Estée Lauder Forms Ending Triangle in Wave-IV

When analyzing a chart, I typically start with the unadjusted weekly chart to view the broader picture and ascertain the overall trend before zooming in to the daily and then the 30-minute chart.  In the case of The Estée Lauder Companies, Inc. (NYSE: EL) the weekly chart did not provide the clarity we needed.  It doesn't help that the company exercised a 2:1 stock split in late January, 2012.  Viewing the unadjusted chart following a split like that dramatically skews the chart pattern, so we have to go with the version that adjusts for splits and dividends.

Since it was clear that the current pattern started well before the time frame shown on the weekly chart, we instead turned our attention to the monthly.  All we're really looking for in this case is the overall trend and a good Elliott Wave count at the higher level.  The monthly did provide that perspective.

EL Monthly Chart

 Sure enough, we can see that the current trend started in March 2009, near the end of the last major financial crisis.  Three of the five Elliott impulse waves have completed with the fourth either in progress or just completed.  We'll talk more about that when discussing the daily chart.  Furthermore, each of the two completed impulse waves subdivided quite nicely into five distinct sub-waves.  With this pattern in focus, we can now turn ourselves to the daily chart to determine any potential setups.

EL Daily Chart

Notice the conflicting trend signal between the monthly and the daily charts.  On the monthly chart, the 200-period moving average is sloping upward and price is well above that line.  From the monthly perspective, the stock is clearly in an uptrend.  On the daily chart, the 200-period moving average is sloping downward and price is well below that line.  From the daily chart, the stock is clearly in a downtrend.  In fact, our short-term analysis of this stock using only the daily chart on 30 November 2016 (The Grape's Vine: Estée Lauder a Short Play Following Pullback) reached that conclusion and we presented a short trade scenario.  That play is still possible, mind you, since it still has not triggered.  The evidence now, though, driven primarily from a broader view obtained from the monthly chart, suggests the potential for an upside move as well.

The completion of Wave-III is marked on the chart, and that's obtained directly from the monthly.  An A-B-C pattern emerged from there, however the bottom of Wave-IV cannot yet be considered complete.  We have a triangle pattern coming off the end of sub-wave v in Wave-C.  From it's position, it could be a leading diagonal heading into the next Wave-A as part of a complex correction in which the second correction is a zig-zag pattern.  More likely, however, we'll find that this is actually an ending diagonal signalling the termination of sub-wave v and Wave-C.  (In that case, of course, we'd have to adjust the labeling on the chart.)

There's other evidence on the chart that Wave IV may be completing and a Wave-V impulse is set to begin.  The volume pattern is showing a lot of demand at the support line formed by the base of the triangle. Upward moves are signalling far greater strength than downward moves.  Adding to that, we see an RSI(9) oscillator that appears to be strengthening.  It appears from the daily chart that the supply that pushed this stock to its 52-week lows is near exhaustion.  Friday's close above the 50-day moving average and above the top of the triangle comprise a strong signal for a long position.

The 30-minute chart should complete the picture for us.

EL 30-Minute Chart

 Interestingly, the trend on the 30-minute is flat.  The 200-period moving average is horizontal (i.e. trendless) although price is currently above that line.  The last move on the daily chart subdivides on the 30-minute into a well-defined 5-wave impulse.  That the impulse completed just prior to the close on Friday and the final candle is a long red candle on high volume suggests there's a pull-back potential as we head into next week.  There's also a bearish divergence on the RSI(9) oscillator, warning us of impending weakness.  That further strengthens the idea that there will be a pullback in the short-term.

An A-B-C correction on the 30-minute provides a couple of very good entry points for a long position.  If you're an aggressive trader, then there's a possible long entry at the diagonal support line in dotted green.  A second entry if that line is breached is at the horizontal support level (not drawn) around $78.83.  (Remember that support and resistance levels are areas, not actual lines.  I like to provide a fuzzy .25% above and .25% below the line on a daily chart as the rough area around which the price may reverse.  On a 30-minute chart, I use .15% above and below as the measure since traders at this level will have much tighter stops.)

