Rising Wedge Signals Trouble For PAA

Despite a bullish channel pattern on the weekly chart, Plains All American Pipeline L.P. (NYSE: PAA) is showing all bearish signals across multiple time frames from the daily through to the monthly charts.  For our analysis, we'll start with the broadest view on the monthly.

PAA Monthly Chart

Since inception, PAA drew a strong 5-wave impulse leading to what appears to be a Wave-I top in September, 2014.  Wave-II appears to be in progress now, forming what is shaping up to be either a zig-zag or a flat correction.  Wave-A retraced over 61.8% of Wave-I, however, which is an extremely deep corrective pattern.  From its current position, Wave-C is somewhat limited to the downside, otherwise the entire wave count will be invalidated.  (Wave-II cannot retrace 100% of Wave-I to be a valid count.)

The RSI(9) oscillator does signal a bearish divergence on both the highs and the lows, however, so continued weakness appears to be in the offing.  From the overall monthly pattern, we do expect a Wave-C to the downside, however given the volume signature in December 2015 through February 2016, we believe significant demand exists between $15.00 and $17.00, so it's not likely for Wave-C to travel below those levels.  Watch for a shallow correction from the current level.

PAA Weekly Chart

On the surface, the weekly chart would appear to offer a contrary interpretation.  A strong, tight bullish channel marked price starting in February 2016 and continuing through to the present.  Note, though, that price has traveled horizontally since November 2016 and has been riding the support line for most of 2017.  On Balance Volume is rising, however price is not rising in conjunction with the indicator.  Both the RSI(9) indicator and the MACD(5,34,5) have rolled over into a bearish configuration.  Similarly, the 200-day moving average is above price, has rolled over, and is now descending.  These are all indications that a downward price move is pending.

PAA Daily Chart

That brings us to the daily chart.  The most recent trend, starting in September 2016, formed a rising wedge pattern.  That, as we've discussed in other posts, is a bearish signal.  Price tends to break downward from a rising wedge pattern, although the price target from such a pattern is somewhat unpredictable.

The other major warning sign is a diagonal trend line that starts in April 2016 and had seven firm touches before being penetrated to the downside on 12 January 2017.  Since then, it has acted as resistance with three touches. 

Volume since the first of the year has been bearish as well.  Notice the extremely weak volume over the first week of February, and notice the falling volume in general for all of 2017.  Interest in the stock appears to be waning, and demand is required to drive price higher. 

From a fundamental perspective, we see that PAA lowered its dividend from $0.70 to $0.55 in October, 2016.  This is accompanied by nine consecutive quarters of missed revenue, and 5 out of 10 quarters of missed earnings.  "Troubled" would be the best way to describe the company.  Trading at a P/E of 78.38 - nearly triple its nearest competitor - it's hard to envision much in the way of an upside, even with the favorable energy infrastructure outlook fostered by the current US Administration.

The only play we see for PAA is to the short side.  We are looking at two possible entry points.  The first is a short trade on a close below the support line of the wedge.  In that case, we'll place a protective stop just above the horizontal resistance line around $33 and we'll set a price target at the horizontal support line around $25.

The second potential play is if price rises a bit further within the wedge.  In that case, we'll watch for a reversal at one of the three major resistance lines: the diagonal resistance line (in red), the blue horizontal resistance line, or the top of the wedge.  A reversal at either of those points will signal a short entry with a protective stop above the next highest resistance line.  Again, our target will be the horizontal support line around $25, although we'll watch for an early exit if the wedge support line appears to hold.  Watch this one carefully since the breakdown, when it comes, may be swift.

Happy Trading.