Chart Setup and Annotation Methodology

Given the amount of volatility we’ve seen in the market over the past six months, I thought I’d give an overview of how I go about preparing a chart and then reviewing the current setup.  The chart I’m showing: Helmerich & Payne Inc (NYSE: HP) just happened to be one of the charts that popped up on a scan, yesterday.  I don’t have any position in HP at the moment.  Here's the daily chart we will review:

HP Daily Chart

 First, let’s look at the chart setup itself.  I use a daily chart for my primary analysis and only use the weekly chart for support and resistance analysis.  The chart is configured as follows:

•    Candlesticks – I use candlestick analysis very heavily when entering a trade and again to determine if it’s time to exit that trade.
•    Bollinger Band (20,2.0) – This gives me a nice 20-day moving average and also shows consolidation points that often result in a tradable explosive move.
•    50-day Exponential Moving Average.  This is a heavily watched indicator by swing-traders and is a very good bellwether of current trend direction.

The indicators that I use on the chart are as follows:

•    Volume – This is obvious.  Volume is the most important piece of information on a chart besides price itself.

•    I use a 63-day exponential moving average attached to volume.  This tells me whether we have something exceptional happening that may require a closer look.

•    On-Balance Volume – I plot OBV in the same pane as volume.  This is a great indicator that tells us if shares are being accumulated or distributed.  Attached to OBV I plot a 20-day exponential moving average that is used to signal when the trend in volume may be changing.

•    Commodity Channel Index (CCI) – I use a 20-day CCI as a trend indicator.  Readings above 100 indicate a bull trend is in progress and readings below -100 indicate a bear trend.  CCI is a leading indicator and is a powerful signal for trend-following strategies.

•    Relative Strength Index (RSI) – I use a 9-period RSI coupled with a 21-day exponential moving average for measuring momentum and – coupled with the MACD – as an entry indicator.  (Note that I find a 9-period RSI more conducive to early entry in a trend system than the default 14-period.)

•    Moving Average Convergence Divergence (MACD) – I use the MACD(5,34,5) histogram in conjunction with the RSI(9) as my primary entry.  Again, I find the 5,34,5 setting to be much more accurate for short-term trading than the default 12,26,9 setting.  Note that I’m primarily using the histogram, and not crossover signals.

•    Full Stochastic (5,3,3) – I use this as an early warning indicator that a trade entry opportunity may be imminent, and it’s my primary exit “canary in a coalmine” indicator.

•    I also have a 12-period Rate of Change indicator drawn, and I plot the strength of the stock vs the S&P paired with a 20 period EMA of the same.  These two plots show additional information about the relative strength or weakness of the stock, but they are not part of my overall signal strategy.

So now that you know what my charts look like, let’s review the steps taken to annotate the chart before analyzing any setups.

1.    Find the lowest low and the highest high on the chart.  In this case, the low was 31 August 2017 and the high was 9 October 2018.  Draw the Fibonacci levels from the low to the high.  You’ll see them on my chart in grey.

2.    Now find the highest high and lowest low of the current primary trend for the stock.  In this case, the high was on 9 October 2018 and the low of the current primary trend was on 26 December 2018.  Draw the Fibonacci levels from the low to the high.  You’ll see them on my chart in a light orange.

3.    Next, we need to add the horizontal support and resistance lines.  I use the following schema for drawing these lines.  Dotted thin light blue line is a simple (weak) support or resistance line.  Dashed thick light blue is a significant strong support or resistance line.  Dashed thick purple is a significant support or resistance line from the weekly chart.  Don’t forget the weekly support or resistance.  They produce very strong levels on the daily chart.

4.    We should now look for major trendlines.  I use a dashed green line to indicate an upward support trendline, and I use a dashed red line to indicate a downward resistance trendline.  Be sure to extend them to their extremes.  As you can see in February 2018, once the upward support line was broken, it became a major resistance line for the subsequent consolidation period.  Notice that the current trend is down (red,) although on 26 December we started a countertrend rally that entered a small consolidation phase on 10 January 2019.  That countertrend rally is shown with a green support trendline.

