Thursday, January 26, 2017

Wave-II Correction in Flight For CONE.

After publicly trading for just over a year, CyrusOne Inc. (NASDAQ: CONE) started a steady bullish motive wave that ended in mid-June, 2016.  The last four months of Wave-I were parabolic, with the slope of the rise at times approaching the vertical.  With Wave-I complete, a corrective set of waves ensued and apparently continue.

CONE Weekly Chart
The corrective wave off the high recorded five sub-waves down to what appears to be the end of Wave-A.  If that's the case, then Wave-B is in flight right now.  The retrace from the bottom of A, however, has already recovered 61.8% of the correction, so depending on the type of corrective pattern we experience, a reversal to Wave-C can occur at any time.  We'll pay close attention to the end of Wave-B since that level will determine how deep of a correction we will probably get in Wave-C.

It's important to note the strength of the support line running the entire length of the motive wave, up to and including the bottom of Wave-A.  That support line has the potential to mark the end of Wave-C, so we'll need to be cognizant of the candle patterns as we retest that line.

So knowing that we may be ending the upswing in Wave-B, let's take a look at the daily chart.

Cone Daily Chart
On the daily, it looks like Wave-A was an extended motive wave.  What's shaping up to Wave-B on the weekly chart, however, isn't quite playing by the rules having covered 5 sub-waves thus far.  Wave-B, by definition, is a three-wave pattern.  Now, this could rectify itself by creating a 5-3-3 or 5-3-5 pattern to the top of Wave-B, so let's see how it develops.

What stood out when analyzing the chart was the bullish channel that formed for the current wave.  Both support and resistance have held firm through the entire 5 sub-wave move, and over the last two days, price has bounced off resistance and headed south into the middle of the channel.  Today, it broke through the 10-day EMA, and it's fast approaching the 200-day SMA. It's also important to note that the two consecutive down days occurred as the Dow broke the 20,000 barrier for the first time.  Yesterday's down bar was on much higher than normal volume, too, causing the OBV indicator to hook down.  The trend in the OBV is still up, but that's an indicator that lags price by a significant margin.

The RSI(9) oscillator is the one shining light on the chart.  Compared to the overall pattern, the RSI is signalling a strong bullish divergence over the long term.  Of course, that may be a harbinger of the subsequent Wave-III move that will follow this correction.

As a short-term swing trader, here's how I plan to play this stock.  As long as the overall market trend is bullish, my only interest is playing this to the long side.  So with that in mind, we'll watch its behavior at the support line of the channel.  The channel is four-points wide, so if we get a good bullish candle at support and the market is still trending up, we'll play the long.  The stop will be just below the support line to create a good reward to risk ratio, and also to get us out of the trade immediately if the bounce is a head fake.

If the breakout is to the downside, however, we'll wait for a reversal.  Now, keep in mind the wave count, since the reversal could be part of the 5-3-3 or 5-3-5 completion pattern of Wave-B. We only want to trade in the direction of the market trend, so if possible, we'll try to catch each of the upward waves into the pattern. 

Longer term, it's really Wave-III that we want to catch.  That, however, could still be off into the far distance, based on the amount of time it took for Wave-A to run.  For now, let's play the short term patterns to the upside and enjoy the current strength in the overall market for as long as it lasts.

Happy Trading.

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