LPX In Tight Horizontal Channel

One glance at the monthly chart for Louisiana-Pacific Corp. (NYSE: LPX) reveals a chart that has been in a corrective state for virtually its entire trading history.  The small-cap building products manufacturer is gradually improving its balance sheet while also growing market share for its SmartSide product family - a realistic-looking wood-grain siding alternative that purports to be lighter and more durable than other traditional artificial siding products.  This has not been enough to garner interest capable of pushing the stock into a typical 5-wave impulse, however, and as a result, it continues to oscillate in an endless corrective wave cycle.

LPX Weekly Chart

The weekly chart shows a lengthy up sloping channel that is showing no signs of ending its nearly two-year run.  Volume is starting to diminish, however, which does not bode well for any attempt to mount an upward surge.  It takes demand to drive a stock higher, and thus far, we're not seeing much of it.

On Balance Volume on the weekly remains flat, and there's no hint of a divergence either way in the RSI.  Thanks to the undulating nature of the channel, the MACD(5,34,5) has been a rather decent indicator of the turning points, however, so we'll certainly keep an eye on that going forward.

LPX Daily Chart

Now, it's the daily chart that caught my attention in the first place.  The higher lows starting in February, 2016 do form a good support channel, and we note that on the chart, however it's the very tight horizontal channel that formed in December that most interests us.  Just look at the number of three and four day swing trades that channel has produced since the channel formed.

Interestingly, the MACD appears to be providing a very consistent signal for directional shifts going back at least to the November time frame.  Until that changes, we'll continue to take our cues accordingly. 

Where we expect some deviation in the pattern is where we see the diagonal support line now intersecting our channel.  This suggests that our horizontal channel may turn into an ascending triangle.  If that happens, of course, we'll need to watch for a breakout play to either side.  Currently, the intermediate trend is up - and an ascending triangle tends to break to the upside - but that could easily change on a whim.

LPX reports earnings before the open tomorrow, so we'll need to watch what those earnings do to our pattern.  Consensus estimates are for $0.19 EPS and $539.90 Million in revenue for the quarter.  Annual estimates are for $0.84 EPS and $2.26 Billion in revenue.  The pattern for this stock over the past year, though, has been for price to form a spinning top on earnings day, but not do much of anything else.  We'll see what tomorrow brings.

How we trade this stock will depend on the pattern that emerges post-earnings.  Until we see evidence that the MACD is no longer reliable, our trades will be long on a bullish crossover and short on a bearish crossover.  Our exit strategy will be to trail a stop $.05 below the low each day and ride it until stopped out.  Our protective stop will be set to just above or just below the signal candle depending on whether we are taking a long or a short position. 

If the ascending triangle does form, of course, we'll change strategies to a triangle breakout and play that accordingly.  Until then, let's enjoy the oscillation this stock is currently providing.

Happy Trading.

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.

ATI Breakout From Ascending Triangle, Forms Bull Flag

The monthly chart of Allegheny Technologies (NYSE: ATI), the small-cap Pennsylvania based specialty materials and components producer demonstrates the the long-term pressures on the US steel industry.  The stock has yet to enjoy a true motive wave to the upside, and it's four-year climb to its all-time high turned out to be a three-wave correction that is likely Wave-A of a longer move.

ATI Monthly Wave

The long-term pattern from 2007 to the present is a descending triangle that is nearing its apex.  The good news for ATI is that there are signs on the monthly chart that the breakout will likely be to the upside.  The RSI(9) pattern is strengthening, and the last two peaks on the price chart - lower highs - compared to the RSI show a bullish divergence.

The volume pattern is showing signs of strength as well.  The amount of supply that entered the scene in the last downward move shows evidence of climactic activity, and the subsequent upward monthly candles are increasing in intensity. 

The price is now trading in the resistance zone, so we're watching this stock to see if it will break to the upside or retreat back towards support and the bottom of the triangle pattern.

ATI Weekly Chart

The weekly chart makes things a bit more interesting.  We can see the resistance zone that clearly and can see that we closed the week in that zone.  What didn't appear on the monthly, however, is the fact that this week's candle constituted a breakout from an ascending triangle that ran the length of 2016.  The volume pattern from this week is the highest volume recorded in at least the last five-years, and it offers strong confirmation of the legitimacy of the breakout. 

