Monday, February 19, 2018

Cup and Handle Breakout in KFRC with Flag Forming

All systems appear go-for-launch with KForce, Inc. (NASDAQ: KFRC,) the Tampa, FL based temporary and permanent placement agency that released very strong earnings and revenue numbers on Tuesday, 6 February.  While it took a couple of days for the good news to sink in, a vertical move over the last four trading days pushed the stock to a 2-year high and resulted in a breakout of a year-long cup and handle formation on confirming high volume.

Today's analysis will focus on the daily chart.

KFRC Daily Chart
The cup formation in the pattern started on 2 March 2017 with a failed test of a longer term high set on 8 February, just a month earlier.  The round-bottom cup formed over the remainder of 2017, tapering off into a consolidation pattern to end the year.  The handle represented a nice 12% decline off the right lip of the cup.  Of significance, however, is that volume throughout the entire development of the handle was well below the 50-period volume-EMA.  That's a major sign that the decline into correction territory was without conviction and wouldn't be sustainable.

Following the strong earnings release, we can see the 4-day vertical rise that may well be the development of a flagpole.  We'll watch this for the next couple of days to see if the flag or pennant actually does form.  The spinning top candle on Friday, appearing below the 50% mark for the day, suggests that it will.

A closer look at the handle itself shows that we attempted a breakout on 14 Feb, however we retreated to close precisely at the top of the right rim. The actual close occurred the next day, with a very strong bullish candle.  The spinning top on Friday, however, suggests a pause or pullback to, or slightly below, the breakout line.  Given the choice, a second thrust above the breakout level is the one we'd prefer to play.  Just remember that we're not always given that opportunity.

A closer look at the technical indicators shows a lot of confirmation around that handle breakout.  The RSI(9) broke a down-trending resistance line on that same day.  The MACD(5,34,5) confirmed with a bullish crossover.  The JDK RS Ratio continued an upturn above the 100 level, and JDK RS Momentum followed suit. (It's always a good sign when both the RS Ratio and the RS Momentum indicators are showing improvement above 100.)  Finally, the Relative Strength vs the S&P broke a down-trending resistance line as well.

Volume, as we mentioned, was extremely depressed through the handle formation but began its rise heading into the earnings release.  Breakout day and the day following the breakout experienced the highest volume of the entire formation, and the On Balance Volume indicator turned sharply upward to intersect a horizontal resistance level.

For a short-to-intermediate term trade, this is a long stock only.  There's nothing that we are tracking to suggest a potential short play, here. Our strategy now is to watch the next couple of days for either a flag or pennant to develop or, if that doesn't happen, to play a break above Friday's candle if there's a continued move upward on volume above the 50-day volume EMA.  We do expect a pullback before entry, but we also need to be prepared to go long if the pullback doesn't manifest.

The price target for the Cup and Handle will be $34.23.  If a flag develops, then the price target for that flag play will be $3.34 above the level of the breakout.  Either way, the play at the moment is long.

Happy Trading.

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