Tuesday, January 24, 2017

Ending Triangle Breakout in AME May Signal Start of Wave V

After a two-year long corrective wave, the aerospace industry's electromagnetic device supplier Ametek, Inc. (NYSE: AME) broke out of an ending triangle pattern on both the daily and the weekly charts.  The pattern took over twelve months to develop, offering the potential for a lengthy run following the breakout.

AME Weekly Chart
The long term trend in AME continues to be bullish, and the triangle on the weekly may have completed Wave-IV of the long-term trend. We still need more evidence to reach that conclusion - evidence we may have on the daily chart - however the initial breakout in early December followed by the pullback to the triangle near the end of the month and the subsequent January bounce off both that triangle and the 10-period EMA all bode well for a resumption of the uptrend.

Wave-III on the weekly was a two-year pattern that was more than double the price movement of Wave-I.  This eliminates any physical restrictions on the height of Wave-5 should it truly be in progress.  We'll know for sure if price closes - and remains - above the resistance line formed by Wave-II and several subsequent tests of that peak.

The breakout started with a bang, driving the second highest weekly volume on the chart.  It's easy to see that virtually all of the volume to date implies strong demand, and that bodes very well for the subsequent impulse wave.  Volume has, indeed, declined since the twin spikes, however that decline merely brings us back to the 200 period volume moving average.  Overall, it's a bullish signal.

AME Daily Chart
The entire triangle pattern is glaringly obvious on the daily chart.  The volume spike off support at the end of Wave-C as well as the volume spikes on the retest are both good indicators that this is a legitimate breakout and we may well be into Wave-V.  Since November, the price action drew a bullish channel at a modest slope.  Price is riding the support line at the moment, and it has been doing so since the beginning of the year.

Now, it's obvious that we missed the prime entry point which came on the retest of the triangle (which is now positioned as a support line.)  That doesn't, however, mean that another trade setup is not about to appear.  Notice that we've traced five full sub-waves since the November low.  Well, we've almost traced them.  Wave-v is still in flight, and while its minimum target has been met, there's nothing preventing it from running further before a corrective wave kicks in.

Based on the length of Wave-III, we expect Wave-V to run at least 21-points, and given the length of Wave-III, it can certainly run further than that. Based on this, there are two entry points for which we will patiently wait.
  1. Wave-v thus far continues to include candles that touch the lower support line.  That's the first possible entry.  If we get a one-candle pullback to support, we'll enter long on a bullish reversal candle.  The stop will be just below the lower support line, and we'll ride the remainder of Wave-v.  
  2. The preferred entry at this point, however, will follow a short sub-wave a-b-c correction. Wave-v - once it completes - will likely signal the end of Wave-1.  Once that happens, we'll wait for Wave-2 to run its course and then attempt to catch the start of Wave-3.  That wave should be at least a 10-point run, so our patience will prove quite rewarding if we catch it in time.
Be aware that AME reports earnings before the open on 7 February.  Earnings have not gone well of late with eight consecutive revenue misses.  In fact, six of the either have merely met expectations on earnings, with the other two beating earnings by only a penny.  Clearly, another quarter of dismal earnings could negate the entire chart pattern and send the stock into free-fall.  On the other hand, good earning surprise (especially if revenue beats expectations) could be the stimulus needed to send this stock to the Wave-V price target.  We won't hold a position through the earnings date, of course, however we do need to be prepared to jump on board if a move immediately triggers.

Be patient, wait for the right entry point, and be wary of the earnings date.  If we play this one right, however, it could prove quite lucrative.

Happy Trading.

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