The fact that we closed in the resistance zone does raise the odds for a pullback.  If that occurs - and it occurs 57% of the time in an ascending triangle upward breakout - then we will watch for how well the triangle top - now a support line - holds.  Remember, we're not long-term traders, so we're using the weekly chart to gauge the directional trend, allowing us to enter short-term swing-trades in the direction of that trend.  So understanding the pressures imposed on the monthly and weekly charts improves our odds of entering a short-term trade in the same direction as the longer term trend.

Looking at the RSI(9) oscillator on the weekly chart, we've had consistent signals in support of the overall price movement.  This week's RSI(9) close, however, is a bit troubling.  Given the strength of the overall move, this week, a higher move in the RSI, preferably above 70, would have provided stronger confirmation of the breakout.  Instead, the RSI closed at the same level as the prior peaks that retreated from the resistance line of the triangle.  That's a sign of weakness that may be a harbinger of a pullback, at least to support.  Keep an eye on it.

ATI Daily Chart

Now let's take a look at the chart that caught our attention in the first place.  Here on the daily chart, there's no sign of that overhead resistance, which is another reason we always want to examine at least the weekly chart.  The ascending triangle, however, is obvious on the daily, and that was an extremely strong resistance line that was broken early this week.

That break, on the highest volume on the chart, also occurred on a strong breakaway gap.  It was better than expected earnings that created the gap, however the 15-month high is seen as a strong positive for the stock.  The remainder of the week created the next pattern in which we have significant interest.  We're in a tight bull flag pattern now and still showing more strength than weakness.  Thus far, there's been no attempt to retreat as low as the bottom of Tuesday's wide-range candle, and certainly no attempt to close the gap.

In the months leading up to this week's move, On Balance Volume began a steady but gradual rise, indicating that subtle accumulation was occurring over the long term.  The RSI(9) on the daily appears to be in agreement. The oscillator began to show signs of strength a month or so before the earnings announcement, again indicating increased interest in the stock.  The spike in price saw a corresponding spike in the RSI, and it continues to run strong.

We show two separate price targets on the chart.  The green target Fibonacci extension is the price target for the ascending triangle breakout, and the melon Fibonacci extension is the price target for the bull flag assuming it breaks to the upside.  The area we will set for our actual target is where the 100% triangle extension and 61.8% bull flag extension overlap.  So we're looking at a conservative target in the $25.60 range.

We will trade this stock as a traditional bull flag.  The entry will be long once the stock closes above the flag on confirming volume.  The stop will be just below the flag and the target will be $25.59. We'll wait for that close above the flag, however, since we still need to be wary of a potential pullback to support that closes the gap.  Overall, however, this appears to be a solid setup with a good probability of success.

Happy Trading.

Aflac in Coiled Spring At End of Wave 2

The daily chart for Aflac, Inc. (NYSE: AFL) is a treasure trove of chart patterns, each converging to signal that a major move may be imminent.  Do you trade double bottoms?  We've got you covered.  How about channels?  Yes, we have that, too.  Want a descending triangle?  That's on the chart.  How about an ascending triangle?  That shows up on the weekly chart. Do you trade Elliott Wave patterns?  How does the end of a wave-2 move on the daily coupled with a wave 3 of 3 move on the weekly and monthly sound? 

Let's start with the broad view and take a look at the monthly chart. 

AFL Monthly Chart

The long-term impulse wave for Aflac started in 1991.  The Wave-1 rise was steady and included a 2:1 stock split in early 2001, just before the 9/11 market adjustment.  Wave-1 ended at the onset of the 2008 financial crisis.  Along with banks, the insurance industry was crushed in that major economic downturn, and AFL retraced nearly 80% of Wave-1 before it ended.  Wave 2 was a running correction and Wave-3 appears to be in flight.  This sub-divided wave is now showing signs that it's in Wave (iii) of Wave iii of Wave-3.  That's about as lucrative a Wave-3 entry that you can find.  With the monthly pullback to the 10-period EMA, there's nothing negative at all appearing in the long-term trend.

AFL Weekly Chart

The Wave (iii) of iii of 3 configuration is well defined on the weekly chart.  Adding to the strength of that signal is the diagonal support line extending from the low of August 2015.  That support line has several touches, including three in the last six weeks. 

Notice that the weekly chart formed an ascending triangle pattern with price currently resting on the hypotenuse (support) of that triangle.  This line is also just above a horizontal support line that pivoted from resistance off the Wave-i peak in October 2013.  That support line was tested at least four times and price bounced off it on each occasion.  From an intermediate (weekly) to long-term (monthly) perspective, the signals are looking strong for a bullish impulse.

