Has the Time Finally Come for TWTR?

In the midst of last week's market turmoil, Twitter, Inc. (NYSE: TWTR) posted a five-cents per share earnings beat, but also posted a $45.94 million beat on revenue.  Those numbers were enough to drive a return to year-over-year revenue growth following a long history of declines.  Even more to the market's delight, Twitter posted a 7% year-over-year increase in owned and operated advertising revenue.  In the ensuing conference call, CEO Jack Dorsey gave a rosy preview of 2018, saying, "We're investing to make 2018 a year of growth and expect our expenses to more closely align with revenue after a year of significant margin improvement."

The market was most appreciative, drawing a significant break-away gap on Thursday in spite of a 1000+ point drop in the overall market.  Twitter continued to show strength on Friday with a very strong bullish candle that didn't penetrate the lows of the previous day's move.

Now, before we go too far in the discussion, Twitter is not, for me, an investment stock.  While the chart shows a very good potential for upside growth, it does lack the number one component I require in any stock held for investments, and that is a quarterly dividend.  Therefore, I'm looking at Twitter solely as a trade vehicle for short term capital appreciation, and would not be interested in holding Twitter as a longer term investment.

With that said, let's take a look first at the Weekly Chart.  This sets the overall canvas upon which our daily analysis will be drawn.

TWTR Weekly Chart

 What we've placed on this chart are the major support and resistance areas that are likely to impact any large-scale move.  Notice that last week's price action broke across the 200-day moving average (that continues to trend downward) but also broke above a major pivot line that has held since July 2015.There's a good possibility this line will be tested several times over the coming weeks, so factor that into any entry and stop plans.

There's a second resistance line looming around $35, and that, coincidentally enough, marked the high of our gap day.  Price hit that resistance and retreated back to the $30.50 range on that day, although it did recover back to $31.51 the next day.  What we need to take from this, though, is that there are sellers looming around $35 and they will have to be shaken out of the market a bit before Twitter can further advance.  Expect some horizontal movement at that level.

The major resistance zone, though, sits between $50 and $52.50.  That level formed a double top on the weekly chart between July 2014 and April 2015, and the stock retreated from there to its all-time lows.  We have due cause to respect this resistance level.  For me, assuming I'm still long the stock if it reaches that point, I'll exit there and wait.  It may become a good short opportunity at that point.  If nothing else, we can always reenter if it shows a breakthrough across that resistance line on strong volume.

What's encouraging about the weekly chart, though, is the 28-month base formed over the 2 1/3 years prior to Thursday's breakout.  The P&F price target from the breakout of that base would put us at $52.  Not by coincidence does that coincide with the major resistance zone discussed previously.

Okay, with that foundation, let's turn to the daily chart.

TWTR Daily Chart

Most of what appears on this chart is positive, and speaks to a decent move to the upside.  Consider the following:

• Strong breakaway gap after good earnings and forward guidance.  It's even stronger considering that the overall market dropped over 1000 points that same day.
• The breakaway gap also broke out of a strong rising channel that began developing in September 2017.
• Volume from the start of this move two weeks ago shows very strong bullish tendencies, more than doubling the 50-day moving average of volume across the entire period.
• On Balance Volume has been rising steadily since July 2017, showing money gradually moving into the stock.  
• The MACD shows a bullish crossover at the start of the move, and then a nice bullish bump in conjunction with the breakaway gap.
• Relative Strength broke out of a rising resistance line.
• The JDK RS Ratio and JDK RS Momentum lines are both rising rapidly.

There aren't many negatives to speak of:

• The RSI(9) is at a level that has proven to be extremely resistant on the last four moves.
• The candle on the breakaway gap day was decidedly bearish, closing within 10% of the low.  In fairness, though, that did come on a major down day in the market, and Friday's candle was decidedly bullish.
• The breakaway candle bounced off major resistance found on the weekly chart.

