Sunday, January 08, 2017

MCHP At Bottom of Bull Channel But Chart Signals Caution

Another stock that appeared on our bull channel scans this weekend is Microchip Technology, Inc. (NASDAQ: MCHP).  Unlike the stock we reviewed yesterday, MCHP is sitting at support, which is where we'd like to setup a long entry.  There are some warning signs on the chart, however, that tell us this may not be the right move quite yet. 

MCHP Daily Chart
We started with the monthly chart to get the overall trend for our Elliott Wave count.  Most of it is reflected on the weekly chart that we'll display shortly, and you can see on our daily chart that the longer term Wave-5 ended on 30 November.  That coincided with a lengthy move that rode the top of the channel for about three weeks.

There are a few things that concern me on this chart from a channel trade perspective.  First, that move down from Wave-5 was a major change of character.  That's the longest bar we can find on the daily, and on the weekly the bar rivals the single-week plummet off the top of Wave-3.  Volume was definitely convincing as well.

The retest of that high was on better than average volume, however it was immediately followed by a failure on near-equal volume.  The return to the bottom of the channel was on higher than average volume (on the down days) but the bounce off the channel bottom was on about half the average volume.  That's not the type volume pattern we want to see before entering a long position.  To feel comfortable with that long entry, we need the upward volume on the bounce to be higher than average, not lower by such a large amount.

The Elliott Wave count is also troubling.  On the daily chart, since the end of Wave-5, at least two corrective subwaves have completed.  The setup is for an a-b-c flat correction, however we can't be certain Wave-c has completed.  In fact, from the top of Wave-b, we can draw four viable sub-waves, which suggests there's one more sub-wave to the downside yet to come.  That will likely complete the flat correction, and the bottom of Wave-A.c would be near the lower channel marker. 

On the higher order, this is just Wave-A of the correction, so the next move should be up from there.  Assuming the volume signature agrees, that's the point where we'd like to enter long.  The strong bearish divergence in the RSI(9) Oscillator adds to our conviction that a long entry would be premature at this time.

Nothing on the weekly chart refutes our interpretation:

MCHP Weekly Chart

Something that does jump out at us on the weekly chart is that this stock really likes to trend sideways for long periods of time between impulse waves.  Both Wave-2 and Wave-4 were diagonal corrections and each lasted for a good 18-months.  What this means is that our post Wave-5 correction may well be a complex correction that drags out through all of 2017.  That's not necessarily a bad thing if it chooses to follow the same corrective pattern as the two prior sideways moves.  Just look at the very lucrative swing trades that setup in those two diagonals.

Notice the bearish divergence in the RSI coming off sub-wave-iii. That adds greater strength to the bearish divergence we see on the daily chart.  Also notice the decreasing volume coming off the top of Wave-5 and that subsequent one-day plunge.  That the last weekly bar was down on volume approaching the average tells us there's still more weakness ahead.

This is a stock for our long-term watch list.  We'll be watching the volume signature on the daily to determine if a long entry is viable as we approach the bottom of the channel.  We'll also watch for signs that the stock is entering another lengthy consolidation period, and if so, we'll look for multiple swing trade positions as the pattern develops.  Let's not be hasty with this one.  It has excellent potential if we give it a chance to develop in its own due course.

Happy Trading.

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