Conservative traders also have two possible entries.  The first is just above the high of Friday's pattern.  The second is above the high shown on the 30-minute chart dating back to 9-December.  Either way, you want both the overall market and the stock moving strongly in your direction when entering the trade.  Be sure volume confirms the move.

EL doesn't report earnings until 2 February, and we don't anticipate another dividend before the end of February.  From a major news perspective, therefore, there's nothing currently on the company's schedule that would impact the flow of the trade.  So for us on the swing side, the decision we need to make is if this is now a long setup with the break of that triangle, or if there's potentially another move to the bottom of the triangle before a breakout to either side.  We'll be playing whichever way this stock decides to break.

Happy Trading.


 

Estée Lauder a Short Play Following Pullback

The second half of 2016 has not been kind to The Estée Lauder Companies, Inc. (NYSE: EL).  Two consecutive quarters of revenue misses were enough to send the stock tumbling over 20 points.  Their recently announced acquisition of Two Faced for $1.45 Billion may have temporarily halted the slide, however the benefits of that acquisition will likely occur too late to prevent a deeper dip in the short term.

EL Daily Chart

 Notice on the daily chart a bit of a spike in volume at the 52-week high in late April.  The behavior of EL for the week leading into that volume spike hints at climactic behavior and the start of a distribution phase by market specialists.  Indeed, that appears to be what followed as we see the stock amble sideways for a good 3 1/2 months. 

The current downtrend for the stock started with a buying climax on August 18th (marked on the chart with "O".  Look at the volume signature on the 18th and 19th.  Supply was clearly abundant, and the stock had no place to go but down.  August 18th marks the start of the current 5-wave impulse.

Following the second consecutive missed revenue quarter, EL plummeted over 9.5 points in just four sessions.  Now, here's where the chart interpretations can get interesting.  We've marked the end of wave 3 on the chart with the low of November 16th, however that is by no means certain.  From the end of Wave 2, we can count three clearly defined sub-waves.  Wave 3 is a 5-wave impulse, so there should be more room to the downside to complete Wave 3.  We've played it safe in our current interpretation, but let's not be surprised if it's actually Wave 3 that continues, and not Wave 5. 

Although it's not shown on the chart, there's a very strong resistance level at the 76.4% mark around 81.33.  That would represent a 61.8% retracement of the current Wave 3 pattern, so we should be prepared for a pullback to that level before the downtrend continues.

The final piece of the puzzle is the Accum/Dist line below the chart.  This is a great indicator that shows whether or not shares are being accumulated (meaning there's high demand for the stock) or if shares are being distributed (meaning there's an oversupply of the stock.)  We can see from the slope of that line that supply has been overpowering demand, and there's no indication yet that supply has been exhausted.  In fact, today's 1.16% drop on high volume with a close at the low of the session suggests that there's plenty of supply remaining to push the stock lower.

Here's how we're playing this stock.

• If the stock breaks below 76.65 with confirming volume, then we will take a short position.  Our stop will be above 79.63, which is the current high of the pattern.  Our initial price target will be 73.06, which is 76.4% of the height of wave 1 as subtracted from wave 2.
• At 73.06, however, we will only exit 1/2 of our position.  Since there's a good possibility that this is still Wave 3, we'll want to ride this as far as we can.  Therefore, we will trail a stop for the remaining 1/2 ten cents above the previous day's high, adjusting that stop daily until we are stopped out of the position.
• At present, there is no long setup showing on the map that matches our trading horizon.  Now, that could change if we get a double bottom setup around 76.37, however that has yet to manifest.

Clearly, taking a short position in the extremely bullish market we've had for the past three weeks is increased risk.  Be sure to factor that into any decisions regarding position size and exit strategies.

Happy Trading.