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.

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