Tuesday, January 31, 2017

NWL At Resistance in Wave-A of Correction

The scan that brought Newell Brands, Inc. (NYSE: NWL) to my attention tonight looked for bullish crossovers in the MACD(5,34,5) indicator.  Now, remember, I don't use an indicator based trading system, so this scan is only intended to identify stocks that are worthy of analysis.  Since this was a bullish crossover scan, I was expecting to see a stock that was signalling a move to the upside.  What I found, however, was a stock with more downside potential in the short-term.

NWL Monthly Chart
Looking first at the monthly chart, we see that NWL was in a corrective pattern for well over two decades.  Without expanding the chart further to the left, in fact, we really don't know if the current pattern is merely a continuation of that correction.  For our purposes, however, it truly doesn't matter.  We're looking for trades that complete in a few days, not a few years.

What we can see from the monthly is that a motive wave started at the end of the financial crisis in 2009.  A full five waves also completed in August, 2016.  A corrective pattern following that 5-wave impulse is now in progress. Whether or not Wave-A is complete on the monthly, however, remains to be seen.  The retracement level, however, suggests there's more room to move to the downside. 

The RSI(9) oscillator on the monthly chart shows a strong bearish divergence.  That divergence ran virtually the entire length of the uptrend, in fact, signalling intense weakness could follow.  The MACD agrees.  While the MACD ascended in conjunction with the uptrend, it did so with numerous signal line crossovers indicating an overall weakness in the move.  A bearish crossover immediately followed the peak, and the distance between the main line and the signal line is widening.  That, too, suggests the downward move is not yet over.

NWL Weekly Chart
The weekly chart tells a similar story.  We see a strong motive wave leading to the peak in August, 2016, although that Wave-4 correction was deep and very short, time-wise.  Coming off Wave 5, however, the sub-waves comprising Wave-A are issuing a cautionary tale.  The most likely wave count shows three complete sub-waves and Wave-iv either complete or in progress.  That implies another downward push to get to the end of Wave-v, which would also end Wave-A.  When we look at the length of Wave-i, we can see a potential decline of another six-points before we reverse into Wave-B. 

Volume is declining, which adds to the bearish sentiment, although it looks like supply has waned significantly in the last few weeks.  It's not coming close to the volume experienced in Wave-iii, although in a counter-trend wave, that really isn't much of a surprise.

RSI(9) on the weekly is, at the very least, confirming price action.  When we look at the lows, we can conclude that a bearish divergence is evident, although it can be debated that the last valley wasn't low enough to support that conclusion.  Given how low it was compared to the prior valley in price and indicator, it does suggest to me that there's plenty of weakness remaining. 

MACD, on the other hand, does show a bullish crossover, and it does not confirm the divergence suggested in the RSI.  That MACD signal is the only indication we have that the downward move in Wave-A may be at an end.  For now, however, I'm trusting the wave count and the overall price pattern, and that tells me there's more room to the downside.

NWL Daily Chart
The five-wave impulse we see on the daily is actually the five sub-waves that comprise the Wave-4 to Wave-5 move on the weekly chart.  This does give us a good measure of the full retracement pattern in Wave-A against the prior motive wave.  Thus far, Wave-A retraced 50% of Wave-5, so there is certainly more room to the downside.  From the weekly, we determined that another 6-points to the downside were likely to complete Wave-A, and on the daily we can see that such a move would land on the 61.8% retracement level.  That's a very common retracement level for a Wave-A move, and that adds credence to the analysis.

The current pattern leading into Wave-A comes into much better focus on the daily.  The three sub-waves that completed already are well defined, and Wave-iii subdivided into five sub-waves that are also very well defined.  Wave-iv is a bit more complex, and it appears to be an irregular a-b-c corrective wave with Wave-c ending in a diagonal.  It's likely, based on this, that Wave-iv is complete and that suggests the next move is to the downside to finish Wave-v. 

I'd now like to draw your attention to the resistance lines that are all converging over the course of the next three days.  There's a significant amount of pressure on the stock at this level, and when we look at the volume signature for today's long bullish candle, we can see that the conviction to the upside is really not that strong. 

The RSI(9) shows fundamental weakness that has plagued the stock since the Wave-5 high, and that weakness continues through the current move.  The MACD experienced a bullish crossover today, however that indicator has been extremely choppy for the past couple of weeks and I would not consider it reliable at the moment.

The pattern formed by the short-term resistance and support lines shows a symmetrical triangle pattern with price rapidly approaching the apex.  We need to watch the next move closely.  It's certainly possible, from the current position, that the stock breaks through resistance and starts a Wave-B move.  It's more probable, however, that price moves to the downside and tests support (at a minimum) and possibly breaks to the downside. 

We're going to trade this stock based on the breakout direction.  If we see a break above resistance with confirming volume, we'll take that trade to the long side.  That would indicate that Wave-B is in progress, and we'd set a conservative price target around $51.84, coinciding with the bottom of the 29 July exhaustion gap and the 61.8% retrace of Wave-A.

If, however, we break below support, we'll take that trade to the short side.  Our price target will be in the $41.72 range, coinciding with a support line, the 61.8% retracement of Wave-5, and the price projection obtained from the weekly.  In either case, the protective stop would be above the resistance pattern for a short trade and below the support pattern for a long trade.  Either way, there's a decent reward to risk ratio, although it does look a bit better to the short side.

Happy Trading

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