Wednesday, January 18, 2017

GILD in Horizontal Channel and Longer Term Descending Triangle

A 50% retracement correction on the weekly chart of Gilead Sciences, Inc (NASDAQ: GILD) has settled into a horizontal channel and a longer term descending triangle pattern on the daily chart. Now, the biotech industry is one in which I always elevate my risk assessment since it can be so volatile on a moment's notice.  The industry as a whole is heavily dependent upon the success of individual products in its R&D pipeline and a single disappointment (or success) can dramatically move the stock without warning.  When a pattern such as we see in GILD emerges, however, it's extremely difficult to resist taking the bait since the potential reward far outweighs the increased risk of an opposing news release.

GILD Daily Chart
Here we clearly see the steady decline that dominates the last year.  Notice, however, that the pattern settled into a horizontal channel in mid-October 2016, and it's that pattern that we're hoping to play in the short term.  There have been four consistent touches of the support line in that channel, the latest in the set coming both yesterday and today.  With the stock sitting on a major support line, it behooves us to analyze a potential long setup.

There have been three bounces off that support line since November, 2016.  In all three cases, the move up was swift and covered the six-point channel range in anywhere from two to four days.  Swift, indeed.  On the flip-side, the subsequent move back to the support line has taken from 9 to 19 days, although that period is shortening as the pattern progresses.

In addition to the channel setup, a descending triangle pattern is also in effect.  The resistance line goes back as far as July, 2016 and has registered five separate touches.  The volume signature's a bit troubling, however, since it showed signs of diminished demand over the last couple of days. 

RSI(9) is no help, in this case.  The pattern has pretty much mimicked the price action since the channel began in earnest.  On Balance Volume is still dropping like a stone, so there's some feeling that there's no accumulation occurring at the moment.

The weekly chart is more bearish than the daily, when viewed from a longer term perspective.

GILD Weekly Chart
A full 5-wave impulse completed on the weekly chart in June 2015.  The stock ran out of steam in an extremely short Wave-3, however, and that resulted in a shorter still Wave-5.  Since mid-2015, the stock has traded in a complex consolidation wave that thus far has retraced 50% of the full prior impulse.  That's a fairly solid correction, however the current Elliott Wave count suggests there could be more room to the downside before the correction ends.  It's possible to count out a complete double corrective pattern here which implies that the next impulse wave is ready to begin, however I'm not confident enough in that count to show it here. 

What does show on the weekly, however, is a strengthening RSI(9).  At least on the lows, we're seeing a bullish divergence, indicating a potential shift to an upward bias may be on the horizon.  On Balance Volume on the weekly would appear to agree since it continued strong while the price retraced 50% of the prior impulse.  That's another bullish divergence that indicates longer term strength.

There are two ways we intend to play this stock, based on how the stock wants to move from here.  We'll play a long setup if that triggers, by placing a buy stop order above today's high.  The protective stop in that case will just below the lower support line.  The price target in this pattern will be the horizontal resistance line formed by the last upward move.

At the same time, we'll setup a sell stop order just below the lower channel support line.  The protective stop in that case will be just above yesterday's high.  The target will be six-points below the support line - i.e. the height of the channel.  That six-point channel stepping stone has been a consistent pattern throughout the down-trend for the past 18-months.

When we place this type of an order setup, we do so with a "one cancels other" type order.  As a result, if the long position triggers, the short entry order will be canceled, and vice versa.  From the current chart position, we could have either a channel play based on a bounce off support (the long entry) or a breakout play based on a violation of support (the short entry.)  This is a good means of allowing the stock to move as it will, and just going along for the ride.

Happy Trading.

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