5.    Next, I add the Elliott Waves for the current primary trend.  These are indicated in bold black on my chart.

6.    Once we know where we appear to be in the Elliott Wave cycle, we can determine price targets for the next wave.  I show price targets using a Fibonacci extension plot in green.  Notice, in this case, that the 100% extension is just beyond a major weekly support line.  That’s no coincidence, and with this being the 5th wave in the cycle, that weekly support line would be a likely location for price to consolidate for an extended period.

So now that our chart is annotated, we can then look at the setup and determine what signals will tell us to enter or to walk away from the trade entirely.

1.    We see that we are in Wave 4 – a consolidation wave – of a downtrend.  This tells us we likely have one more downward wave to go before the cycle is complete.

2.    Notice the downward resistance trendline and the upward support line of the countertrend rally.  They are rapidly converging.  A break of the support line and/or a bounce off the resistance line will be a powerful signal.

3.    For an early warning indicator, I’m watching both the CCI(20) and the Fast Stochastic (5,3,3).  What will tell me an entry is imminent is if the CCI(20) drops below 0 and the Fast Stochastic(5,3,3) experiences a bearish crossover within a day or two of each other.  That puts me on alert for an entry signal.

4.    My entry signal -- in this case, for a short position - will be a bearish crossover of the RSI(9) and it’s EMA(21) within one day of the MACD(5,34,5) histogram turning negative.

5.    The entry trigger will be pulled if the signal occurs on a bearish candle, preferably with above average volume.

6.    The stop will be placed above the high of Wave 4, and the (imaginary) price target will be the weekly support line near the 100% price target I drew in step 6 above.  I say “imaginary” because we are not going to actually exit the trade with a pre-defined limit at that level.  Rather, we will exit the trade on a bullish reversal candle coupled with the Fast Stochastic (5,3,3) signaling a bullish reversal.

There you have it!  I hope this provides some insight into how I setup my charts, what indicators I use (and how I use them) and how I go about determining trade setups.

Happy Trading!

SYMC is a Tale of Three Charts

One of the scans I run on a daily bases searches for potential flag setups.  These minor pauses in a trending stock often offer good entry points when the trend resumes, provide, of course, the overall stock pattern is correctly interpreted.

A stock that caught my attention in today's scan was Symantec Corp (NASDAQ: SYMC), the nationally known cyber-security software developer most familiar to consumers as the maker of the Norton anti-virus suite.  The three-day consolidation underway following a healthy upward move is what tripped today's scan.

SYMC Daily Chart

There are a lot of positives on the daily chart.  The slope of the 200-day SMA shows a healthy uptrend.  A 5-wave motive is in progress, although we'll see on the weekly and monthly charts why I start the Elliott Wave count in May 2016 and not February.  On Balance Volume is rising at a slow, but steady pace.  The RSI(9) oscillator is confirming our price action, and finally, the stock recently broke out of a descending triangle pattern and has not pulled back in the month since that breakout.

There are two warning signs on the daily, chart, however.  The first is that obvious high spike in volume on 25 January.  The size of the candle that day is rather small, warning us that we may need to take a closer look at the price action since something out of the ordinary has occurred.  It's possible that this spike is indicative of climactic action signalling an end to the uptrend.

The second warning sign is the price target for our potential Wave-(v).  Using the rule of thumb that, when Wave-(iii) is longer than Wave-(i), the conservative price target for Wave-(v) is the height of Wave-(i).  Now, nothing constrains Wave-(v) in this pattern, however history shows that this rule of thumb works with enough consistency to be a valid predictor of price action.

I show the Wave-(v) price targets as a Fibonacci extension measured from the end of Wave-(iv).  We're already trading above the 61.8% extension, and that's a level I normally use as my most conservative target in any price calculation.  So based on this, the end of Wave-(v) can occur at any time.  A count on the hourly time frame, however, suggests that this slight 3-day pause is a fourth wave in an impulse that started 3 January, so if that's the case, we may yet approach the 100% extension.

I'm going to jump to the monthly chart next, since that's the chart that puts everything in focus.

SYMC Monthly Chart

That a motive wave ran from 1999 to 2005 appears obvious on the chart.  Since price following that 2005 peak has not retraced 100% of that move, we're safe (for) now in labeling that peak the top of Wave-I.  The question before us now is what to do with Wave-II.  Has it ended, or is it still in progress?  If it ended, when, and what does that tell us about Wave-III?

