Saturday, February 04, 2017

MS Breakout on Daily and Weekly Charts

Financial stocks received another boost this week with definitive signs coming out of Washington that some of the regulations imposed by Dodd-Frank will be brought back under control.  Between the promise of higher interest rates and the indication that financial regulations will be loosened, the climate continues to support growth for the top financial industry firms. 

The regulatory impact is not trivial.  In 2014 alone, the top six banks in the US spent over $70 Billion on regulatory compliance ( Regulations, Regulators And The High Cost Of Banking Compliance) and that number continues to grow.  Indeed, unchecked regulations are the greatest risk faced by top financial firms in 2017.  Attempting to unravel the ridiculously complex 22,000 page Dodd-Frank fiasco is a major step in the right direction.

The executive action taken this week by President Trump to target excessive and complex financial regulations (NY Times: Trump Moves to Roll Back Obama-Era Financial Regulations) was well received in the industry, and it's against that backdrop that we begin our analysis of Morgan Stanley (NYSE: MS)

MS Monthly Chart
The monthly chart for MS shows just how much the financial industry has suffered since the peak in early 2000.  The post-9/11 recession took its toll, and the financial crisis in 2008 sent most of the top names in the industry into penny-stock territory.  The recovery from those basement level prices continues to be slow.  For MS, they also come with a few warning signs. 

Notice the lengthy descending triangle pattern forming on the monthly chart.  Now, that pattern will likely take several more years to run its course, but it does not bode well for any truly long-term investments.  Even the current up-trend is at risk since price is now trading on the resistance line while volume and range are decreasing.  The likelihood of a pullback on the monthly is high.

The RSI(9) oscillator on the monthly chart would agree.  Comparing the highs in mid-2015 to the high traced over the prior month, we see a bearish divergence forming in the RSI.  This, again, signals longer term weakness that will ultimately initiate a pullback.

MS Weekly Chart
The weekly chart, which gives us a more intermediate-term picture, is a bit more optimistic.  From an Elliott Wave perspective, Waves-I and II are complete and Wave-III is in progress.  Now, there are two possible counts for the current wave, and in retrospect (after annotating the daily chart) I really should have gone back to the weekly to show the alternate count.  Rather than Wave-1 completing in November, 2016, it would appear Wave-1 completed in August and Wave-3 completed in November.  That does make a difference, since it leaves only one wave remaining to complete the impulse, although it's entirely possible for Wave-5 to extend one or more times.

The RSI(9) oscillator shows continued strength through the entire move, although that strength is starting to wane as the horizontal consolidation runs its course.  This consolidation on the weekly takes on the appearance of a bull flag, however, with the near vertical weekly move that started the week of 7 November.  The price target for that flag would be $49.60, marking the 61.8% extension of the flagpole.  Note that the target falls just shy of the conservative price target for Wave-5, which is $50.85. 

The weekly close on Friday marks a breakout from that consolidation flag pattern. It comes, on the weekly, however, following a bearish cross-over of the MACD(5,34,5) momentum indicator. The strength of the breakout, therefore, needs to be treated with caution.

MS Daily Chart
So this brings us to the daily chart and our short-term swing-trade strategy for MS.  As on the weekly, we see the breakout from the two-month horizontal consolidation pattern.  (Notice that it hardly resembles a flag at this level, however, and we would not trade it as such for a swing-trade.)  Volume was very strong on the breakout day, adding confirmation to the breakout.

On Balance Volume continues to rise as it did throughout the horizontal consolidation, providing clues that the stock is under accumulation.  That's not surprising, given the prospects for the financial sector as a whole as we discussed earlier. 

The Elliott Wave count shows wave-4 at or near completion. One aspect of the count that troubles me, however, is that waves 2 and 4 do not appear to alternate.  Well, 4 is much choppier than 2, however for alternation we typically see one of the waves cutting a deep pullback while the other is shallow.  That's not the case here, so there is the potential for a pullback before Wave-5 begins in earnest.  Be aware of the possibility and plan accordingly.

Looking at the MACD, we see a Zero Line Reversal followed immediately by a bullish crossover.  Both of these are very strong bullish signals in the context of the current chart.  The RSI(9) is confirming price action and displaying no signs of a divergence either way.

With this in mind, our trading strategy for MS is as follows.  We'll play the breakout that occurred on Friday, and take a long position just above the high of Friday's candle.  We'll place a protective stop just below the low of Friday's candle which coincides with the middle of the horizontal channel.  (If we trade that deep into the channel, it negates the breakout signal, and we will want out of the trade immediately.)  Our price target will be $49.59, the target set by the weekly chart's bull flag.  As always, we'll exit the trade immediately if price action appears to turn against us. 

Happy Trading.

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