Tuesday, January 17, 2017

Complex Correction and Weekly Double Top In PPG

While a short-term bullish channel has emerged on the daily chart for PPG Industries, Inc. (NYSE: PPG), the weekly chart offers strong clues that the next move may be to the downside.  To better understand the configuration of the daily chart, we'll first start with the weekly.

PPG Weekly Chart
From an Elliott Wave perspective, a strong Wave-1 impulse ran from September 2011 through May 2015.  The end of that wave, in fact, was a 2:1 split that apparently took the wind out of investor's sails and triggered a wave of profit taking that resulted in a 38.2% retracement (so far) of the first wave. 

A Double Top pattern is in effect, although given the "W" shape, some may trade this more as a Double Bottom.  Personally, I use the subsequent action off the top of the "W" to determine if this is a top or bottom pattern, and in this case, the move is solidly to the downside.  Thus, I treat it as a Double Top.

Notice the rising neckline in this case.  That neckline - since it's rising - offers an aggressive entry on the weekly for intermediate term traders looking to play this pattern.  Price closed below that neckline, retraced back to it only to see the neckline hold as resistance, and is now poised to run lower.  That's a pretty decent entry point for a trade that may take several months to play out.  (That's longer than our horizon, but it's a region that many traders do play, so it's worth mentioning.)

There's currently a weak support line that the pattern is following.  Since the next Elliott Wave - a Wave-b - is expected to be to the upside, it's possible that this support line will hold for a time.  It's Wave-c that will likely take us to the price target of the double top, assuming that pattern follows its natural course.

The RSI is simply confirming the overall price action, volume is declining (indicating a breakout in either direction may be setting up) and On Balance Volume is flat, indicating an equilibrium.  So, for now, the weekly is telling us that we are still in a Wave-2 correction, we have a potential Double Top pattern in flight, and the next corrective wave we anticipate is a Wave-b to the short-term upside.  With that in mind, we'll look at the daily chart.

PPG Daily Chart
The dominant short-term feature - and in this case, by short-term we are referring to the trend that started in October 2016 - is a bullish channel that is 23.6% off the pattern low.  Since the pattern high to low on this time frame is Wave-a on the weekly chart, that retracement is noteworthy.  The Wave-b pattern is expected to be to the upside, and there's a very attractive target for that wave around the 61.8% level.  The resistance line for this bullish channel is rapidly approaching that level as well.

Today's candle is an extremely bullish one in this time frame.  It's a hammer that bounced off the lower support line on high volume.  That's a major sign of price rejection and an indication - at least in the short term - that there are a significant number of buyers entering the market along that support level.  It helps that today's low was at the convergence of three separate support lines.  The first is the bull channel that runs from October, the second is the horizontal support line that crosses three separate patterns, and the third is a downward sloping support line that extends back to May 2016 and served as support on multiple occasions since then.  Since each of those lines would generate interest and their associated stop and limit orders, it's no wonder today's volume was higher than usual.

The RSI(9) offers little help on the daily.  It's confirming price action, but that's about it.  There are no signs of a divergence that may help us understand where price is heading.  On Balance Volume is oscillating without clear direction, as well.  It's well off its lows, however it may be hooking back down again, showing signs of distribution.

So how are we playing this stock?  Well, in the short term, we're looking to ride that potential Wave-b, and today's hammer off support on high volume offers a signal we're willing to take.  We'll place a buy stop just above today's high, and we'll place a protective stop just below the channel.  Our price target will be the lower purple resistance line that marks the inner boundary of the resistance channel.

Now, the wave we ultimately want to catch is that Wave-c that could complete the Double Top pattern.  As we approach our price target for Wave-b, we'll start watching for signs of a reversal and attempt to enter short as Wave-c gets underway.  The overall Elliott Wave pattern on the weekly will give us clues as to the distance that wave could travel, and since Wave-c is typically a 5-wave impulse in itself, there should be multiple swing trades on which we may capitalize, even if we miss the first downward thrust.

Happy Trading.

No comments :