattern.

With horizontal support and resistance straddling today's long candle, a potential trade in either direction is likely early this week.  Normally, a descending triangle tends to break to the downside, and the fact that we entered this triangle from the bottom increases those odds, but when we look at the weekly and monthly charts, we'll see that the intermediate and longer term patterns favor just the opposite.

OMC Monthly Chart
The Elliott Wave count on the monthly chart shows an impulse pattern that started back in the early 1990s.  After trading sideways for just over a decade, Wave-III began after the Financial Crisis and is currently in it's 5th sub-wave.  Remember, third waves extend frequently, so we can't assume this is the last sub-wave before another correction.

The monthly pattern is riding the rails along the resistance line in a channel that dates back to 2009. Not surprisingly, if Wave-III is truly approaching its terminus, the RSI(9) oscillator is showing a bearish divergence.  Still, from a monthly perspective, we're not yet seeing signs of the reversal that will mark the start of Wave-IV, although all of the Elliott Wave targets have been satisfied.

OMC Weekly Chart
The bearish divergence is also present on the weekly chart, so the ensuing downtrend may come sooner, rather than later but again, we're not yet seeing signs of the reversal that would mark Wave-III's demise.  What does stand out on the weekly that is not evident on the other charts, though, is an ascending wedge pattern that is rapidly nearing its apex.  An ascending wedge is a bearish pattern that typically breaks to the downside.  The Elliott Wave count on the weekly suggests we still have three waves remaining, however that wedge looks like it will force a decision within the next few weeks. 

The current direction on the weekly, however, is up, not down, and that's what we truly needed to learn from the two longer term charts.

We already alluded to how we plan to trade this stock.  We'll take a long position on a breakout to the upside - something which is poised to occur in the next day or two.  Our protective stop will be just below the triangle support line and our price target will be just above $92.  If, however, we get a bearish reversal, tomorrow, we'll hold off entering any positions until we get a subsequent break either above or below the triangle.  It's the triangle pattern we're looking to play in this stock, so let it show us which way it wants to run.

Happy Trading.

Sunday, February 05, 2017

NI Forms Horizontal Wave-B Channel

Frequently, the first major warning sign of an impending breakdown in a specific stock comes from the volume signature, to see the full picture we typically need to step back to either the weekly or the monthly chart.  Often the daily noise masks what's really occurring and only on the longer time frame charts will it clearly manifest.  That is certainly the case for Nisource, Inc. (NYSE: NI).

NI Monthly Chart
Looking first at the monthly, we see a very strong 5-wave impulse leading to a Wave-I top in July 2016.  Traders watching the volume patterns, though, were warned of the impending top as early as September, 2015.  Any interest at all in the stock fell off the cliff right at the end of Wave-4, and it's been flat ever since.  This will become even more evident when we examine the weekly chart, but for now, just be aware that the first warning signs started there.

The RSI(9) suggests that the decline is not yet over.  When we compare the price lows of Wave-A and Wave-4 with the corresponding RSI level, we see a distinct bearish divergence.  This strongly suggests that the correction currently in flight will have a relatively lengthy run.  The MACD(5,34.5) would agree, having rolled over into a bearish crossover just after the Wave-5 top.  The shape of that crossover is one that suggests it has a lengthy run ahead of it.

NI Weekly Chart
We'll turn now to the weekly chart.  You can see change in volume signature here, as well, and you can also get a much better feel for just how long that disinterest has persisted.  The entire 5th wave was accompanied by lackluster volume.  Encouragingly, though, the subsequent correction is also generating very little interest. 

The bearish divergence in the RSI is evident on the weekly chart as well, again confirming the conclusion that the correction has a ways to go.  Of interest, however, is the bullish crossover in the MACD.  That's a good indication that Wave-A did end where we suspected, and that we're now into the Wave-B pullback.  The MACD has been a good indication of major wave initiation, so watch for a bearish crossover to signal the start of Wave-C.

The bottom of Wave-A retraced 50% of Wave-5, so it's likely that Wave-C will take us at least to the 61.8% level or lower.  That 61.8% line sits just above a good support line that marks the Wave-i top, so we'll be watching for signs of a MACD bullish crossover around that level.  Of course, we won't know at the time if that's a Wave-III start or a Wave-X start, but either way it will be a tradeable up-wave.

NI Daily Chart
We come at last to the daily chart.  When this first popped up on our scans, this weekend, it looked like it had potential for an imminent trade setup.  Our analysis, however, shows that not to be the case.  The Elliott Wave count is both consistent and defensible.  I did wonder if the lengthy channel we're not exploring could be a wave iv in the current Wave-A, but I really can't find a legitimate count that would produce that result.  So the conclusion I do reach is that Wave-A ended in November and we're well into a flat Wave-B corrective pattern.

The next major direction we can anticipate is a Wave-C move that should be to the down side.  I hesitate playing anything to the upside in this stock unless we see a sudden change in the volume signature that would indicate demand is once again coming into dominance.  What I'm watching is the intersection of the current channel with that diagonal resistance line.  There will be some downward pressure as we approach that convergence, but until then, there's nothing setting up that draws our interest.  We need Wave-C to initiate to find a good reward to risk play, so we'll exercise patience and await that development.

Happy Trading.

Saturday, February 04, 2017

MS Breakout on Daily and Weekly Charts

Financial stocks received another boost this week with definitive signs coming out of Washington that some of the regulations imposed by Dodd-Frank will be brought back under control.  Between the promise of higher interest rates and the indication that financial regulations will be loosened, the climate continues to support growth for the top financial industry firms. 

The regulatory impact is not trivial.  In 2014 alone, the top six banks in the US spent over $70 Billion on regulatory compliance ( Regulations, Regulators And The High Cost Of Banking Compliance) and that number continues to grow.  Indeed, unchecked regulations are the greatest risk faced by top financial firms in 2017.  Attempting to unravel the ridiculously complex 22,000 page Dodd-Frank fiasco is a major step in the right direction.

The executive action taken this week by President Trump to target excessive and complex financial regulations (NY Times: Trump Moves to Roll Back Obama-Era Financial Regulations) was well received in the industry, and it's against that backdrop that we begin our analysis of Morgan Stanley (NYSE: MS)

MS Monthly Chart
The monthly chart for MS shows just how much the financial industry has suffered since the peak in early 2000.  The post-9/11 recession took its toll, and the financial crisis in 2008 sent most of the top names in the industry into penny-stock territory.  The recovery from those basement level prices continues to be slow.  For MS, they also come with a few warning signs. 