So, where does this leave us?  Well, given the glowing forward guidance from Twitter on Thursday, we've got at least a quarter for this stock to run without negative news weighing on it.  If TWTR can break through the resistance at $35, then it has a very good shot at running to $52. That's precisely how we're going to play it.  I don't intend an entry until TWTR breaks the resistance line above Thursday's candle.  We'll take 1/2 profits at $48.35 (the 78.6% Fibonacci level of the entire range,) establish a trailing stop set to the prior day's low, and allow the remaining half to run until we get stopped out.  The key, though, is to be patient and let it break that $35 level with volume. Do keep in mind that we expect that line to be tested once or twice as a support line, so don't set your initial stop too high. 

Happy Trading.

MS Breakout on Daily and Weekly Charts

Financial stocks received another boost this week with definitive signs coming out of Washington that some of the regulations imposed by Dodd-Frank will be brought back under control.  Between the promise of higher interest rates and the indication that financial regulations will be loosened, the climate continues to support growth for the top financial industry firms. 

The regulatory impact is not trivial.  In 2014 alone, the top six banks in the US spent over $70 Billion on regulatory compliance (Pymnts.com: Regulations, Regulators And The High Cost Of Banking Compliance) and that number continues to grow.  Indeed, unchecked regulations are the greatest risk faced by top financial firms in 2017.  Attempting to unravel the ridiculously complex 22,000 page Dodd-Frank fiasco is a major step in the right direction.

The executive action taken this week by President Trump to target excessive and complex financial regulations (NY Times: Trump Moves to Roll Back Obama-Era Financial Regulations) was well received in the industry, and it's against that backdrop that we begin our analysis of Morgan Stanley (NYSE: MS). 

MS Monthly Chart

The monthly chart for MS shows just how much the financial industry has suffered since the peak in early 2000.  The post-9/11 recession took its toll, and the financial crisis in 2008 sent most of the top names in the industry into penny-stock territory.  The recovery from those basement level prices continues to be slow.  For MS, they also come with a few warning signs. 

Notice the lengthy descending triangle pattern forming on the monthly chart.  Now, that pattern will likely take several more years to run its course, but it does not bode well for any truly long-term investments.  Even the current up-trend is at risk since price is now trading on the resistance line while volume and range are decreasing.  The likelihood of a pullback on the monthly is high.

The RSI(9) oscillator on the monthly chart would agree.  Comparing the highs in mid-2015 to the high traced over the prior month, we see a bearish divergence forming in the RSI.  This, again, signals longer term weakness that will ultimately initiate a pullback.

MS Weekly Chart

The weekly chart, which gives us a more intermediate-term picture, is a bit more optimistic.  From an Elliott Wave perspective, Waves-I and II are complete and Wave-III is in progress.  Now, there are two possible counts for the current wave, and in retrospect (after annotating the daily chart) I really should have gone back to the weekly to show the alternate count.  Rather than Wave-1 completing in November, 2016, it would appear Wave-1 completed in August and Wave-3 completed in November.  That does make a difference, since it leaves only one wave remaining to complete the impulse, although it's entirely possible for Wave-5 to extend one or more times.

The RSI(9) oscillator shows continued strength through the entire move, although that strength is starting to wane as the horizontal consolidation runs its course.  This consolidation on the weekly takes on the appearance of a bull flag, however, with the near vertical weekly move that started the week of 7 November.  The price target for that flag would be $49.60, marking the 61.8% extension of the flagpole.  Note that the target falls just shy of the conservative price target for Wave-5, which is $50.85. 

The weekly close on Friday marks a breakout from that consolidation flag pattern. It comes, on the weekly, however, following a bearish cross-over of the MACD(5,34,5) momentum indicator. The strength of the breakout, therefore, needs to be treated with caution.

MS Daily Chart

So this brings us to the daily chart and our short-term swing-trade strategy for MS.  As on the weekly, we see the breakout from the two-month horizontal consolidation pattern.  (Notice that it hardly resembles a flag at this level, however, and we would not trade it as such for a swing-trade.)  Volume was very strong on the breakout day, adding confirmation to the breakout.

On Balance Volume continues to rise as it did throughout the horizontal consolidation, providing clues that the stock is under accumulation.  That's not surprising, given the prospects for the financial sector as a whole as we discussed earlier. 

