|DNKN Daily Chart|
The RSI(9) Oscillator does hint at significant weakness in the short to medium term. The bearish divergence coming off the highs leading to the 16 December peak is pronounced, and the divergence in the lows adds strength to the downward signal. We can infer from this that either Wave A or Wave C (or both) may be deep corrections.
The buying climax on 16 December, as evidenced by the huge volume spike, adds further confirmation when we factor in the lack of follow-through after that one day spike. We don't have evidence of demand forcing the stock up at this point.
The two long-term trend-lines that formed at the origin of the entire impulse (offering a long-term support line) and the Wave-2 and 3 progressions (offering a long-term resistance line) appear significant. Notice that the lines are diverging. The bottom of this correction could be deep indeed, provided no actual merger announcement intervenes and scrubs the entire pattern.
Let's take a quick look at the Weekly Chart for additional guidance.
|DNKN Weekly Chart|
Notice the long diagonal pivot line drawn from the lows on the chart. That line offered support on each of the pullbacks through the impulse wave, and it offered resistance consistently through the Wave-B move. That it was breached the last week of the year coming off that high is significant and we can expect it to once again resume its resistance role should we attempt to retest to the upside.
Notice the RSI(9) oscillator. Since the Wave 3 top in March 2014, the RSI was unable to penetrate the 70 mark, although Wave-A brought it below 30 twice. The RSI shows a very strong resistance level at 70, and although it's an ascending triangle in the oscillator, the indications of weakness are significant.
So where does this leave us? Well, on the daily, we expect the first A-B-C correction to make it down as far as that upward sloping support line. That it appears to be a flat correction on the Weekly implies that the daily may well be a complex correction and it will ultimately breach that support line.
What we are watching in the short term is the A-B-C pattern in flight now. A strong reversal candle may signal the start of B, and if possible, we'd like to catch that wave to the long side. We're not going short on DNKN until we see evidence that Wave-B is complete. Rather, we're looking for a long play on a strong reversal at either the 38.2% line (where we are now,) the 50% line, or the 61.8% line.
With the long-term correction suggesting a return to test the $37 range, we believe there will be several viable swing trades to play with DNKN before it ends. Because of the merger rumors, we have to exercise care in our short plays, and we'll adjust position sides accordingly. For now, however, we'll put that rumor to the side, at least until there's evidence that it's closer to becoming a reality. Watch for the reversal signals, and play each of the waves as they manifest. Remember, where Wave-B ends will tell us what type of a corrective pattern Wave-C will display, so watch it carefully. In the meantime, let's try to catch Wave-B when it starts.