Notice the lengthy descending triangle pattern forming on the monthly chart.  Now, that pattern will likely take several more years to run its course, but it does not bode well for any truly long-term investments.  Even the current up-trend is at risk since price is now trading on the resistance line while volume and range are decreasing.  The likelihood of a pullback on the monthly is high.

The RSI(9) oscillator on the monthly chart would agree.  Comparing the highs in mid-2015 to the high traced over the prior month, we see a bearish divergence forming in the RSI.  This, again, signals longer term weakness that will ultimately initiate a pullback.

MS Weekly Chart
The weekly chart, which gives us a more intermediate-term picture, is a bit more optimistic.  From an Elliott Wave perspective, Waves-I and II are complete and Wave-III is in progress.  Now, there are two possible counts for the current wave, and in retrospect (after annotating the daily chart) I really should have gone back to the weekly to show the alternate count.  Rather than Wave-1 completing in November, 2016, it would appear Wave-1 completed in August and Wave-3 completed in November.  That does make a difference, since it leaves only one wave remaining to complete the impulse, although it's entirely possible for Wave-5 to extend one or more times.

The RSI(9) oscillator shows continued strength through the entire move, although that strength is starting to wane as the horizontal consolidation runs its course.  This consolidation on the weekly takes on the appearance of a bull flag, however, with the near vertical weekly move that started the week of 7 November.  The price target for that flag would be $49.60, marking the 61.8% extension of the flagpole.  Note that the target falls just shy of the conservative price target for Wave-5, which is $50.85. 

The weekly close on Friday marks a breakout from that consolidation flag pattern. It comes, on the weekly, however, following a bearish cross-over of the MACD(5,34,5) momentum indicator. The strength of the breakout, therefore, needs to be treated with caution.

MS Daily Chart
So this brings us to the daily chart and our short-term swing-trade strategy for MS.  As on the weekly, we see the breakout from the two-month horizontal consolidation pattern.  (Notice that it hardly resembles a flag at this level, however, and we would not trade it as such for a swing-trade.)  Volume was very strong on the breakout day, adding confirmation to the breakout.

On Balance Volume continues to rise as it did throughout the horizontal consolidation, providing clues that the stock is under accumulation.  That's not surprising, given the prospects for the financial sector as a whole as we discussed earlier. 

The Elliott Wave count shows wave-4 at or near completion. One aspect of the count that troubles me, however, is that waves 2 and 4 do not appear to alternate.  Well, 4 is much choppier than 2, however for alternation we typically see one of the waves cutting a deep pullback while the other is shallow.  That's not the case here, so there is the potential for a pullback before Wave-5 begins in earnest.  Be aware of the possibility and plan accordingly.

Looking at the MACD, we see a Zero Line Reversal followed immediately by a bullish crossover.  Both of these are very strong bullish signals in the context of the current chart.  The RSI(9) is confirming price action and displaying no signs of a divergence either way.

With this in mind, our trading strategy for MS is as follows.  We'll play the breakout that occurred on Friday, and take a long position just above the high of Friday's candle.  We'll place a protective stop just below the low of Friday's candle which coincides with the middle of the horizontal channel.  (If we trade that deep into the channel, it negates the breakout signal, and we will want out of the trade immediately.)  Our price target will be $49.59, the target set by the weekly chart's bull flag.  As always, we'll exit the trade immediately if price action appears to turn against us. 

Happy Trading.

Wednesday, February 01, 2017

XL in Ascending Triangle Nearing Breakout

While XL Group PLC (NYSE: XL) displays nothing but corrective action on the long-term charts, the daily chart is displaying a well-pronounced Ascending Triangle pattern with price within range for a breakout to either side.  The weekly chart offers our first set of clues on direction, however, so we'll begin our analysis there.

XL Weekly Chart
There are enough Elliott Wave impulse rules violations for me to conclude that price action is still in a corrective pattern.  Coming off the second high in December, 2015, there is a 5-wave pattern that would lead down to a Wave-A (in June, 2016) and it's possible to draw a 3-wave pattern up to Wave-B in October, 2016.  The current pattern is an ascending triangle - or a diagonal, in Elliott Wave parlance - and in its position at the start of Wave-C we do need to be mindful of a potential break to the downside to complete that wave.

What dominates the weekly chart, however are the numerous channels that are consistently tested over the prior six-years.  Of particular interest (aside from the upper and lower boundaries of the main channel) is that very strong pivot line in pink near the middle of the channel.  Price is now resting just above that channel and it's also encountering a second diagonal support line coming up from the Wave-A bottom. 

Volume is signalling a strong breakout as well.  While it's been declining since that single strong weekly candle the week of 7 November 2016, it has now contracted into a coiled spring, indicating a potential violent breakout in the near term.  Let's look at the daily chart for more clues as to direction.

XL Daily Chart
Well, from the June 2016 low, it's easy to envision a Wave-1 completion in late July, a Wave-2 completion in November, and a Wave-3 completion in mid-November.  The current wave, then, would be a Wave-4 (which matches the formation of a diagonal in the Elliott Wave schema.)  If this count is correct - and it's hard to draw a different plausible count - then the breakout would be to the up side for a Wave-5 that could rack up as many as 5-points in the move.  That, coincidentally, would take us to just above the 100% price projection of the ascending triangle.  Now, I never like to use 100% price projections, so I'd be more inclined to set the conservative target at the 61.8% level around $40.19.

Volume is showing strength on the daily chart as well.  Notice how volume contracted significantly over the last two weeks, but it has surged over the last two trading days.  OBV is also rising, giving us an indication that the stock is under accumulation.

Looking below the chart, we see two very bullish indicators in the MACD(5,34,5).  There was a Zero Line Reversal around 12 January, and that was followed by a bullish crossover today.  The crossover's somewhat weak and is the second in as many weeks, however it's still more bullish than not.

Given the distance we've already traveled in the triangle, the only way we will play this is as a breakout.  A reversal off either trend line at this point does not generate sufficient profit potential to make it worthwhile.  Instead, what we will do is place a buy stop just above the resistance line in the triangle.  Our protective stop will be just below the support line of the triangle, and the price target will be the 61.8% triangle-height extension from the breakout.

