Wednesday, February 01, 2017

XL in Ascending Triangle Nearing Breakout

While XL Group PLC (NYSE: XL) displays nothing but corrective action on the long-term charts, the daily chart is displaying a well-pronounced Ascending Triangle pattern with price within range for a breakout to either side.  The weekly chart offers our first set of clues on direction, however, so we'll begin our analysis there.

XL Weekly Chart
There are enough Elliott Wave impulse rules violations for me to conclude that price action is still in a corrective pattern.  Coming off the second high in December, 2015, there is a 5-wave pattern that would lead down to a Wave-A (in June, 2016) and it's possible to draw a 3-wave pattern up to Wave-B in October, 2016.  The current pattern is an ascending triangle - or a diagonal, in Elliott Wave parlance - and in its position at the start of Wave-C we do need to be mindful of a potential break to the downside to complete that wave.

What dominates the weekly chart, however are the numerous channels that are consistently tested over the prior six-years.  Of particular interest (aside from the upper and lower boundaries of the main channel) is that very strong pivot line in pink near the middle of the channel.  Price is now resting just above that channel and it's also encountering a second diagonal support line coming up from the Wave-A bottom. 

Volume is signalling a strong breakout as well.  While it's been declining since that single strong weekly candle the week of 7 November 2016, it has now contracted into a coiled spring, indicating a potential violent breakout in the near term.  Let's look at the daily chart for more clues as to direction.

XL Daily Chart
Well, from the June 2016 low, it's easy to envision a Wave-1 completion in late July, a Wave-2 completion in November, and a Wave-3 completion in mid-November.  The current wave, then, would be a Wave-4 (which matches the formation of a diagonal in the Elliott Wave schema.)  If this count is correct - and it's hard to draw a different plausible count - then the breakout would be to the up side for a Wave-5 that could rack up as many as 5-points in the move.  That, coincidentally, would take us to just above the 100% price projection of the ascending triangle.  Now, I never like to use 100% price projections, so I'd be more inclined to set the conservative target at the 61.8% level around $40.19.

Volume is showing strength on the daily chart as well.  Notice how volume contracted significantly over the last two weeks, but it has surged over the last two trading days.  OBV is also rising, giving us an indication that the stock is under accumulation.

Looking below the chart, we see two very bullish indicators in the MACD(5,34,5).  There was a Zero Line Reversal around 12 January, and that was followed by a bullish crossover today.  The crossover's somewhat weak and is the second in as many weeks, however it's still more bullish than not.

Given the distance we've already traveled in the triangle, the only way we will play this is as a breakout.  A reversal off either trend line at this point does not generate sufficient profit potential to make it worthwhile.  Instead, what we will do is place a buy stop just above the resistance line in the triangle.  Our protective stop will be just below the support line of the triangle, and the price target will be the 61.8% triangle-height extension from the breakout.

Remember, the charts show a probability of an upward breakout, not a guarantee.  That's all we are ever able to trade - probabilities.  There are no guarantees in swing-trading.

Happy Trading.

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