AFL Daily Chart

This brings us to the heart of the matter on the daily chart.  We'll start with the double bottom that formed on 1 November 2016 and 2 December 2016.  The price target for that pattern is $77.79 (61.8% of the height of the pattern added to the neckline.)  Price is trading sideways above the bottom of the pattern, but it has not closed below the pattern so it is still a valid double bottom. Note, however, that it has yet to close above the neckline, so by definition, the pattern has not yet been confirmed. 

The volume pattern at the second bottom - which is an eve bottom - strongly suggests climactic selling.  One relationship we always compare is the range of the price bar compared to the size of the volume bar.  We can see significant supply pushing the price to that second volume, but then we have an extremely narrow range bar on extremely high volume.  Supply is being exhausted.  Then we have a hammer pattern on 9 December with the second highest volume bar of the year.  That was a sign that major demand entered the scene as priced reached the bottom support line. 

What stands out in the short term is the rising volume we're starting to experience while price continues to trade horizontally.  A narrow channel formed starting with a long wick on 14 December, and this pattern now appears to be a coiled spring ready to explode in either direction.  The green support area forms a descending triangle when paired with the diagonal resistance line shown in purple, so price truly could break in either direction.  The Elliott Wave counts show a higher probability that the break will be to the upside, but it's always important to remember that this only shows us probabilities, not certainties. 

We intend to play this current setup to the long side.  What we are looking for is a strong bullish candle that closes above the horizontal channel resistance line on confirming volume.  Our stop will be just below the lower green support line.  A break of that line not only invalidates our entry, but it also invalidates the Elliott Wave count on the weekly and monthly charts.  So if we break that barrier, we definitely need to exit and reassess the pattern.

Because this is a Wave (iii) of iii of 3, we're not going to set a fixed price target.  Rather, we'll want to ride this one as long as we can, gradually moving our protective stops up as each of the sub-waves form.  We'll only want to be stopped out of this one when Wave-4 finally forms.  The Elliott Wave targets, both for the primary wave and the sub-waves, show a minimum target of $87.70 which will be a nice 17-point move from our current position.  Compared to the 3.50 point risk we're assuming with our protective stop, that's a solid 4.85:1 reward to risk ratio.  We'll take that trade.

Happy Trading.

Channels and Triangles Typify GT on Daily and Weekly

When a corrective pattern in a single stock nears the end of its second decade, one may be forced to conclude that it's no longer a correction but rather the "new normal" for that issue's behavior.  Such is the case with the well-known US tire manufacturer Goodyear Tire and Rubber Company (NASDAQ: GT).  When you step back far enough to view the stock on a monthly chart (not shown in this article,) we see a distinctive long-term double top pattern formed at the all-time highs between May 1993 and March 1998.  The neckline was breached in December 1999, and the target met in February 2003.  Since then, the stock has wandered aimlessly, mostly sideways, only occasionally showing signs that it may attempt to initiate a new impulse wave.  Such attempts are short-lived and price action quickly returns to the lower levels reached in the correction. 

For long-term position traders, there's not much to hold any attention.  Even the 1.3% dividend yield will quickly lose any remaining luster as the Fed continues to raise interest rates.  As a buy-and-hold investment, there are certainly more lucrative income stocks, and the long term investor would be better off with the US Treasury's 10-year bond which is paying nearly double what GT is offering and holds none of the risk associated with the equity giant.

Turning our attention to the weekly chart, however, we start to see some decent potential for the short to intermediate term trader.

GT Weekly Chart

What stands out on the weekly is that two-year long horizontal channel that formed with enough touches of both support and resistance to make it a very strong multi-directional setup.  Given the other signals on the chart, however, this is one we'd prefer to play to the long side.  Since we want to enter long on support, there are multiple trend lines to which we will look for a strong reversal signal.  We're sitting on one of those support lines right now, so a reversal here would be a permissible long entry. 

Notice the orange channel that has appeared in the short term.  That orange support line is a better entry point if price retraces and reverses at that level.  Better still are any of the green lines since they have much greater strength are would offer much better protective stops.  The best entry, if we retrace far enough is that horizontal green line that marks the bottom of the channel.  So if you're a longer term trader with a horizon in the two to three month range, this is your chart and there are numerous possible entry levels depending on your risk tolerance.