Remember, the charts show a probability of an upward breakout, not a guarantee.  That's all we are ever able to trade - probabilities.  There are no guarantees in swing-trading.

Happy Trading.

Tuesday, January 31, 2017

NWL At Resistance in Wave-A of Correction

The scan that brought Newell Brands, Inc. (NYSE: NWL) to my attention tonight looked for bullish crossovers in the MACD(5,34,5) indicator.  Now, remember, I don't use an indicator based trading system, so this scan is only intended to identify stocks that are worthy of analysis.  Since this was a bullish crossover scan, I was expecting to see a stock that was signalling a move to the upside.  What I found, however, was a stock with more downside potential in the short-term.

NWL Monthly Chart
Looking first at the monthly chart, we see that NWL was in a corrective pattern for well over two decades.  Without expanding the chart further to the left, in fact, we really don't know if the current pattern is merely a continuation of that correction.  For our purposes, however, it truly doesn't matter.  We're looking for trades that complete in a few days, not a few years.

What we can see from the monthly is that a motive wave started at the end of the financial crisis in 2009.  A full five waves also completed in August, 2016.  A corrective pattern following that 5-wave impulse is now in progress. Whether or not Wave-A is complete on the monthly, however, remains to be seen.  The retracement level, however, suggests there's more room to move to the downside. 

The RSI(9) oscillator on the monthly chart shows a strong bearish divergence.  That divergence ran virtually the entire length of the uptrend, in fact, signalling intense weakness could follow.  The MACD agrees.  While the MACD ascended in conjunction with the uptrend, it did so with numerous signal line crossovers indicating an overall weakness in the move.  A bearish crossover immediately followed the peak, and the distance between the main line and the signal line is widening.  That, too, suggests the downward move is not yet over.

NWL Weekly Chart
The weekly chart tells a similar story.  We see a strong motive wave leading to the peak in August, 2016, although that Wave-4 correction was deep and very short, time-wise.  Coming off Wave 5, however, the sub-waves comprising Wave-A are issuing a cautionary tale.  The most likely wave count shows three complete sub-waves and Wave-iv either complete or in progress.  That implies another downward push to get to the end of Wave-v, which would also end Wave-A.  When we look at the length of Wave-i, we can see a potential decline of another six-points before we reverse into Wave-B. 

Volume is declining, which adds to the bearish sentiment, although it looks like supply has waned significantly in the last few weeks.  It's not coming close to the volume experienced in Wave-iii, although in a counter-trend wave, that really isn't much of a surprise.

RSI(9) on the weekly is, at the very least, confirming price action.  When we look at the lows, we can conclude that a bearish divergence is evident, although it can be debated that the last valley wasn't low enough to support that conclusion.  Given how low it was compared to the prior valley in price and indicator, it does suggest to me that there's plenty of weakness remaining. 

MACD, on the other hand, does show a bullish crossover, and it does not confirm the divergence suggested in the RSI.  That MACD signal is the only indication we have that the downward move in Wave-A may be at an end.  For now, however, I'm trusting the wave count and the overall price pattern, and that tells me there's more room to the downside.

NWL Daily Chart
The five-wave impulse we see on the daily is actually the five sub-waves that comprise the Wave-4 to Wave-5 move on the weekly chart.  This does give us a good measure of the full retracement pattern in Wave-A against the prior motive wave.  Thus far, Wave-A retraced 50% of Wave-5, so there is certainly more room to the downside.  From the weekly, we determined that another 6-points to the downside were likely to complete Wave-A, and on the daily we can see that such a move would land on the 61.8% retracement level.  That's a very common retracement level for a Wave-A move, and that adds credence to the analysis.

The current pattern leading into Wave-A comes into much better focus on the daily.  The three sub-waves that completed already are well defined, and Wave-iii subdivided into five sub-waves that are also very well defined.  Wave-iv is a bit more complex, and it appears to be an irregular a-b-c corrective wave with Wave-c ending in a diagonal.  It's likely, based on this, that Wave-iv is complete and that suggests the next move is to the downside to finish Wave-v. 

I'd now like to draw your attention to the resistance lines that are all converging over the course of the next three days.  There's a significant amount of pressure on the stock at this level, and when we look at the volume signature for today's long bullish candle, we can see that the conviction to the upside is really not that strong. 

The RSI(9) shows fundamental weakness that has plagued the stock since the Wave-5 high, and that weakness continues through the current move.  The MACD experienced a bullish crossover today, however that indicator has been extremely choppy for the past couple of weeks and I would not consider it reliable at the moment.

The pattern formed by the short-term resistance and support lines shows a symmetrical triangle pattern with price rapidly approaching the apex.  We need to watch the next move closely.  It's certainly possible, from the current position, that the stock breaks through resistance and starts a Wave-B move.  It's more probable, however, that price moves to the downside and tests support (at a minimum) and possibly breaks to the downside. 

We're going to trade this stock based on the breakout direction.  If we see a break above resistance with confirming volume, we'll take that trade to the long side.  That would indicate that Wave-B is in progress, and we'd set a conservative price target around $51.84, coinciding with the bottom of the 29 July exhaustion gap and the 61.8% retrace of Wave-A.

If, however, we break below support, we'll take that trade to the short side.  Our price target will be in the $41.72 range, coinciding with a support line, the 61.8% retracement of Wave-5, and the price projection obtained from the weekly.  In either case, the protective stop would be above the resistance pattern for a short trade and below the support pattern for a long trade.  Either way, there's a decent reward to risk ratio, although it does look a bit better to the short side.

Happy Trading

Monday, January 30, 2017

Zig-Zag Correction in AEP Sets Up Long for Wave-c of B

On a day when the Dow Jones Industrial Average (INDEX: DJIA) retreated 122 points to close back below the 20,000 milestone, American Electric Power Company (NYSE: AEP) registered a .38% gain and pushed to the top of a two-month long horizontal channel, while setting up for a potential upside breakout.

The monthly chart shows a stock that started its current 5-wave impulse pattern at the end of the financial crisis in 2009.  Wave-I completed in July, 2016 and the stock is currently running its course in a Wave-II corrective pattern.  Note that, while we show Wave-A as complete on the monthly, that is not a conclusion we can truly reach just yet.  The first downward move only covered a 23.6% retrace, so there's a lot more potential to the downside.  We'll need to see how this behaves.

