PFG Has One-Wave Remaining After Healthy 27 Point Run

For much of 2016, Principal Financial Group (NYSE: PFG) enjoyed a healthy, steady uptrend, gaining 27 points coming off a low of $33.09 in the beginning of February.  The uptrend was briefly interrupted by a Wave-2 correction that retraced 50% of the first wave.  Since then, it's been an impressive upward march to an 8-year high.

PFG Daily Chart

There are multiple possible wave counts on the daily chart, however, which means some caution is in order.  One possible wave count is in bold black, and that's the count that first caught my attention.  In that count, Wave 3 completed and Wave 4 is in progress.  This means there is one more wave to go to the upside before we head into a corrective pattern.

The more I scrutinized the chart, however, the more I realized there was an alternate count that may be in play. That alternate count is shown in red, and in that count wave-5 completed on 8 December and we're now into a correction.  There's some evidence to support this count when you consider the bearish pattern that formed in the RSI(9) Oscillator.  A bearish divergence on both the highs and the lows first appeared in early November, and nothing has changed since then to change the situation. 

Volume also hints at waning interest.  The pattern was declining on up days prior to the holidays, and since then the three bars thus far this week are warning of lessening demand.  So we cannot eliminate the potential for an impending correction.

Let's take a look at the weekly chart to see if it will clarify the picture for us.

PFG Weekly Chart

There is certainly less in doubt on this chart.  Granted, Wave II was an odd complex correction, however there can be little doubt that it was a corrective wave.  So on the weekly chart, Wave III started on 2 February, just as our current 5-wave impulse started on the daily chart.  So far, so good.

Waves 1 and 2 on the weekly are crystal clear as well.  In fact, Wave-1 traces a strong 5-sub-wave impulse, and that helps clarify the labeling of Wave-1 on our daily chart.  Wave-2 is also crystal clear.  The wave on the daily that has a bit of confusion is the next one, but there's no confusion at all on the weekly chart.  Wave 3 follows a straight line pattern and ends the week of 5 December.  Based on this, we can conclude that the count in bold black on the daily chart is the correct count.  There's no disagreement on the weekly with that interpretation.

Also, we can see that, on the weekly, Wave 2 is a relatively short and deep correction.  The alternation rule tells us that Wave 4 will be a shallow and potentially long correction.  That would explain the weakness we're seeing on both the weekly and daily RSI(9) oscillators.  A lengthy Wave-4, even if it's a flat correction with a tight range, will eventually push the oscillator close to its lower boundaries. 

On the daily chart, it appears that Wave-4 has already traced a very shallow flat a-b-c correction. We now need to see if the wave develops into a complex correction.  Note that today's candle rests right on top of two separate diagonal support lines, each drawn from different originating points. Those lines diverge starting tomorrow, but it's probable that one of those two lines will hold.  We need to wait and see which one it may be, however.

Given the current pattern, we're not anticipating a short trade from here.  Rather, we're watching for signs that Wave-4 is completing and we intend to ride Wave-5 to its ultimate top.  There are a potential twelve points (or more, since we've no constraints to the upside) in the move. PFG raised dividends three times in 2016 and is currently paying a 2.94% yield, so we're perfectly fine if that move takes us through the next ex-dividend period.  That's not likely, however, since we don't expect it much before the first week of March. 

We'll add this stock to our watch list and attempt to catch the beginning of Wave-5.  Be aware of a potential pullback in the market after the Dow Industrial Average finally trades above the 20,000 level, and also watch for a post inauguration pullback.  Both have the potential to stop us out of any long positions, so be aware of it and manage your risk accordingly.

Happy Trading.