I prefer to trade on the daily chart, however, and prefer a horizon that is much shorter, measured in days, not weeks, so let's see what the daily is telling us.

GT Daily Chart

The technical screen that called attention to this chart identifies ascending triangles, and I show that triangle with the bold red resistance and bold green support lines.  Both extremes mark excellent entries for a play in the opposite direction, and on a breach (i.e. a close above resistance or below support on high volume) they make excellent entry points for breakout plays.  As long as volume confirms the move, I wouldn't hesitate to take either, although the protective stop needs to account for the likelihood of a pullback and retest of the line.

Of interest at the moment is the short-term Elliott Wave count.  That the long-term pattern is corrective is largely irrelevant at the moment.  We can see that a 5-wave impulse pattern started at the diagonal support line of the triangle, and it culminated at the horizontal resistance line that marks the top of the triangle.  After bouncing off resistance, an A-B-C zig-zag correction ensued, and may have completed.

Notice the diagonal support line marked in purple.  That line has served as a pivot since May 2016 and has numerous valid touches, including two in the current Wave-c pattern.  A bullish reversal on volume at this point will be a good entry with a price target near the horizontal red resistance line.

The potential for Wave-c to continue further, however, is equally significant.  There is an orange channel drawn, and the support line in that channel originates at the October high.  It's a moderately strong support line, and it intersects the green support line of the triangle on 30 January.  We would not be surprised if that's where the price trends since that's only six trading days distant.  That point would be our ideal entry point for a long position if it manifests.

With no divergence showing on the RSI(9) and On Balance Volume still drifting gradually lower, we see that continued decline into stronger support as a highly probable move. GT reports earnings before the open on 7 February, but it trades ex-dividend on 30 January.  Since we have no short setups appearing on the chart prior to then, I'm not concerned about the dividend.  Just remember that the opening price will be adjusted down by $0.10 on that date.  You don't want to be artificially stopped or entered because of the dividend adjustment.

The way we'll play this is relatively simple.  From where the stock currently sits, we only see a long setup for now.  We'll enter long on a strong bullish reversal with confirming volume.  We'll set our price target at the red horizontal resistance line.  Our protective stop will be just below the lower dotted green support line. We'll look to raise that stop to just below the purple line as soon as we see a move that confirms the upward direction.  Be aware of the orange channel line, but don't stress over it.  A strong impulse wave may pause at that line, but it's not likely to reverse there.  Whether or not we take a short position at resistance or on a breach of support will depend on what the overall price and volume patterns look like at that time.  For now, we'll just concentrate on the next move, and we currently see that as a long position.

Happy Trading.

Quintiles IMS Holdings Showing Weakness on Daily and Weekly Charts

A wedge pattern is not one of my preferred setups.  The breakout from such a pattern is fairly random, and the performance after the breakout is often lackluster at best.  Nonetheless, that's the pattern we're facing on the daily chart for Quintiles IMS Holdings (NYSE: Q), a mid-cap provider of bio-pharmaceutical development services as well as commercial outsourcing services in the health-care field.

Q Daily Chart

Since we know we really can't rely on the wedge pattern alone, let's review what other clues the chart has to offer.  It's hard to miss the twin towers of volume - in this case, supply - that dominate the landscape on 30 November and 1 December 2016.  While that pattern is symptomatic of climactic activity, it's not the first major indicator of weakness in the current pattern.  Look at the decline from 6 October to 1 November.  In that entire period, only four days were positive, and all four were extremely short candles compared with the rest of the save.  In total, over 11 points were traveled, forming both the top and bottom of the wedge.

When we look at the volume pattern, the amount of supply that's evident appears stronger than the amount of demand, and we can see the overall strength of the down days in general. As an added point of confirmation, the On Balance Volume (OBV) indicator (shown in orange above volume) continues to decline.  That's an indication that shares are being distributed, not accumulated, and it's an extremely bearish sign.

Curiously, we don't see a divergence on the daily RSI(9) oscillator.  Instead, it's merely echoing the price action.  In itself, it's not giving us much of a clue as to where Q intends to breakout, although the price action implies a downward break in the short-term.

Finally, notice the peaks on 5 October, 29 November, and 15 December.  With those peaks, we have at least a double top formation with the first two, and the last one arguably creates a triple top.  The pattern is not confirmed, of course, since we've yet to close below the neckline at $70.10, however it's definitely a major flashing warning light.