AEP Monthly Chart
The RSI(9) on the monthly chart shows a bearish divergence, and the length of that divergence suggests that this correction could cover a lot of ground.  Note that the MACD does not show a divergence on the monthly, but it has provided very reliable crossover indications at the beginning and end of each wave.  Given the reliability throughout Wave-I, from a monthly perspective we should be able to use it to signal the start of Wave-B.  From the current pattern, it does not look like we've reached the bottom of Wave-A, so there appears to be more weakness in store.

 The weekly chart's wave count tells a slightly different story with respect to Wave-A.

AEP Weekly Chart
Here, we can see the formation through the Wave-I top, and it looks like Wave-A was a valid 5-wave impulse. We also see the reaction off what appears to be the Wave-A bottom with Wave-a, and it looks like Wave-b has gone horizontal.  From the current setup, it appears this overall corrective move will be a Zig-Zag, so the monthly is correct in signalling more weakness towards the downside.  The weekly, however, is telling us we have a bit of room to the upside before that next drop occurs.

As in the monthly, there's a bearish divergence evident in the RSI(9).  The divergence is also evident in the MACD on the weekly, as we compare the heights of the last three highs.  As was the case in the monthly, the weekly crossovers have been reliable signals.  There's a bit of a warning flag in the current MACD, however, in that it could develop into a Zero Line Retrace pattern.  We have to watch the movement of the main line here, since the way it's hooking, it could just brush the zero line and then turn down again.  A crossover at that point would be an extremely bearish signal.

So now let's turn to the daily chart to figure out how we want to trade this stock.

AEP Daily Chart
There's a bit more strength showing on the daily chart than we see on either the weekly or the monthly.  First, that horizontal pattern we've experienced for the last two months came on a break of a strong diagonal resistance line.  When we complete the upward move, we need to watch the behavior as we once again approach that line since it could be a strong support line in the future.

The horizontal channel that formed starting in early December did so bounded by two very strong horizontal support and resistance lines that ran the length of 2016.  The upper line was a major pivot line, flipping from support to resistance and back again several times over the prior year.  Each time, it proved to be a very strong signal line.

What we show on the chart from Wave-A is what looks to be an a-b-c Zig-Zag that will lead to a Wave-B top that corresponds to another major resistance line that has shown staying power in the past.  From there, if it's a true Zig-Zag, we can expect a lengthy downward move in Wave-C, and that would explain the bearish divergences showing on the weekly and monthly.

For each of the significant waves, once again we see that MACD provided a good signal, so we're watching it here for a sign that Wave-b is in flight.  Today, in fact, we did get a signal line crossover (which is what flagged this chart in my scans) and the stock moved to the top of the horizontal channel, poised for a potential breakout play.

The MACD is also showing signs of a potential Zero Line Retrace (ZLR) which, approaching it from the top, would herald another move to the upside.  That's consistent with the short-term expectation of a rise to complete Wave-c of Wave-B.

So that is the move we are currently looking to trade.  On a break of overhead resistance, we will enter long with a protective stop just below the lower support line.  Notice how the height of Wave-a extended from the bottom of Wave-b takes us to the next major overhead resistance line.  There is also a potential resistance line that is not shown, but sits very close to the 76.4% extension.  We'll use that as our conservative price target, since this next move has a high probability of ending between the 76.4% and 100% extensions.  That move will complete Wave-B, and when you look at the length and shape of Wave-A, we believe there will be several swing-trade opportunities in Wave-C as well.  Market conditions at the time will determine which of those waves we attempt to trade.

Happy Trading. 

Sunday, January 29, 2017

MDT Cup and Handle Setting Up Long

I've stated several times in the past year that I do not trade based on indicators.  My decisions to enter or exit a trade are made based on a price and volume analysis, and my trading plan requires me to trade in the direction of the overall trend of both the stock and the market.  "The market" in this sense, depends on the stock being considered.  The default chart layout that I use includes a correlation line (which I don't normally show in these articles) between the stock and each of the major indices: S&P 500, S&P 600, S&P 400, NASDAQ Composite, and the Dow Jones Industrial Average.  Whichever index shows the highest correlation value for that stock is the one I use as "The Market" for that stock, and it's the trend the price must follow for me to enter a trade.

In today's article, we will analyze Medtronic, Inc. (NYSE: MDT), a Large Cap Health Care stock that trades on the NYSE.  Based on that, we would expect MDT to correlate to either the Dow Industrials or the S&P 500, wouldn't we?  Well, here are the full set of indicators I use to analyze my stocks, shown for MDT on daily chart.

MDT Daily Chart Indicators
Well, there's a surprise!  MDT, at least for now, correlates best with the NASDAQ Composite, and it has done so since at least late November.  So when we look at market trends, for now we need to look at the NASDAQ Composite index, and possibly the S&P 500 since that is also showing a strong correlation.  The Mid cap, Small cap, and Dow Industrials are pretty much irrelevant in this case.

Now, the reason I mention indicators at all is because I do use them to scan for stocks worth analyzing.  The scan that found MDT, today, was a "MACD ZLR scan."  This scan looks for stocks where the MACD(5,34,5) Line approached the zero line from the top, barely brushed it, and then moved higher.  Since "close is close enough" in trading, I use a range of 2% above and 2% below the zero line to calculate "zero".

For users, here is the scan.  You may copy and paste this directly into the Advanced Scan Workbench and modify the basics to meet your own trading preference.

[type = stock] AND [country = US] AND [sma(63,Daily Volume) > 1000000] and [[exchange is NYSE] or [exchange is Nasdaq] or [exchange is Amex]]

and [Close >= 20.00]
and [Close < 100.00]

and [2 days ago macd line(5,34,5) >= [2 days ago max(252, macd line(5,34,5)) - 2 days ago min(252, macd line(5,34,5))] * .02]
and [yesterday's macd line(5,34,5) <= [yesterday's max(252, macd line(5,34,5)) - yesterday's min(252, macd line(5,34,5))] * .02]
and [yesterday's macd line(5,34,5) >= [yesterday's max(252, macd line(5,34,5)) - yesterday's min(252, macd line(5,34,5))] * -.02]
and [today's macd line(5,34,5) >= [today's max(252, macd line(5,34,5)) - today's min(252, macd line(5,34,5))] * .02]

and [
[group is ConsumerStaplesSector]
or [group is CyclicalsSector]
or [group is EnergySector]
or [group is FinancialSector]
or [group is HealthCareSector]
or [group is IndustrialSector]
or [group is MaterialsSector]
or [group is TechnologySector]
or [group is UtilitiesSector]
This is for long setups only.  You can use it for short setups by changing the first and last MACD test to be a <= comparison and changing the first and last MACD calculation to be -.02.  The middle two MACD tests remain unchanged.

