Saturday, January 07, 2017

Autodesk Trading in a Bullish Channel on Daily Chart

Channels, especially if they are channels trending in the same direction as the overall market, can be extremely lucrative for the swing trader.  An aggressive swing trader can play the stock in both directions as it bounces off the extremes of the channel.  A conservative swing trader can enter in the direction of the broader market when the stock touches the boundary most suited for that directional play. 

It's important to remember that, for channel plays, you only want to go long in an area of support and you only want to go short in an area of resistance.  Entering a channel trade outside of those extremes (either within the boundaries of the channel or on a pierce of the extremes) is tantamount to gambling, and that's not a game we like to play with our hard earned capital.

One stock that is trading in a bullish channel right now is Autodesk, Inc. (NASDAQ: ADSK). We'll look first at the daily chart since that's where the pattern first caught our attention.

ADSK Daily Chart
The channel is well defined, as you can see, with at least three touches on both the top and bottom.  The height of the channel at its innermost limits is about 8 points, so there's a very healthy spread there.  The support and resistance zones are about 2 1/2 points wide, so our reward to risk ratio is at least 2 1/2 to 1 assuming we enter at the inner limit and place a stop just outside the outer limit. 

The 200-day moving average is trending up and price is above the moving average, so we're looking at this as primarily a long play.  On this type of trade I tend to be a bit aggressive, so I'd be willing to play the short side as well, but that's really a matter of style and preference.

Now, this is a watch list stock right now, not an immediate setup.  For a long trade, we went to enter in the zone between the green diagonal support areas.  We've missed that point and we're not going to chase any stocks.  For a short entry, we want to enter in the zone between the red diagonal resistance areas. 

The daily chart does offer two warning flags.  First, there's a bearish divergence building in the RSI(9) oscillator.  This uptrend is weakening and may not have much more to offer on the upside.  This strengthens our desire to play a short if we hit that resistance zone.  Second, the last thrust to the top of the resistance zone looks suspiciously like climactic activity.  We can see that demand is weakening in the last couple of up bars.  Again, it's a strong argument for a short if we retest that resistance zone.

Let's zoom out a bit and look at this stock from a longer-term perspective.  The weekly chart was a bit chaotic and did little to offer clarity, so instead we went out to the monthly chart.  That pattern was crystal clear as you'll see here.

ADSK Monthly Chart
There are two possible Elliott Wave counts here, and I've shown the count that makes the most sense to me.  It doesn't matter which is correct, however, since in both counts Waves 3, 4, and 5 are the same.  We land in the same place, and for the purposes of understanding our daily chart, that's all we really need to know.

What has developed into our channel on the daily chart actually starts at the bottom of wave-ii on the monthly chart.  That monthly spinning top in December 2016 may have been the final gasp of Wave-v, although we won't know that until the January 2017 candle completes.  It's a warning sign, though, that we may be nearing the end of this long-term uptrend.

The RSI(9) oscillator on the monthly chart is also urging caution.  While it's subtle, there is a bearish divergence along the highs.  Despite that huge Wave-5 spike as compared to Wave-3, the RSI barely peaked above the 70 line.  So the pattern is definitely displaying weakness.

Volume, on the other hand, is still extremely bullish on the monthly.  We'll have to see how this month's volume signature forms, but there's a crystal clear upward trend in demand through the last couple of quarters.

The bottom line is we'll add this one to our watchlist.  If we retest support, we'll review the RSI, volume, and candle patterns to determine if a long entry is warranted.  Remember, we'll only enter long in that support area.  Likewise, if we retest resistance, we'll review the overall signature to determine if a short is warranted.  Based on what we can see on both the daily and monthly right now, it looks like a short at that level will be a good play, but that could be a week or more into the future, so let's see what develops.

Remember, never chase a stock in a channel play.  Enter long at support and enter short at resistance, but never in between.  We always want the probabilities and the reward to risk ratio in our favor, and that only occurs within those two narrow zones.  Be patient, and let the stock come to you.  Never chase it.

Happy Trading.

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