The Elliott Wave count shows wave-4 at or near completion. One aspect of the count that troubles me, however, is that waves 2 and 4 do not appear to alternate.  Well, 4 is much choppier than 2, however for alternation we typically see one of the waves cutting a deep pullback while the other is shallow.  That's not the case here, so there is the potential for a pullback before Wave-5 begins in earnest.  Be aware of the possibility and plan accordingly.

Looking at the MACD, we see a Zero Line Reversal followed immediately by a bullish crossover.  Both of these are very strong bullish signals in the context of the current chart.  The RSI(9) is confirming price action and displaying no signs of a divergence either way.

With this in mind, our trading strategy for MS is as follows.  We'll play the breakout that occurred on Friday, and take a long position just above the high of Friday's candle.  We'll place a protective stop just below the low of Friday's candle which coincides with the middle of the horizontal channel.  (If we trade that deep into the channel, it negates the breakout signal, and we will want out of the trade immediately.)  Our price target will be $49.59, the target set by the weekly chart's bull flag.  As always, we'll exit the trade immediately if price action appears to turn against us. 

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.

Descending Triangle in COP Hints at Upside Strength

Conventional wisdom for descending triangles is that they are bearish patterns that produce lucrative downside trades.  Reality, however, is that a breakout can occur either way, and that breakout - in the short term - can be lucrative regardless of the direction.  As we head into the final trading week of the year, we're seeing just such a short term pattern in ConocoPhillips (NYSE: COP) and the current signal is hinting strongly at an upside break in the short term.

COP Daily Chart

The current triangle started with what appears to be a continuation gap on 12 December.  From that point, the stock has traded in a tight sideways pattern that appears to be setting us up for another significant short-term move.  There are two words of caution here, though.  While I call it a continuation gap, there's the potential for it to be an exhaustion gap.  The stock did gap up with gusto at the open on the 12th and it pushed to news highs before retreating significantly to close well below its open.  A true continuation gap should have a close in the direction of the gap, not opposed to it.

Additionally, a long-shadow on the 15th briefly closed the gap.  That trait is also not typical of a continuation gap, and it does give us pause when considering the significance of the gap itself.  Instead, we'll focus on the other subtle hints that the chart is offering. 

The base of this triangle formed at a very strong line of support that dates back to October 2015.  Notice that it served as strong resistance in a pullback on 15 December 2015.  That COP broke through this line with a gap and has held the line on eight consecutive days is a message we can't ignore. 

The next bit of evidence is a bullish channel marked in dashed green lines.  The slope is clearly established at the bottom of the channel with three well marked touches.  Extending that line to the top of the channel also produces three clear touches, and the two days surrounding the gap appear to transform that upper boundary into a support line.  We can see how that line held on 15 December, in fact.  It's important to note that we closed right on that line on Friday.  Now, volume on the last trading day before Christmas is historically light, as is trading the week between Christmas and New Years, so some caution is needed when reading any signals that may arise over the next four trading days.

Let's turn out attention next to the 52-week high-low Fibonacci retracement levels. After bouncing around between the 38.2% and 61.8% level for a good eight months, the latest surge pushed COP above the 76.4% level where it has remained.  That in itself is considered a bullish move and is a major signal that the downtrend was successfully reversed.

Given the strength projected for oil in the coming year, strong guidance from COP, a major oil production deal from OPEC, and a rising US Dollar, we believe the signals from COP are to the upside.  The company completed planned 2016 distributions, generating $1.3 Billion in revenue, well above it's original $1 Billion target.  Taking those distributions into account, the forecast for 2017 is still encouraging, with up to 2% year over year growth in the offing.  Additionally, they started their planned $3 Billion share buybacks in November, adding further strength to the underlying issues.

COP is now on our watch list for a potential long trade.  What we need to see, however, is confirmation that both the major S/R line in bold-dashed blue and the upper channel line in dashed-green will hold.  We also need to see a close above the hypotenuse of the triangle on convincing volume (seasonably adjusted.)  You can see on the chart that I've added the Fibonacci lines that mark the section from the triangle base to the 52-week high.  A reasonable price target for that upward break is the 76.4% extension at $55.78.  That line corresponds to a horizontal resistance level (not drawn) going back to that consolidation region from October to December 2015.