What this setup does is identify stocks that have shown signs of a resurgence to the uptrend.  I use it to attempt to locate stocks that may be exiting a Wave-2, Wave-4, or Wave-B corrective wave.  Remember, though, that all trades are based on the price and volume action, not the indicators.  They are only used to find stocks that must then be properly analyzed.  

So, after that rather lengthy introduction, let's take a look at MDT.

MDT Daily Chart
The dominant features on the chart start with that significant gap down on 22 November.  From its position at the time, identifying the type of gap would have been problematic.  It's position makes it unlikely it was a breakaway gap since a downtrend was already in progress, although it could qualify as a continuation gap.  Subsequent price action, however, suggests that this was really an exhaustion gap.  The volume pattern around the gap suggest a selling climax, and the downward move met a lot of demand on 3 January with a strong bullish reversal candle.

The post-gap pattern now resembles a cup-and-handle formation.  It's even more pronounced if you draw the cup excluding the three low spikes and stick to the bottoms of the candle bodies.  Now, normally we think of cups-and-handles as appearing at the top of an uptrend and representing a pull-back followed by a resumption of the uptrend.  There's nothing that requires such an entry into the pattern, however, and the general psychology of the market participants creating the pattern remains the same when it represents a reversal off the bottom.  In both cases, we have a pattern high from which there was a significant pull-back. The high was retested - the right rim of the cup - and price showed a weak retreat on declining volume off that retest - the handle. 

In many ways, the handle also resembles a flag or pennant, and it can certainly be traded as such. When the right rim of the cup is relatively steep, as it is with MDT, it can act as a flagpole and provide a price target nearly identical to that of the cup-and-handle price target.

Before we talk about our trade strategy, there are a couple of other chart items we should review.  There's a weak resistance line formed from the last bullish spike before the gap and the last retest of the cup.  That resistance line is where price closed on Friday, constituting a third-touch of the line.  If price retreats from here, that line could gain significance, so we do need to watch behavior early in the week.

Notice that both the RSI and MACD show a bullish divergence.  That's encouraging and suggests a resumption of an uptrend that is still in progress on the weekly and monthly charts.  (I'll post them at the end of this article, but not discuss them due to the growing length of today's review.)  One word of caution, though.  Both the RSI and MACD are momentum indicators. While they measure two different aspects of price, we do need to be careful when using them together since they can give a false appearance of signal strength.  If you trade based on indicators, I recommend using only one momentum indicator along with a volume indicator, a trend indicator, and price action. 

With all this in mind, there are two ways we can trade this stock.  Current price action signals an aggressive long entry on a break above the diagonal resistance line.  Protective stop could be set below the low of Friday's candle, below the low of Thursday's candle, or most conservatively, below the low of the handle.  As each setting increases risk, be sure to adjust position sizing to mitigate that increased risk. 

Using this aggressive entry, the conservative price target is the high of the cup.  It's a high probability target in that it would represent a third test of that high.  For an entry at this point, though, that's really the only safe conclusion we can reach.

The second more conservative approach is to wait for a close above the high of the cup rim.  A protective stop would be just below that support line that also represents the 50% retrace of the gap to low pattern.  The price target, however, is shown above in green, representing a range straddling the 100% retrace of the gap combined with the 61.8% extension of the cup-and-handle formation.  This setup has a higher reward to risk ratio than entering on the handle, and it allows time for the stock to penetrate the resistance at the cup rim.

Depending on market behavior, I'm tempted to play both setups, but that's a decision I'll finalize when I see how the futures are looking before the open Monday and Tuesday.  If there isn't sufficient strength to push the stock quickly from this level to the rim, I'll pass on that trade and watch for a rim break before entering long.  Patience is always a virtue in trading.

Here are the weekly and monthly charts, respectively.  They're included so you can see the additional analysis that setup what we are watching on the daily chart.

Happy Trading.

MDT Weekly Chart

MDT Monthly Chart

Saturday, January 28, 2017

SYMC is a Tale of Three Charts

One of the scans I run on a daily bases searches for potential flag setups.  These minor pauses in a trending stock often offer good entry points when the trend resumes, provide, of course, the overall stock pattern is correctly interpreted.

A stock that caught my attention in today's scan was Symantec Corp (NASDAQ: SYMC), the nationally known cyber-security software developer most familiar to consumers as the maker of the Norton anti-virus suite.  The three-day consolidation underway following a healthy upward move is what tripped today's scan.

SYMC Daily Chart
There are a lot of positives on the daily chart.  The slope of the 200-day SMA shows a healthy uptrend.  A 5-wave motive is in progress, although we'll see on the weekly and monthly charts why I start the Elliott Wave count in May 2016 and not February.  On Balance Volume is rising at a slow, but steady pace.  The RSI(9) oscillator is confirming our price action, and finally, the stock recently broke out of a descending triangle pattern and has not pulled back in the month since that breakout.

There are two warning signs on the daily, chart, however.  The first is that obvious high spike in volume on 25 January.  The size of the candle that day is rather small, warning us that we may need to take a closer look at the price action since something out of the ordinary has occurred.  It's possible that this spike is indicative of climactic action signalling an end to the uptrend.

The second warning sign is the price target for our potential Wave-(v).  Using the rule of thumb that, when Wave-(iii) is longer than Wave-(i), the conservative price target for Wave-(v) is the height of Wave-(i).  Now, nothing constrains Wave-(v) in this pattern, however history shows that this rule of thumb works with enough consistency to be a valid predictor of price action.

I show the Wave-(v) price targets as a Fibonacci extension measured from the end of Wave-(iv).  We're already trading above the 61.8% extension, and that's a level I normally use as my most conservative target in any price calculation.  So based on this, the end of Wave-(v) can occur at any time.  A count on the hourly time frame, however, suggests that this slight 3-day pause is a fourth wave in an impulse that started 3 January, so if that's the case, we may yet approach the 100% extension.