A double top appears on the weekly chart as well, and that formation is more ominous.  The left peak dates to late July 2015 and the right peak is in late September 2016.  The neckline on this longer term pattern is $55.01.  Note that meeting the price target of the daily chart double top would approach that weekly neckline.

Q Weekly Chart

Here's where things start to get interesting, though.  The weekly chart starts to bring an Elliott Wave pattern into context, and for the moment, at least, we appear to be in the waning stages of a Wave-2 correction.  The low of Wave-2 retraced 61.8% of Wave-1, so it was a deep correction, but in-line with all of the rules.  The next wave we'd expect on the weekly is a Wave-3 impulse that would, in this case, be an up-trend. 

That wedge we see on the daily chart extends out to an ascending triangle on the weekly chart.  That's also considered a bullish pattern.  The volume pattern is somewhat neutral on the weekly.  There's certainly some heavy supply early in the triangle, but following that one climactic week there hasn't been much follow-through in either direction.

The one major caution sign on the weekly chart is the RSI(9) oscillator.  Unlike the daily chart, there is definitely a bearish divergence on the weekly.  That's warning us of potential trouble ahead, and points to a possible downward break, at least for the short term.

Here's a case where we really need to give the stock some reins and see where it wants to lead us.  If we get a downside breakout on convincing volume, I'll play it.  The wedge is showing a potential 7 to 10 point move in either direction, and that's worth trying to capture.  A stop a few percent inside the pattern to give it room for a pullback would still be a good reward to risk ratio, and likely keep us out of a shakeout flip.

A break to the upside, however, may signal the start of Wave-3 on the weekly chart, and we definitely want to ride that one.  Again, however, we need to see convincing volume, especially given the number of failures off that resistance line thus far. 

That, in fact, is the third potential setup.  A failure off resistance will be an excellent short opportunity.  The moves down from resistance have been swift to date, and our stop would be just above the resistance line.  Again, that's a fantastic reward to risk ratio.

Let's see which of the setups will actually trigger.  With several very good plays lining up in either direction, we'll add this to our watch list.

Happy Trading.

CSAL Approaching Apex of Ascending Triangle

When a stock touches a horizontal resistance line at least three times, while retreating to at least two consecutive higher lows, the resulting pattern forms an ascending triangle.  Conventional wisdom states that this is a very reliable pattern that breaks to the upside.  Chart pattern guru Tom Bulkowski takes a different view, however, after having studied thousands of patterns.  His brief ascending triangle treatise on The Pattern Site informs us that the pattern does tend to break to the upside 70% of the time, however it ranks 17 out of 23 for profitable upside breakout trades.  He goes into much greater detail, including trading tactics, in his highly acclaimed Encyclopedia of Chart Patterns.

My experience with the ascending triangle is that, for much of 2015 and 2016, the more profitable trades were on downside breakouts.  The pattern has become extremely well known, which means it's now a prime target for stop-hunting market specialists.  The pull-back rate cited by Tom Bulkowski was 57% on an upside break.  I believe it's even higher, now, reflecting the popularity of the pattern.  Of course, to a swing trader, that means there are potentially two or three trades coming out of a single breakout. 

Communications Sales and Leasing, Inc. (NASDAQ: CSAL) is in the final throws of an ascending triangle following a 5-wave bearish impulse and at least a three-wave corrective pattern.  (I label that with traditional A-B-C labeling, however in reality it is likely an A-B-C-D-E triangle.)  Given that we're only 8 trading days away from the apex, it's fair to say that a breakout is imminent.  We're about 75% into the triangle, and that's getting a bit long.  The average breakout is around 62% of the length of the pattern, and the signal will be broken if this continues for a few more days.

CSAL Daily Chart

While we don't try to anticipate the direction of the breakout - we can play it either way - there are some aspects of the chart that suggest it will break to the upside.

• The bottom of Wave 5 retraced 61.8% of the prior bullish impulse wave, which coincides with the 52-week high-low pattern.  That 61.8% level is a strong support level in and of itself.
• Wave 5 ended on what appears to be climactic selling.  This was a strong candle with a shadow almost three times the length of the body.  The only negative point on that long candle is that the close was below the open.  It would be a stronger signal were it a white candle, not a red candle.
• The pattern has broken out of the bearish channel that marked all of the impulse wave and much of the corrective wave.
• The SMA(10), EMA(20), and EMA(30) lines are converging and appear poised to form a bow-tie pattern in which the three lines reverse.
• The mid-point of the Bollinger Band channel is acting as support.
• The RSI(9) pattern is decidedly bullish.