Throughout this period and into the beginning of 2017, it's important to keep the broader market in mind as well.  We're starting to see a bit of a pause in the strong uptrend that's characterized the market as a hold since the US elections in early November.  How the market will behave after the first of the year is anyone's guess at the moment.  A post-inauguration pullback - or even a correction - is likely, given the strong run that ended the year.  The point is, watch the broader market and be sure the broader market is moving in the right direction should COP breakout shortly.  A trade counter the broader market will likely fall short of price projections and could adversely effect our reward to risk positioning.  It's something to keep in mind as we watch for a break.

Happy Trading.

MOS Breaks Upward Out of Descending Triangle But Warning Signs Abound

We started tracking Mosaic Co. (NYSE:MOS) for a potential breakout on June 19th.  The stock finally pierced the pattern with an upward breakout yesterday (7/13) that continued with strength today.  You'll note from the chart that there were two other false starts (also upward) on June 7th and again on June 23rd.  Neither of them were a valid signal, however, since both immediately fell back into the pattern the following day.  Yesterday was the third penetration of the trend-line and, since there was strong follow-through today, this appears to be the valid break-out.

MOS Breaks Upward From Descending Triangle

Despite having followed this pattern for close to a month, I'm going to sit this one out.  There are some warning signs on the chart that suggest that there's possibly very little room to the upside.  Here's why:

• The standard "measure rule" in a descending triangle offers a profit target of the height of the triangle measured from the breakout point.  That would give us a target of $33.38 with a stop at $24.39 (just below the bottom of the pattern.)  Our entry would be $28.68, just above today's high.  Now, an aggressive trader could place a stop around $26.99, which lowers the risk, but when I count 6 unique touches of that bottom trend-line, I'd be concerned that a pullback would easily take out that aggressive stop. 
• That brings us to the reward vs risk ratio.  The conservative stop only gives us a ratio of 1.08:1. The aggressive stop is much better with a ratio of 2.76:1, however as I said, I'm very concerned about the probability of that stop being taken out prematurely.  The 1.08:1 ratio is a non-starter.  The number of winning trades needed at that level are much higher than even a professional trader can consistently achieve.
• The profit target assumes we hit 100% of the estimate.  That only occurs about 60% of the time, however, for a descending triangle breakout.  A more realistic target would be $31.17 which is the 61.8% Fibonacci extension of the height of the triangle.  That brings our ratio down to 0.57:1.  There's also a weak resistance line at that level based on the high of the triangle.  That increases the probability that we'd never hit the 100% estimate.
• Today's candle forms a double-top with an almost identical candle that formed June 23rd.  In both cases, the price stalled at the 23.6% Fibonacci extension.  A double top is a bearish pattern that, in this case, has a price target of $20.53.  That, coincidentally enough, meets the 61.8% Fibonacci extension of a downward breakout from the triangle.
• The real killer for this trade, however, is an extremely strong resistance line at $26.91.  That coincides with the 38.2% extension, and it's formed by a low on October 2, 2015, passes through the highs of the triangle pattern, and halted an advance on April 21, 2016 as well as June 7, 2016.  It's a very strong area of resistance and, in all likelihood, the current breakout will stall at that level.

We'll keep MOS on our watch list, despite the fact that we're not taking the trade that setup yesterday.  The reason is that, if it does reverse and fall back into the pattern, there's a much higher probability that it will penetrate the support line at the base of the triangle and then resume the down-trend that has plagued this stock in stages since early 2011.

The other potential short that we will watch for is a break back into the pattern.  At that point, if the market is similarly retracing, we can enter short and ride it at least to the bottom of the pattern, if not beyond.  The way the overall stock market is surging this week, however, we'd only enter that play if the market itself pulls back and begins a downward retrace.

Remember, always stalk your trade.  We're under no pressure to enter a position ahead of its time, and when we do commit capital we always want to do so when the odds are stacked in our favor.  The moment those odds turn against us, the smart play is to revert to cash.  When it comes to MOS, that's precisely what we will do.  Cash is a position, and in this case, we believe it's the right one.