I'm going to jump to the monthly chart next, since that's the chart that puts everything in focus.

SYMC Monthly Chart
That a motive wave ran from 1999 to 2005 appears obvious on the chart.  Since price following that 2005 peak has not retraced 100% of that move, we're safe (for) now in labeling that peak the top of Wave-I.  The question before us now is what to do with Wave-II.  Has it ended, or is it still in progress?  If it ended, when, and what does that tell us about Wave-III?

What I show on this chart is one of many possible wave counts.  It has problems, but then, complex corrective waves always generate massive headaches when trying to piece together their puzzle.  I've shown, in this case, the various subwaves that lead me to conclude that Wave-II ended in February 2016 and that Wave-III is in progress.  I also show my conclusion that, for the long-term trend, Wave-1 and Wave-2 of Wave-III have completed and Wave-3 of Wave-III is in progress.

Of note on the monthly chart is the breakout of the ascending channel that formed much of Wave-II.  Following that breakout - which occurred on high volume - we had a pullback and a retest of the support line.  That retest was rejected and price spiked to an all-time high this month.  That's good news for those looking for a bullish move out of SYMC and it offers confirmation that this wave count may be correct.

There are two warning signs, however.  First, volume is once again declining, and this month's candle - despite its length - has thus far experienced very light volume.  In other words, volume is not confirming price this month.  Another way of showing that is via the On Balance Volume (OBV) indicator.  Throughout the current uptrend, OBV has oscillated a bit, however the overall indicator remains flat.  We're not seeing any signs of accumulation, and we really do need that to occur in order to sustain a lengthy upward move.

The second warning comes from the RSI(9) oscillator.  When we compare the height of the RSI now to the height during the three prior price highs, we see a pattern indicative of a bearish divergence.  At best, the RSI is not confirming price action, and it may possibly be signalling weakness that will lead to a downturn.  So, while we believe for the moment that we have a valid wave count, we do need to be aware that it could be invalidated at any time.

I've left the weekly chart for last since it really needed the monthly analysis to put it into perspective.

SYMC Weekly Chart
The current 5-wave impulse is obvious on the weekly, but equally obvious is that 5-wave patterns throughout the correction were the norm.  Were it not for the monthly chart, there would be little reason to believe that this current impulse is nothing more than the next wave in the correction.

What does add some credence to the Wave-III theory is the overall volume signature.  We see some serious demand entering the picture at the move up from what we believe to be the bottom of Wave-II.  Indeed, each of the motive waves that occur throughout this upward move are accompanied by rising volume with a strong demand signature. 

The volume pattern in the tight symmetrical triangle was accompanied by an interesting volume pattern.  A lot of shares changed hands in this consolidation, and the subsequent breakout was on rising volume. 

Now, the bad news.  The RSI(9) oscillator shows a pronounced bearish divergence on the weekly chart.  This move could very well be short-lived, at least according to the RSI.  Additionally, when we look at the symmetrical triangle, we see that it is actually a pennant formed from the Wave-(iii) motive.  I've added the Fibonacci extension targets to the breakout of that pennant, and price has already closed at the 50% extension with a high nearly reaching the 61.8% mark.  That 61.8% target is a typical end-point for a pennant breakout such as this one. 

So, how are we going to trade this one?  Well, I'm going to take my cues from the daily chart.  Regardless of the Weekly or Monthly wave counts, it's obvious that we're currently in the fifth wave of a 5-wave impulse on the daily.  The current pause may be the end of that wave, it may be the mid-point of the wave, or - most likely - it's the fourth wave of a 5-wave move on the hourly chart.

Remember, the overall market is trending up with strength, so right now we're only taking long positions.  Therefore, if this stock breaks to the downside from here, we'll mark Wave-(v) complete and wait for Wave-(a) to play itself out before going long on Wave-(b).  If, on the other hand, we break to the upside, we'll open an immediate long position.  We'll set a price target of 28.41 with a stop just below the low of the entry day.  This is a two or three day trade at most, and it's a pure motive-wave play.  We will want out of the trade at any hint of weakness.  Based on the pattern on the chart, however, we believe the probability is strong for a short-term trade to the upside with a maximum 3-day trade horizon.

Happy Trading.

Friday, January 27, 2017

ATI Breakout From Ascending Triangle, Forms Bull Flag

The monthly chart of Allegheny Technologies (NYSE: ATI), the small-cap Pennsylvania based specialty materials and components producer demonstrates the the long-term pressures on the US steel industry.  The stock has yet to enjoy a true motive wave to the upside, and it's four-year climb to its all-time high turned out to be a three-wave correction that is likely Wave-A of a longer move.

ATI Monthly Wave
The long-term pattern from 2007 to the present is a descending triangle that is nearing its apex.  The good news for ATI is that there are signs on the monthly chart that the breakout will likely be to the upside.  The RSI(9) pattern is strengthening, and the last two peaks on the price chart - lower highs - compared to the RSI show a bullish divergence.

The volume pattern is showing signs of strength as well.  The amount of supply that entered the scene in the last downward move shows evidence of climactic activity, and the subsequent upward monthly candles are increasing in intensity. 

The price is now trading in the resistance zone, so we're watching this stock to see if it will break to the upside or retreat back towards support and the bottom of the triangle pattern.

ATI Weekly Chart
The weekly chart makes things a bit more interesting.  We can see the resistance zone that clearly and can see that we closed the week in that zone.  What didn't appear on the monthly, however, is the fact that this week's candle constituted a breakout from an ascending triangle that ran the length of 2016.  The volume pattern from this week is the highest volume recorded in at least the last five-years, and it offers strong confirmation of the legitimacy of the breakout. 

The fact that we closed in the resistance zone does raise the odds for a pullback.  If that occurs - and it occurs 57% of the time in an ascending triangle upward breakout - then we will watch for how well the triangle top - now a support line - holds.  Remember, we're not long-term traders, so we're using the weekly chart to gauge the directional trend, allowing us to enter short-term swing-trades in the direction of that trend.  So understanding the pressures imposed on the monthly and weekly charts improves our odds of entering a short-term trade in the same direction as the longer term trend.

