LHO Completes Double Bottom - Poised For Next Move

LaSalle Hotel Properties (NYSE: LHO), a real estate investment trust (REIT) that specializes in upscale luxury hotel properties in prime markets around the US, completed a classic double bottom pattern on November 17.  Dubbed a "Big W" pattern for obvious reasons when you look at the chart, the double bottom itself is a very reliable trading opportunity.  Now that the pattern has completed, however, we'll look at our options for setting up the next play with this stock.

LHO Daily Chart

The double bottom started at Point A on the chart, with the first leg completing at point B.  The bound back up to "C" completes the retrace leg, and we quickly return to the second bottom at point "D".  Stock pattern guru Thomas Bulkowski would classify this as an Eve & Adam double bottom due to the rounding effect at point B.  That does matter, since the potential rise is influenced by the shape of the bottoms.

If we measure the length of leg A-B, take 76.4% of that leg, and add it to point D, we come up with a price target around 27.70.  That target was met on November 17th, so we can consider the double bottom pattern complete.

It's important to note the candle that appears on November 17th as that target is reach.  The long upper wick on the candle, accompanied by higher than average volume suggests climactic activity where supply has now overtaken demand.  The likelihood of this stock climbing higher in this pattern is greatly diminished.  Indeed, we see the stock amble sideways for the next week.

Look closely at the activity on November 22nd.  We have very high volume on a day where the stock opened up, drove higher, and then plunged to its lows before closing below the open.  Similar behavior on much lower volume was seen the day before.  The range for the day was small, at least as compared to the candles that made up the entire prior leg up, yet our volume was very high.  From a Volume Price Analysis perspective (VPA,) this should be shooting warning flares all over your charts.  Remember that only the large institutions can really drive volume to that level.  Retail traders simply don't have the capital to do it.  Large institutions traded a lot of shares that day, but the price basically went nowhere.  Now, whether they were holding price down to accumulate large quantities or they were holding price down to unload large quantities, we don't yet know.  It's a sign, however, that the next move for this stock should be a fast, explosive move in either direction.

With that in mind, here's how we'll play this stock:

• The final leg of the "W" formed a flagpole, and the pattern for the past week was a clear bullish flag.  If we close above the flagpole, then we will take a long position, setting our price target at 31.11.  That's 76.4% of the flagpole height added to the current top of the flag.  Our stop in this case will be the mid-point of the flag on breakout day.
• If, however, the breakout is to the downside, signaled by a close below the bottom of the flag, then we will take a short position, setting our price target at 23.06, the low of the double bottom.  Once again, our stop will be the mid-point of the flag on breakout day.

We expect the move in either direction to be swift, matching the slope of that final leg in the "W".  If the stock meanders or doesn't move with the velocity we anticipate, then we'll exit the trade.  Lackluster movement would invalidate our interpretation of the behavior over the past week.

Once in the trade, we need to be cautious of overhead resistance on the long side, as well as a level of support on the downside.  There's really only one area of resistance of concern, and that's the dashed line at the top of the "W" pattern.  Other than that, there's not much constraining price movement.  On the downside, however, there's an extremely strong support level around 25.20 were a solid support line coincides with the 38.2% retracement level of the entire double bottom pattern.  The potential for a bit of consolidation at that level is significant.  If we're short, we'll tolerate that for a day or two, but after that we'll exit the trade.  Since we pay interest on short positions, each day it meanders sideways is another day that interest takes away from our potential profits.  When I'm short, I want the stock to move, not sit there in neutral.

As always, manage your trade to reduce and then to eliminate risk.  Take your profits at the first indication that the trade is no longer playing out as planned.  Always remember that risk management and money management are the keys to profit, and as always, know your exit strategy before you enter the trade.

Happy Trading.

DEI Showing 5th Wave Extension During Uptrend

[Disclaimer: Trading examples used here are not recommendations.  They are intended to demonstrate my personal analysis and style of trading.  Always do your own analysis and tailor strategies to your own risk tolerance.]
 
Douglas Emmett Inc. (NYSE: DEI) has been in a strong uptrend since early February. This REIT holds 48 office properties and 9 multi-family properties in California and Hawaii. It currently returns a 2.47% yield in quarterly dividends, and has been raising dividends consistently year over year.

A quick analysis of the chart shows that the stock is likely in the 5th wave of the current uptrend.  Initial analysis showed a potential Wave 5 top last week, however yesterday's strong action suggests that Wave 5 may actually be extending.

DEI Showing 5th Wave Extension

If so, we have a potential price target for DEI around $37.50.  That's the height of Wave 1, which - when Wave 3 exceeds Wave 1 - is a probable target for Wave 5.  There's an alternate wave count (not shown) for this impulse, however.  It is indeed possible that Wave 5 completed on 7/5/16.  If so, then 7/7/16 would have marked the end of sub-wave (a), and Friday may have marked sub-wave (b).  If that's the case, then our next direction is down, briefly, with a target of about $35.00.  That would actually be a very good entry point, if it plays out, since this stock is showing a lot of potential in an environment in which REITs are currently thriving.

We are not interested in playing the possible Wave 5 extension, despite an attractive target.  If Wave 5 is extending, then we'll wait for it to conclude and play Wave A to the downside.  That has the potential to move a few points in a retrace of Wave 5 and will offer a better reward to risk ratio.

If, however, we do get a move to the downside early this week that takes us back to the $35 range, then we'll definitely play the bounce off Wave (c).  There's a high probability is this environment that the subsequent impulse wave will be upward, at least until there are signs that the Fed is ready to consider interest rate hikes again, and the next Wave 1 has some excellent upward potential.

If you're adding this one to your watch list, here are a few points to consider:

• DEI reports earnings before the open on August 2nd.  As always, use caution in that period since the trading session immediately following earnings is typically extremely volatile.
• While not yet announced, we expect DEI to go ex-dividend around September 27th, and we expect it to pay $0.22 per share.
• DEI has been consistently raising dividends every year, so look for a potential increase to either $0.23 or $0.24 per share in 1Q17.
• With a dividend yield of 2.47% currently, and given a projection of share price growth, that yield will decline over the remainder of the year.  This means DEI will be very sensitive to interest rates.  If the prospects for a rate hike in 2016 increase, expect that to have negative drag on DEI's share price.

For the moment, I like the pattern developing here, especially with no overhead resistance.  Just be aware that the first area of significant support is down at $31.95, so once the specter of interest rate hikes again rears its head, there is a fair amount of room for the stock to fall before hit hits major support.

Happy trading.