High Volume Gap Up Followed by Pullback in DXCM

Back to back good news events last week propelled DexCom, Inc. (NASDAQ: DXCM) to an opening gap up $11.75 a week ago today.  The first bit of good news came on Tuesday, 10 January 2017 when DexCom upped their forward guidance for 2016's full-year report.  Their forecast increased revenue by 42% to $570 million, and they reported that as many as 90,000 new patients are using their Continuous Glucose Monitoring System.

For 2017, they provided guidance of $710 to $740 million in revenue with a gross margin of 67% to 70%.  They expect to add another 70,000 patients worldwide.  That news alone was well received, and the stock surged over $5 on higher than average volume.

The major news, however, came on Friday, 13 January.  CMS (Centers for Medicare and Medicaid Services) approved a reimbursement program for the Continuous Glucose Monitoring System, classifying it as "Durable Medical Equipment. (DME)"  DexCom is the sole provider of a this type of device with a DME classification.  This action by CMS came a year earlier than analysts predicted, resulting in a major market surprise that rocketed the stock northwards.

DXCM Daily Chart

The upward push started a couple of days prior to the upgraded forward guidance, and on a lower level scale, the move culminated at the high on the gap day in a 5-impulse wave move.  It's interesting (and significant) to note that the gap opened on a diagonal support line extended downward from the 52-week high and subsequent test of that high.  This implies that this support line may have some teeth if price decides to test it over the next couple of trading days. 

The gap up created an island reversal pattern that counters the gap down on 2 November.  Unfortunately, if you're hoping to trade the island pattern, it's too late.  The price target for the island reversal was met - and exceeded - on the day of the gap itself.  From a chart pattern perspective, it's not one that we'd consider using, in any case.  Of all the breakout patterns, the island reversal is the worst performing and has the lowest success rate.  It's not a reliable signal and we don't base any trading decisions on its manifestation.

What we're watching for on the daily chart now is whether the uptrend will resume, indicating that Wave-v was also the top of Wave-1.  If so, there's a potential very lucrative Wave-3 in the offing, and that's one we'd love to catch at its inception.  Normally, we'd use the low of the gap day as the support line, but in this case, since we have a very well defined diagonal support that already touched the gap candle, we'll use that as the demarcation line for this pattern. 

Thus far, the four-day pullback retraced just over 23.6% of the full impulse.  Notice the intersection of the support line with the 38.2% retracement line.  It's entirely possible that the stock will retrace to that level before reversing.

RSI(9) is encouraging, showing a bullish divergence pattern.  There's strength entering the picture, offering a subtle hint that a full impulse may actually be in flight.  Offering support for bullish view is the overall volume signature.  The behavior starting 2 November 2016 suggests climactic selling, and we can see how price retested and subsequently retreated off that 2 November low.  This occurred in the holiday period, so we do need to be careful not to draw conclusions from the volume picture at the retest.

What we do find telling is the volume coming off last Friday's gap.  A lot of shares changed hands the following day as well, although the stock pretty much hovered in place.  The three down days after that were on continuously declining volume, suggesting a bit of profit taking following the gap, but there are no indications that there's widespread supply entering the scene.  We'll be watching for a bullish reversal on confirming volume to indicate that the uptrend has resumed.

DXCM Weekly Chart

The weekly chart shows a lengthy corrective pattern that ran for over 15-months.  The pattern is a classic A-B-C flat correction, and Wave-c completed the week of 3 January.  It's still to early to tell if that was also the end of Wave-4, hover the length of the pattern would suggest that the corrective wave has, indeed, run its course.  Time will tell. 

The strong moves last week are evident in the largest candle on the chart, coupled with the highest volume on the chart.  That may be the start of Wave-5, however we do have to wait for confirmation before making that claim.  Wave-5 has the potential to run at $43 points, based on typical impulse wave patterns, and that would bring us close to the all-time high.  Notice that such a move would setup a double-top pattern, so be aware of a potential significant play to the downside if we stall at that level.

There's a bit of weakness along the lows on the RSI(9) weekly oscillator, although the highs confirm the price action that we've seen throughout the correction. Overall, the trend lines are forming a triangle pattern, and we entered that triangle from the bottom, so there's additional weakness concerns manifesting on the weekly chart.

The way we will play this stock depends on its next move.  If we get a bullish reversal on the daily with confirming volume, then we'll take a long position and attempt to ride would could be a daily Wave-3.  Wave-1 ran over 30 points, so Wave-3 has a decent profit potential. 

If, on the other hand, we break below the diagonal support line on confirming volume, then we'll take a short position.  Our target, in that case, will be a retest of the lows that marked the bottoms of Wave-iii and Wave-v.  Patience is the buzzword with this stock.  Let it show us the direction it wants to take and we'll play that move accordingly.

Happy Trading.