Friday, January 06, 2017

Mobileye Completes 5-wave Impulse after Trend Line Break

The Jerusalem, Israel based autonomous driving technology firm Mobileye NV (NYSE: MBLY) ended 2016 by breaking a strong resistance trend-line with a short breakaway gap.  The stock was trendless through most of its trading history, however the oscillating 20-point high to low pattern on the daily chart offers periodic opportunities for the swing trader.  With the completion of a short-term 5-wave impulse pattern following that trend-line break, one such swing opportunity may be in front of us.

MBLY Daily Chart
One of the methods for defining a trend in the stock - and a method I like since it scans very well - involves the 200-day simple moving average.  When the SMA(200) is moving up and price is above that average, then the stock is an uptrend and long positions are warranted.  When the SMA(200) is moving down and price is below that average, then the stock is in a downtrend and short positions are warranted.  When neither of those conditions are true, then the stock is not in a clear trend, as is the case with MBLY on the daily chart.

Looking at our chart, however, we can see the break of that diagonal trend-line just as the stock broke out from its bottom near year-end.  Notice the volume that coincided with that breakout.  That surge was on 29 December 2016, and was more than double average volume in a period where overall market volume is exceptionally low.  There was strong follow-through with that volume in each wave, too.

It's likely no coincidence that the company announced a deal with BMW and Intel on 4 January 2017.  The plan is for BMW to test 40 driverless cars in the US and Europe in 2017 using Mobileye's anti-collision technology. (Reuters: BMW, Intel, Mobilieye to Test 40 Driverless Cars in Second Half of 2017.)  The $9 leap in price in the week preceding that news is a good sign of institutional and specialist interest, especially given the volume we saw in the last week of the year.

Let's zoom into this chart now to see what type of entry may be available.  I prefer the 30-minute chart for entries, as opposed to the hourly chart, since the 30-minute doesn't cross daily boundaries and better aligns with the hectic first and last half hours of the trading day.

MBLY 30-Minute Chart
Well, that 5-wave impulse certainly comes into focus on this 30-minute chart.  Notice that the 200-period moving average at this level is swinging into an up-trend status.  Also notice the volume patterns throughout the move.  Compared to the rest of the chart, volume was exceptional in the entire upswing.  It's started to taper off as we've consolidated into a horizontal pattern following the completion of Wave-5, however that's a good sign as well.

What we are attempting to ascertain is whether or not that 5-wave impulse was merely the first wave of a much larger higher order impulse.  The volume pattern and the consolidation we're seeing now suggests that it is.  The problem is, we don't yet know which way this next move will break.  The pattern can be interpreted as a descending triangle (which has a probable downside break) or a pennant coming off that 5-wave impulse (which has a probable upside break.)  We can make a case for either one.

A bit of caution is needed.  That lengthy consolidation on the 30-minute is only 2 bars on the daily, and after the move this stock made, that's not enough of a correction to signal the next move with any conviction.  I'd expect to see a bit more of a pullback on the daily, which means we may get a downside break of that triangle on the 30-minute.  Because of the daily pattern, I won't take a short position on that first break.  Rather, I'd only take it on a retest and subsequent failure of the base of that triangle.  We need confirmation that it's a true resistance line before entering.

That's not true on an upside break, however.  Because of the strong move this stock made in the first place, and because of the high demand showing in the volume signature, we will take a long position on an upside break.  Notice that the daily is showing a strong support line at the bottom of today's candle, so a protective stop below the low of the January 4 candle would be a safe play.  This is a momentum play, so a break below that candle would signal a level of weakness that would invalidated the trade, and we'd want out immediately.

Watch the 30-minute chart but be wary of a possible bear trap.  On the upside, a conservative target is the resistance level at $46.98.  On the downside, a conservative target is the support level of $34.06.  Let's see how this one plays.

Happy Trading.

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