Looking at the RSI(9) oscillator on the weekly chart, we've had consistent signals in support of the overall price movement.  This week's RSI(9) close, however, is a bit troubling.  Given the strength of the overall move, this week, a higher move in the RSI, preferably above 70, would have provided stronger confirmation of the breakout.  Instead, the RSI closed at the same level as the prior peaks that retreated from the resistance line of the triangle.  That's a sign of weakness that may be a harbinger of a pullback, at least to support.  Keep an eye on it.

ATI Daily Chart
Now let's take a look at the chart that caught our attention in the first place.  Here on the daily chart, there's no sign of that overhead resistance, which is another reason we always want to examine at least the weekly chart.  The ascending triangle, however, is obvious on the daily, and that was an extremely strong resistance line that was broken early this week.

That break, on the highest volume on the chart, also occurred on a strong breakaway gap.  It was better than expected earnings that created the gap, however the 15-month high is seen as a strong positive for the stock.  The remainder of the week created the next pattern in which we have significant interest.  We're in a tight bull flag pattern now and still showing more strength than weakness.  Thus far, there's been no attempt to retreat as low as the bottom of Tuesday's wide-range candle, and certainly no attempt to close the gap.

In the months leading up to this week's move, On Balance Volume began a steady but gradual rise, indicating that subtle accumulation was occurring over the long term.  The RSI(9) on the daily appears to be in agreement. The oscillator began to show signs of strength a month or so before the earnings announcement, again indicating increased interest in the stock.  The spike in price saw a corresponding spike in the RSI, and it continues to run strong.

We show two separate price targets on the chart.  The green target Fibonacci extension is the price target for the ascending triangle breakout, and the melon Fibonacci extension is the price target for the bull flag assuming it breaks to the upside.  The area we will set for our actual target is where the 100% triangle extension and 61.8% bull flag extension overlap.  So we're looking at a conservative target in the $25.60 range.

We will trade this stock as a traditional bull flag.  The entry will be long once the stock closes above the flag on confirming volume.  The stop will be just below the flag and the target will be $25.59. We'll wait for that close above the flag, however, since we still need to be wary of a potential pullback to support that closes the gap.  Overall, however, this appears to be a solid setup with a good probability of success.

Happy Trading.

Thursday, January 26, 2017

Wave-II Correction in Flight For CONE.

After publicly trading for just over a year, CyrusOne Inc. (NASDAQ: CONE) started a steady bullish motive wave that ended in mid-June, 2016.  The last four months of Wave-I were parabolic, with the slope of the rise at times approaching the vertical.  With Wave-I complete, a corrective set of waves ensued and apparently continue.

CONE Weekly Chart
The corrective wave off the high recorded five sub-waves down to what appears to be the end of Wave-A.  If that's the case, then Wave-B is in flight right now.  The retrace from the bottom of A, however, has already recovered 61.8% of the correction, so depending on the type of corrective pattern we experience, a reversal to Wave-C can occur at any time.  We'll pay close attention to the end of Wave-B since that level will determine how deep of a correction we will probably get in Wave-C.

It's important to note the strength of the support line running the entire length of the motive wave, up to and including the bottom of Wave-A.  That support line has the potential to mark the end of Wave-C, so we'll need to be cognizant of the candle patterns as we retest that line.

So knowing that we may be ending the upswing in Wave-B, let's take a look at the daily chart.

Cone Daily Chart
On the daily, it looks like Wave-A was an extended motive wave.  What's shaping up to Wave-B on the weekly chart, however, isn't quite playing by the rules having covered 5 sub-waves thus far.  Wave-B, by definition, is a three-wave pattern.  Now, this could rectify itself by creating a 5-3-3 or 5-3-5 pattern to the top of Wave-B, so let's see how it develops.

What stood out when analyzing the chart was the bullish channel that formed for the current wave.  Both support and resistance have held firm through the entire 5 sub-wave move, and over the last two days, price has bounced off resistance and headed south into the middle of the channel.  Today, it broke through the 10-day EMA, and it's fast approaching the 200-day SMA. It's also important to note that the two consecutive down days occurred as the Dow broke the 20,000 barrier for the first time.  Yesterday's down bar was on much higher than normal volume, too, causing the OBV indicator to hook down.  The trend in the OBV is still up, but that's an indicator that lags price by a significant margin.

The RSI(9) oscillator is the one shining light on the chart.  Compared to the overall pattern, the RSI is signalling a strong bullish divergence over the long term.  Of course, that may be a harbinger of the subsequent Wave-III move that will follow this correction.

As a short-term swing trader, here's how I plan to play this stock.  As long as the overall market trend is bullish, my only interest is playing this to the long side.  So with that in mind, we'll watch its behavior at the support line of the channel.  The channel is four-points wide, so if we get a good bullish candle at support and the market is still trending up, we'll play the long.  The stop will be just below the support line to create a good reward to risk ratio, and also to get us out of the trade immediately if the bounce is a head fake.

If the breakout is to the downside, however, we'll wait for a reversal.  Now, keep in mind the wave count, since the reversal could be part of the 5-3-3 or 5-3-5 completion pattern of Wave-B. We only want to trade in the direction of the market trend, so if possible, we'll try to catch each of the upward waves into the pattern. 

Longer term, it's really Wave-III that we want to catch.  That, however, could still be off into the far distance, based on the amount of time it took for Wave-A to run.  For now, let's play the short term patterns to the upside and enjoy the current strength in the overall market for as long as it lasts.

Happy Trading.

Wednesday, January 25, 2017

ACAD in Ending Diagonal in Weekly Wave-II

One of the technical screens that I use to locate imminent trade candidates searches for stocks resting on a technical support or resistance line.  Arcadia Pharmaceuticals (NASDAQ: ACAD) appeared on that screen today, however it was the overall pattern that intrigued me.  The technical scan showed the stock resting on a horizontal support line but it also displayed both an ascending triangle and a descending triangle each connecting to that central support line.  It was a pattern I could not resist analyzing further.

We'll start with the weekly chart, today, since the overarching pattern offers a necessary perspective in this case.

ACAD Weekly Chart
 Arcadia emerged from penny-stock status in late November, 2012, and the initial pattern quickly resembled a traditional five-wave impulse.  Indeed, we can count a valid 5-waves that end in mid-July 2015.  The ensuing corrective pattern was both deep and chaotic, however, forcing us to take a harder look at the overall wave count.