CSAL reported earnings on 14 November 2016 which, not surprisingly, coincides with the long range candle.  Earnings themselves were positive, beating by $0.03 EPS and also beating revenue by $1.62 million.  What appears to have spooked investors was an announcement as part of their earnings release that they acquired Network Management Holdings for $65 million.  NMS has 313 wireless communications towers in Mexico, 55 in Nicaragua, and 105 in Columbia.  Additionally, they hold another 114 build-to-suit tower sites that are currently under development.  The suite is expected to produce $7.9 million in additional annual revenue and $4.4 million in annual tower cash flow.  Overall, it appears to be a positive addition to their portfolio.

Given that we do not yet know when CSAL will break out of the ascending triangle pattern, we must be aware that the stock will trade ex-dividend on 28 December.  The dividend is $0.60 per share, with a pay date of 13 January 2017. 

We need to keep a close eye on the development of this pattern.  When it breaks, it's likely to move quickly.  Be aware that an upward breakout may hit resistance at the 200-day moving average.  That may be the prime location for a pull-back, in fact, sitting about 10% above the top of the triangle.  To the downside, there may be support at either the 23.6% retracement line or the lower Bollinger Band.  Either of those could be a logical point for a pull-back.  Knowing the potential for a pullback in either direction, of course, gives us probably entry points for a second play should that opportunity arise.  Be alert for the initial break as well as any subsequent entries on a pullback.

Happy Trading.

KHC Forms Double Bottom With RSI Bullish Divergence

Kraft Heinz Co. (Nasdaq: KHC) provides an excellent study in multiple chart patterns and signals.  The most current pattern under development appears to be a double bottom with lows on 14 November and 6 December 2016.  If confirmed, the double bottom is fairly reliable bullish pattern, although due to the growth in popularity for this pattern, more caution is needed when trading it.

KHC Daily Chart

First up on the chart is an interesting diagonal support line (in dashed green) that started out as resistance in early April.  Since that line was broken with an significant gap up at the end of April, it served as a very reliable support line until November.  We can also see that a horizontal resistance line (also in dashed green) formed in early September.  The combination of the two produced a very tight ascending triangle pattern that I've highlighted in pink.

The documentation you'll find on the ascending triangle will tell you it's a bullish pattern and to anticipate an upward breakout.  That has not been my experience, especially when there are as many touches of that resistance line as seen in KHC.  A bullish breakout requires demand, and my experience has been that the most profitable plays in a triangle is to the side of the hypotenuse, not the resistance leg. 

That certainly came to pass with KHC.  The downward break was swift and it hit the price target for that break in a single day.  The subsequent retest of the diagonal - now a resistance line - was equally profitable with another rapid retreat back to the price target level of the triangle.  Two nice profitable plays for the price of one.

This now sets up our next pattern - the double bottom.  Once again, most books and websites will list the double bottom as one of the most reliable trading patterns.  At one time, it was.  Unfortunately, the setup has become too popular, and market specialists now engage in enough stop hunting that a pullback following the pattern breakout is more the norm.

The actual confirmation of the double bottom is when price closes above the neckline of the pattern.  I show that level on the chart with a thick, dashed orange horizontal line.  What's very common now, though, is for price to break above the neckline, trade there for a few days, and then quickly retreat back below the neckline as the specialists trap the retail traders on the long side.  If you're an aggressive trader, you can play that, keeping your stops tight.  Grab the quick upside profit, wait for it to retreat, and then go long again on a second break of the neckline.  That second break is often the true move.

Returning to our chart, though, notice that the double bottom has formed at the 50% retracement level of the overall uptrend.  That's an extremely strong support line, especially since it coincides with the highs of October, 2015 and with the top of the congestion pattern  from March to May 2016.  A retreat to the 61.8% retracement is possible, but there's a lot of support to overcome for that to happen.  The bounce off 50% is a bullish signal.

Next up is the volume pattern.  We have rising volume as ranges declined into the second bottom.  A high volume day on a long white candle coming off that bottom is a very bullish signal.  The day following was an inside day, creating a bearish harami setup, however the requirement that the bearish harami occur on a strong downtrend was not satisfied.  Therefore, we're interpreting the inside days as a bit of a pause following that high volume up day, but we're not interpreting it as a reversal.

