Sunday, January 01, 2017

Bull Flag Develops in PGR Off All-Time High

I'd like to wish everyone a very Happy, Healthy, and Prosperous 2017.

A very strong third-quarter earnings release on 13 October 2016 pushed Progressive Corporation (NYSE: PGR) to its all-time (split-adjusted) high, narrowly surpassing the prior high set in March 2016.  Not surprisingly, the stock experience a slight pullback coming off that all-time high.  In a strong bull market such as we've experienced recently, a pullback off a major high is often an excellent entry point since the stock will typically retest those highs and often push well above them.  This strategy with major lows also works well for short entries in strong bear markets.

The daily chart, in the case of Progressive, offers strong evidence that there's more to come on the high side.

PGR Daily Chart
The overall daily chart shows a long-term complex correction, and as such, I chose not to label anything other than the current move.  Starting from the low on 4 November 2016, however, the stock drew three complete impulse waves that ended at the all-time high.  Since then, the very shallow pullback is filling in the Wave-iv picture very nicely.

Wave-iii, like Wave-i before it, was near vertical.  The Wave-iv pullback formed a classic bull flag, and the break of that flag will be our signal that Wave-v is in progress.  That, in fact, is the trade we plan to take with this stock, but more on that in a bit.

Before we briefly discuss the weekly chart, I'd like to draw your attention to the three diagonal support lines that all converge at a horizontal support line around $35.50 in the late January time-frame.  Two of those lines are extension of prior resistance levels, each with a minimum of three resistance touches.  The third line is formed from support coming out of Wave-ii.  Combined, these are all significant levels of support that may factor into a trade setup later this month. 

Finally, the RSI(9) oscillator is in a strong bullish wedge pattern.  There's currently no indication of weakness in the RSI, at least not on the daily chart.  The current pullback has found some support on the EMA(10) line, adding to the strength we anticipate in the next move.

Now let's take a quick look at the weekly chart.
PGR Weekly Chart
Going all the way back to September, 2012, Progressive's march was steadily northward.  A strong bull channel formed very early in that trend, and it has yet to be broken to the downside.  It's an extremely strong bull trend for this stick, however, we are starting to see signs of weakening.

You can easily see the twin peaks formed in March 2016 and December 2016.  For longer term traders, those peaks form a double top, and suggest the next long-term move for PGR could be down.  Now, that time horizon is far greater than I trade, but the potential for future weakness shouldn't be ignored.

The RSI(9) oscillator on the weekly chart also signals weakness.  There's a bearish divergence in the RSI coming off those two peaks, and there's a general downward slope to the channel formed in the oscillator.  Now, these types of RSI signals are often well in advance of the actual price action they portend, so this doesn't influence the short-term trade we're planning.  It does, however, give us a pretty good clue as to what types of trades may setup longer term, once the current daily five-wave impulse completes.

So, what trade are we contemplating?  Well, the signal will come on the daily chart, as usual.  We're looking at a long position trade on a break (with confirming volume) above the bull flag.  Our initial protective stop will be $0.10 below the low of the pattern.  Currently, that would make it $35.23, however that could certainly change before entry.  There are three potential price targets that we are watching, and all of them are based on the height of the flagpole.  When entering flag trades, we use the 61.8%, 76.4%, and 100% values as the targets ranging from conservative to aggressive, respectively.  That puts our targets at $37.17, $37.54, and $38.13. 

Looking at the number of support lines converging, we expect to be able to reduce our risk almost immediately, and hope to quickly move our stop above the entry in order to eliminate our risk.  As always, we'll trail our stops up until we are stopped out of the position.  The conservative target will be used for position sizing and initial risk analysis.  As we close in on each of those targets, however, we'll move our stops tighter, and tighter.  Remember, we want to stay in the trade as long as the stock is running in the right direction, so we don't set hard exit limits.  Rather, we let the market stop us out when the direction shifts.

Happy Trading.

No comments :