The monthly chart shows a stock that started its current 5-wave impulse pattern at the end of the financial crisis in 2009. Wave-I completed in July, 2016 and the stock is currently running its course in a Wave-II corrective pattern. Note that, while we show Wave-A as complete on the monthly, that is not a conclusion we can truly reach just yet. The first downward move only covered a 23.6% retrace, so there's a lot more potential to the downside. We'll need to see how this behaves.
|AEP Monthly Chart|
The weekly chart's wave count tells a slightly different story with respect to Wave-A.
|AEP Weekly Chart|
As in the monthly, there's a bearish divergence evident in the RSI(9). The divergence is also evident in the MACD on the weekly, as we compare the heights of the last three highs. As was the case in the monthly, the weekly crossovers have been reliable signals. There's a bit of a warning flag in the current MACD, however, in that it could develop into a Zero Line Retrace pattern. We have to watch the movement of the main line here, since the way it's hooking, it could just brush the zero line and then turn down again. A crossover at that point would be an extremely bearish signal.
So now let's turn to the daily chart to figure out how we want to trade this stock.
|AEP Daily Chart|
The horizontal channel that formed starting in early December did so bounded by two very strong horizontal support and resistance lines that ran the length of 2016. The upper line was a major pivot line, flipping from support to resistance and back again several times over the prior year. Each time, it proved to be a very strong signal line.
What we show on the chart from Wave-A is what looks to be an a-b-c Zig-Zag that will lead to a Wave-B top that corresponds to another major resistance line that has shown staying power in the past. From there, if it's a true Zig-Zag, we can expect a lengthy downward move in Wave-C, and that would explain the bearish divergences showing on the weekly and monthly.
For each of the significant waves, once again we see that MACD provided a good signal, so we're watching it here for a sign that Wave-b is in flight. Today, in fact, we did get a signal line crossover (which is what flagged this chart in my scans) and the stock moved to the top of the horizontal channel, poised for a potential breakout play.
The MACD is also showing signs of a potential Zero Line Retrace (ZLR) which, approaching it from the top, would herald another move to the upside. That's consistent with the short-term expectation of a rise to complete Wave-c of Wave-B.
So that is the move we are currently looking to trade. On a break of overhead resistance, we will enter long with a protective stop just below the lower support line. Notice how the height of Wave-a extended from the bottom of Wave-b takes us to the next major overhead resistance line. There is also a potential resistance line that is not shown, but sits very close to the 76.4% extension. We'll use that as our conservative price target, since this next move has a high probability of ending between the 76.4% and 100% extensions. That move will complete Wave-B, and when you look at the length and shape of Wave-A, we believe there will be several swing-trade opportunities in Wave-C as well. Market conditions at the time will determine which of those waves we attempt to trade.