As you can see with the sub-wave and primary wave counts we show on the chart, we believe the five-wave impulse to be a Wave-I at the higher order.  (This view is, in part, justified by a quick study of the monthly chart.)  This puts the corrective pattern in focus, and we are able to count a valid 5-wave impulse to Wave-A, a three-wave correction to Wave-B, and the in-progress five-wave impulse that will ultimately lead us to Wave-C.  Whether that continues into a compound correction or if that completes Wave-II remains to be seen, of course.

Note the triangle pattern that forms support and resistance.  That will come into play further as we study the daily chart.  From the weekly, however, we can see that we're just starting Wave-v of Wave-C, and if this will be a true zig-zag correction, this will be a long and deep pattern leading down to roughly where I have C shown on this chart.  As far as the weekly chart is concerned, our only move is to the short side.

ACAD Daily Chart
The area of focus on the daily chart is that final upward move we saw in the weekly.  That last move is what triggered the technical screen, after all, since we can see that it broke through resistance, retested it as support a couple of times, and now rests directly on that line.  Were it not for the overall Elliott Wave count, this would appear to me to be an excellent long trade opportunity.  From an Elliott Wave perspective, however, danger signs abound.

The A-B-C correction dominates the daily chart, and if Wave-C is a 5-wave impulse, as it appears to be on the weekly chart, then it is clearly not yet over.  That signals more distance to the downside before any true uptrend can occur.

What didn't appear on my technical screen, however, is the current wave pattern in the upturn.  We appear to be in an ending diagonal pattern in wave-iv.  Now, we entered this pattern from the top, and typically, the ending diagonal exits in the direction from which we entered.  That would imply an upward move, and we do anticipate that to Wave-v of this sub-wave impulse. But this is wave-4 of the overall move, and wave-5 will be to the downside.  That's the warning I show with that down arrow in black.  Wave-5 must complete Wave-C, and Wave-5 is a continuation of the downward impulse of that correction.

Despite the strong candle drawn today, we don't believe the Wave-iv (which will be Wave-E of the diagonal) downward move is complete.  We're still too far from the support line that forms the lower part of the diagonal.  We'll watch the next moves, of course, since no pattern is perfect, and we need to trade what is, not what the books say it should be. 

Before we look to place a trade, however, we need to see evidence that Wave-C is complete.  This is one case where we'll take our cues from the weekly chart.  The signal is cleaner there, and we should have a better indication when the next impulse - a Wave-III on the weekly chart - begins.

Given the overall strength of the market - the Dow crossed the 20,000 barrier today, after all - we are not interested in taking a short position.  Until Wave-C ends, we'll keep this chart in reserve for the inevitable pull-back of the overall market.  When the market does correct, this may be a prime candidate for a short position.  For now, however, we'll take a pass on entering a trade here.

Happy Trading.

Tuesday, January 24, 2017

Ending Triangle Breakout in AME May Signal Start of Wave V

After a two-year long corrective wave, the aerospace industry's electromagnetic device supplier Ametek, Inc. (NYSE: AME) broke out of an ending triangle pattern on both the daily and the weekly charts.  The pattern took over twelve months to develop, offering the potential for a lengthy run following the breakout.

AME Weekly Chart
The long term trend in AME continues to be bullish, and the triangle on the weekly may have completed Wave-IV of the long-term trend. We still need more evidence to reach that conclusion - evidence we may have on the daily chart - however the initial breakout in early December followed by the pullback to the triangle near the end of the month and the subsequent January bounce off both that triangle and the 10-period EMA all bode well for a resumption of the uptrend.

Wave-III on the weekly was a two-year pattern that was more than double the price movement of Wave-I.  This eliminates any physical restrictions on the height of Wave-5 should it truly be in progress.  We'll know for sure if price closes - and remains - above the resistance line formed by Wave-II and several subsequent tests of that peak.

The breakout started with a bang, driving the second highest weekly volume on the chart.  It's easy to see that virtually all of the volume to date implies strong demand, and that bodes very well for the subsequent impulse wave.  Volume has, indeed, declined since the twin spikes, however that decline merely brings us back to the 200 period volume moving average.  Overall, it's a bullish signal.

AME Daily Chart
The entire triangle pattern is glaringly obvious on the daily chart.  The volume spike off support at the end of Wave-C as well as the volume spikes on the retest are both good indicators that this is a legitimate breakout and we may well be into Wave-V.  Since November, the price action drew a bullish channel at a modest slope.  Price is riding the support line at the moment, and it has been doing so since the beginning of the year.

Now, it's obvious that we missed the prime entry point which came on the retest of the triangle (which is now positioned as a support line.)  That doesn't, however, mean that another trade setup is not about to appear.  Notice that we've traced five full sub-waves since the November low.  Well, we've almost traced them.  Wave-v is still in flight, and while its minimum target has been met, there's nothing preventing it from running further before a corrective wave kicks in.

Based on the length of Wave-III, we expect Wave-V to run at least 21-points, and given the length of Wave-III, it can certainly run further than that. Based on this, there are two entry points for which we will patiently wait.
  1. Wave-v thus far continues to include candles that touch the lower support line.  That's the first possible entry.  If we get a one-candle pullback to support, we'll enter long on a bullish reversal candle.  The stop will be just below the lower support line, and we'll ride the remainder of Wave-v.  
  2. The preferred entry at this point, however, will follow a short sub-wave a-b-c correction. Wave-v - once it completes - will likely signal the end of Wave-1.  Once that happens, we'll wait for Wave-2 to run its course and then attempt to catch the start of Wave-3.  That wave should be at least a 10-point run, so our patience will prove quite rewarding if we catch it in time.
Be aware that AME reports earnings before the open on 7 February.  Earnings have not gone well of late with eight consecutive revenue misses.  In fact, six of the either have merely met expectations on earnings, with the other two beating earnings by only a penny.  Clearly, another quarter of dismal earnings could negate the entire chart pattern and send the stock into free-fall.  On the other hand, good earning surprise (especially if revenue beats expectations) could be the stimulus needed to send this stock to the Wave-V price target.  We won't hold a position through the earnings date, of course, however we do need to be prepared to jump on board if a move immediately triggers.

Be patient, wait for the right entry point, and be wary of the earnings date.  If we play this one right, however, it could prove quite lucrative.

Happy Trading.