Thursday, January 12, 2017

Quintiles IMS Holdings Showing Weakness on Daily and Weekly Charts

A wedge pattern is not one of my preferred setups.  The breakout from such a pattern is fairly random, and the performance after the breakout is often lackluster at best.  Nonetheless, that's the pattern we're facing on the daily chart for Quintiles IMS Holdings (NYSE: Q), a mid-cap provider of bio-pharmaceutical development services as well as commercial outsourcing services in the health-care field.

Q Daily Chart
Since we know we really can't rely on the wedge pattern alone, let's review what other clues the chart has to offer.  It's hard to miss the twin towers of volume - in this case, supply - that dominate the landscape on 30 November and 1 December 2016.  While that pattern is symptomatic of climactic activity, it's not the first major indicator of weakness in the current pattern.  Look at the decline from 6 October to 1 November.  In that entire period, only four days were positive, and all four were extremely short candles compared with the rest of the save.  In total, over 11 points were traveled, forming both the top and bottom of the wedge.

When we look at the volume pattern, the amount of supply that's evident appears stronger than the amount of demand, and we can see the overall strength of the down days in general. As an added point of confirmation, the On Balance Volume (OBV) indicator (shown in orange above volume) continues to decline.  That's an indication that shares are being distributed, not accumulated, and it's an extremely bearish sign.

Curiously, we don't see a divergence on the daily RSI(9) oscillator.  Instead, it's merely echoing the price action.  In itself, it's not giving us much of a clue as to where Q intends to breakout, although the price action implies a downward break in the short-term.

Finally, notice the peaks on 5 October, 29 November, and 15 December.  With those peaks, we have at least a double top formation with the first two, and the last one arguably creates a triple top.  The pattern is not confirmed, of course, since we've yet to close below the neckline at $70.10, however it's definitely a major flashing warning light.

A double top appears on the weekly chart as well, and that formation is more ominous.  The left peak dates to late July 2015 and the right peak is in late September 2016.  The neckline on this longer term pattern is $55.01.  Note that meeting the price target of the daily chart double top would approach that weekly neckline.

Q Weekly Chart
Here's where things start to get interesting, though.  The weekly chart starts to bring an Elliott Wave pattern into context, and for the moment, at least, we appear to be in the waning stages of a Wave-2 correction.  The low of Wave-2 retraced 61.8% of Wave-1, so it was a deep correction, but in-line with all of the rules.  The next wave we'd expect on the weekly is a Wave-3 impulse that would, in this case, be an up-trend. 

That wedge we see on the daily chart extends out to an ascending triangle on the weekly chart.  That's also considered a bullish pattern.  The volume pattern is somewhat neutral on the weekly.  There's certainly some heavy supply early in the triangle, but following that one climactic week there hasn't been much follow-through in either direction.

The one major caution sign on the weekly chart is the RSI(9) oscillator.  Unlike the daily chart, there is definitely a bearish divergence on the weekly.  That's warning us of potential trouble ahead, and points to a possible downward break, at least for the short term.

Here's a case where we really need to give the stock some reins and see where it wants to lead us.  If we get a downside breakout on convincing volume, I'll play it.  The wedge is showing a potential 7 to 10 point move in either direction, and that's worth trying to capture.  A stop a few percent inside the pattern to give it room for a pullback would still be a good reward to risk ratio, and likely keep us out of a shakeout flip.

A break to the upside, however, may signal the start of Wave-3 on the weekly chart, and we definitely want to ride that one.  Again, however, we need to see convincing volume, especially given the number of failures off that resistance line thus far. 

That, in fact, is the third potential setup.  A failure off resistance will be an excellent short opportunity.  The moves down from resistance have been swift to date, and our stop would be just above the resistance line.  Again, that's a fantastic reward to risk ratio.

Let's see which of the setups will actually trigger.  With several very good plays lining up in either direction, we'll add this to our watch list.

Happy Trading.

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