What I show on this chart is one of many possible wave counts.  It has problems, but then, complex corrective waves always generate massive headaches when trying to piece together their puzzle.  I've shown, in this case, the various subwaves that lead me to conclude that Wave-II ended in February 2016 and that Wave-III is in progress.  I also show my conclusion that, for the long-term trend, Wave-1 and Wave-2 of Wave-III have completed and Wave-3 of Wave-III is in progress.

Of note on the monthly chart is the breakout of the ascending channel that formed much of Wave-II.  Following that breakout - which occurred on high volume - we had a pullback and a retest of the support line.  That retest was rejected and price spiked to an all-time high this month.  That's good news for those looking for a bullish move out of SYMC and it offers confirmation that this wave count may be correct.

There are two warning signs, however.  First, volume is once again declining, and this month's candle - despite its length - has thus far experienced very light volume.  In other words, volume is not confirming price this month.  Another way of showing that is via the On Balance Volume (OBV) indicator.  Throughout the current uptrend, OBV has oscillated a bit, however the overall indicator remains flat.  We're not seeing any signs of accumulation, and we really do need that to occur in order to sustain a lengthy upward move.

The second warning comes from the RSI(9) oscillator.  When we compare the height of the RSI now to the height during the three prior price highs, we see a pattern indicative of a bearish divergence.  At best, the RSI is not confirming price action, and it may possibly be signalling weakness that will lead to a downturn.  So, while we believe for the moment that we have a valid wave count, we do need to be aware that it could be invalidated at any time.

I've left the weekly chart for last since it really needed the monthly analysis to put it into perspective.

SYMC Weekly Chart

The current 5-wave impulse is obvious on the weekly, but equally obvious is that 5-wave patterns throughout the correction were the norm.  Were it not for the monthly chart, there would be little reason to believe that this current impulse is nothing more than the next wave in the correction.

What does add some credence to the Wave-III theory is the overall volume signature.  We see some serious demand entering the picture at the move up from what we believe to be the bottom of Wave-II.  Indeed, each of the motive waves that occur throughout this upward move are accompanied by rising volume with a strong demand signature. 

The volume pattern in the tight symmetrical triangle was accompanied by an interesting volume pattern.  A lot of shares changed hands in this consolidation, and the subsequent breakout was on rising volume. 

Now, the bad news.  The RSI(9) oscillator shows a pronounced bearish divergence on the weekly chart.  This move could very well be short-lived, at least according to the RSI.  Additionally, when we look at the symmetrical triangle, we see that it is actually a pennant formed from the Wave-(iii) motive.  I've added the Fibonacci extension targets to the breakout of that pennant, and price has already closed at the 50% extension with a high nearly reaching the 61.8% mark.  That 61.8% target is a typical end-point for a pennant breakout such as this one. 

So, how are we going to trade this one?  Well, I'm going to take my cues from the daily chart.  Regardless of the Weekly or Monthly wave counts, it's obvious that we're currently in the fifth wave of a 5-wave impulse on the daily.  The current pause may be the end of that wave, it may be the mid-point of the wave, or - most likely - it's the fourth wave of a 5-wave move on the hourly chart.

Remember, the overall market is trending up with strength, so right now we're only taking long positions.  Therefore, if this stock breaks to the downside from here, we'll mark Wave-(v) complete and wait for Wave-(a) to play itself out before going long on Wave-(b).  If, on the other hand, we break to the upside, we'll open an immediate long position.  We'll set a price target of 28.41 with a stop just below the low of the entry day.  This is a two or three day trade at most, and it's a pure motive-wave play.  We will want out of the trade at any hint of weakness.  Based on the pattern on the chart, however, we believe the probability is strong for a short-term trade to the upside with a maximum 3-day trade horizon.

Happy Trading.

DHI Signals Short Term Bull Channel Trade

DR Horton, Inc. (NYSE: DHI) approached the lower (20,2) Bollinger Band on very high volume, bouncing off to produce a long-tailed spinning top in today's trading.  The significance of the high volume is somewhat diminished by today's quadruple witching, however the remainder of the chart shows promise for a short-term long play.  Let's first take a look at the daily chart. 