Finally, we see a bullish divergence in the RSI(9) oscillator.  The RSI has traced higher lows in each of the major lows on the chart since early November.  That's an indication that a bullish reversal may be imminent, and that sentiment is consistent with the double bottom pattern that we're currently watching.

The target price range for this pattern sits between the 61.8% and 100% extensions above the neckline.  (We measure the height of the neck from the low of the double bottom and set a Fibonacci grid based on that height starting at the neck.  We expect price to at least reach the 61.8% extension before pulling back, although a 100% extension is also common.)

Keep in mind that the pattern is not confirmed until there's a close above the neckline.  We can trade the rise to that neckline, of course, however that's a higher risk trade than is the rise from the neckline.  Be sure to factor that into position sizing.

Remember, too, that busted patterns are also profitable.  A break below the low of the double bottom is an excellent shorting opportunity.  There are a series of support lines (not drawn) that offer target guidance, however remember that downside moves tend to be swift and steep.  (Look at the downside move out of the triangle as an example.)  As we watch this - or any - stock for the development of the primary pattern we wish to trade, always keep an eye out for an opposing trade.  Often, it's the breakdown of the pattern we're stalking that proves to be the profitable play.  Avoid being so rigid in the analysis that we miss the true trading opportunity.  Keep an open mind, and play the setup that develops.

Happy Trading.

Enbridge Energy (EEP) In Ascending Triangle Pattern

Enbridge Energy Partners (NYSE: EEP) is deep into a classic Ascending Triangle chart pattern.  The company reported mixed earnings on Wednesday, missing analyst earnings estimates by a penny, but beating analyst revenue estimates by $320 Million.  What moved the stock, though, was some very positive forward guidance.  They expect adjusted operating income to increase by 12% over 2014, and they expect their distributable cash flow to increase by 15%.  EEP's stock gained 1.5% in Thursday's trading, bouncing off the triangle's support line on very high volume.  With only 45% institutional ownership and with a 5.9% dividend yield, the stock does have some room to run.

For today's discussion, though, let's take a look at the stock pattern itself - an Ascending Triangle.  There are several very popular stock patterns that are watched by chartists, and this is one of the more reliable patterns that can be very profitable.

The ascending triangle stock pattern is considered a continuation pattern.  So in an uptrend, as EEP has been in for the past year, the pattern is considered bullish.  What forms the pattern is a very strong area of resistance - the top horizontal line on this chart - and a support line that has a distinct upward slope - the bottom line on this chart.

For a pattern like this, we want to see at least three touches of each trend line, and in this case, we have five of each.  Remember, a chart pattern is intended to give us insight into the behavior of traders.  The five touches of the resistance line indicate points where buying pressure has been exhausted, whereas the five touches on the support line indicate the points where selling pressure is exhausted and buyers are again interested in picking up the stock.  The entry point for that buying pressure continues to increase, hence the ascending pattern.

There are two ways to play a bullish entry on an ascending triangle.  For very aggressive traders, you can enter a long position when price bounces off the support line.  This gives the greatest profit potential, but it's also carries much higher risk since there's a well-defined price ceiling in the pattern.  An entry point for more conservative traders is to wait until price closes above the resistance line, providing an entry following the breakout.

According to Thomas Bulkowski, the well-regarded guru of stock pattern analysis, breakout is upward 70% of the time on a bullish pattern, and of those that do breakout, 75% of them reach their price targets.  That's not a bad average at all!  Be aware, though, that there is a pullback to just below the resistance line 57% of the time.  That, in fact, provides a third entry possibility since, if you miss the initial breakout, 57% of the time you'll have another chance to get in when the price breaks resistance a second time.

Setting a price target for this type of pattern is relatively straightforward.  Subtract the lowest valley in the pattern from the resistance line, and - for a conservative target - multiply that by 75%.  Add the result to the resistance line and you have the price target.  So using EEP as the example, it would be (40.50-35.00)*0.75 = 4.12.  Add that to the resistance line: 40.50 + 4.12 for a price target of 44.62.

For added confidence, we'd really like to see the breakout occur on high volume.  Now, the very high volume we saw yesterday was an excellent sign, but remember, that volume was driven primarily by EEP's earnings announcement.  I'd like to see volume above its 20-day moving average on the day of the breakout above resistance, as well.  Assuming, of course, this is one of the 70% that break upward.

As always, when discussing technical analysis, it's important to remember that the charts are telling us something about the behavior of traders.  This analysis alone does not replace the due diligence we still should do before entering a position.