DHI Daily Chart

The price action on 9 November penetrated both the lower Bollinger Band and the 61.8% Fibonacci retracement from the 52-week high to low pattern.  Of significance, however, was the immediate bounce back to the 50% level where a very strong pivot line has already been established.  Since then, we've found support at that 61.8% line on two additional tests. 

Both the highs and the lows in this six-week pattern have created a well-defined bull channel, albeit with a modest slope.  Today's price action marked the third test of that support line, but we'll take a much closer look at that test shortly.

From the daily chart perspective, we're now looking at a potential short term channel play.  The RSI is confirming the short-term bullish signal, so there are no worries there.  The higher highs and higher lows are also encouraging, as is the volume in today's action.  Remember, though, that the volume was influenced by quadruple witching, so we do need to downplay it just a bit.

To get a better feel for today's action, and to analyze a potential entry and protective stop range, we'll turn our attention to the 30-minute chart.  (I prefer 30-minute charts to the 60-minute chart since the open and close volatility fits neatly into one candle on each end and isn't potentially hidden by doubling that cycle.  Also, the trading day is 6.5 hours long, so there's an inconsistent overlap of alternating days using the 60-minute.  I find the analysis works better on the 30.

DHI 30-Minute Chart

Well, the very first thing that pops out as us is the long tail.  That certainly caught our attention on the daily chart, but here we see that it occurred right in the first 1/2 hour of trading.  That has all the hallmarks of some stop gunning.  It's the type pattern you'll see if the specialists are taking out sell stops in preparation for a move upward.  For the rest of the day, the stock traded in a narrow range that created a bull pennant with the long tail acting as the pole.  Volume at the end of the day was high on a very short candle, but given today's options expiration, that's not a surprise.

Notice that, just like the daily chart, the 30-minute chart is also hovering right at the 61.8% retracement level from the 52-period high-low pattern.  There is also a very strong horizontal pivot line (in dotted bold blue) that is now acting as support.

The 30-minute chart is providing a potential entry zone as well as a good protective stop level.  For the entry, remember that we don't enter a position before 10:01 EST.  You can see on this chart how volatile that first 1/2 hour is, and it's the territory primarily of the market specialists, day traders, and scalpers.  I prefer to let the market settle down a bit and enter after we can see the true direction it's taking.  So 10:01 is the earliest I'll enter a position.

The range we'll set for entry, based on this 30-minute chart is from 0.10 above the upper pennant line to 0.10 above the height of the full flagpole.  Above that and the reward to risk ratio is too low, and below it invalidates the signal.

There are three potential stop loss levels depending on how aggressive you are as a trader.  The first obvious level is just below the pennant.  That level is a bit too aggressive for me, however, and I believe it's an area likely to be taken out if there's still some stop-gunning on the horizon. 

The second level is what I've highlighted in red.  That area forms support from the two-day pattern, and that nice rounded bottom heading into Thursdays close appears to be a solid bottom.  In fact, that's likely what prompted the specialists to go stop hunting at the open, today.  Now, that level is still somewhat aggressive, however as long as we avoid the first 30 minutes of trading, we may well avoid another stop-hunt at that level.  So personally, I'll set a stop just below that red line.

The final level, of course, is below the low of that long shadow.  That's the most conservative level in this short-term pattern, and for me it's too conservative.  The distance we'll have to travel to get a decent reward to risk ratio is more than I can comfortably plan.

For our exit strategy, we return again to the daily chart.  Remember, we take our signal from the daily, select our entry and stop from the 30-minute, and then exit based on the daily.  As we can see on the chart, there's a very strong resistance line (in light blue) that coincides with the upper Bollinger Band.  It is also intersected by our bull channel in three trading days.  That's where we'll set our price target. 

This is a pure channel play, so we must be prepared to exit at any sign of weakness.  We also need to be aware of that intermediate pivot line that sits dangerously close to the center of the Bollinger Bands.  There's a risk of pausing or retreating at that level, and we must remain nimble enough to recognize it and exit immediately.  This is a two or three day play, not a long-term play, so we can't afford to sit around and wait for a consolidation to work itself out.  Exit immediately on any weakness.

Happy Trading.