Wave-II Correction in Flight For CONE.

After publicly trading for just over a year, CyrusOne Inc. (NASDAQ: CONE) started a steady bullish motive wave that ended in mid-June, 2016.  The last four months of Wave-I were parabolic, with the slope of the rise at times approaching the vertical.  With Wave-I complete, a corrective set of waves ensued and apparently continue.

CONE Weekly Chart

The corrective wave off the high recorded five sub-waves down to what appears to be the end of Wave-A.  If that's the case, then Wave-B is in flight right now.  The retrace from the bottom of A, however, has already recovered 61.8% of the correction, so depending on the type of corrective pattern we experience, a reversal to Wave-C can occur at any time.  We'll pay close attention to the end of Wave-B since that level will determine how deep of a correction we will probably get in Wave-C.

It's important to note the strength of the support line running the entire length of the motive wave, up to and including the bottom of Wave-A.  That support line has the potential to mark the end of Wave-C, so we'll need to be cognizant of the candle patterns as we retest that line.

So knowing that we may be ending the upswing in Wave-B, let's take a look at the daily chart.

Cone Daily Chart

On the daily, it looks like Wave-A was an extended motive wave.  What's shaping up to Wave-B on the weekly chart, however, isn't quite playing by the rules having covered 5 sub-waves thus far.  Wave-B, by definition, is a three-wave pattern.  Now, this could rectify itself by creating a 5-3-3 or 5-3-5 pattern to the top of Wave-B, so let's see how it develops.

What stood out when analyzing the chart was the bullish channel that formed for the current wave.  Both support and resistance have held firm through the entire 5 sub-wave move, and over the last two days, price has bounced off resistance and headed south into the middle of the channel.  Today, it broke through the 10-day EMA, and it's fast approaching the 200-day SMA. It's also important to note that the two consecutive down days occurred as the Dow broke the 20,000 barrier for the first time.  Yesterday's down bar was on much higher than normal volume, too, causing the OBV indicator to hook down.  The trend in the OBV is still up, but that's an indicator that lags price by a significant margin.

The RSI(9) oscillator is the one shining light on the chart.  Compared to the overall pattern, the RSI is signalling a strong bullish divergence over the long term.  Of course, that may be a harbinger of the subsequent Wave-III move that will follow this correction.

As a short-term swing trader, here's how I plan to play this stock.  As long as the overall market trend is bullish, my only interest is playing this to the long side.  So with that in mind, we'll watch its behavior at the support line of the channel.  The channel is four-points wide, so if we get a good bullish candle at support and the market is still trending up, we'll play the long.  The stop will be just below the support line to create a good reward to risk ratio, and also to get us out of the trade immediately if the bounce is a head fake.

If the breakout is to the downside, however, we'll wait for a reversal.  Now, keep in mind the wave count, since the reversal could be part of the 5-3-3 or 5-3-5 completion pattern of Wave-B. We only want to trade in the direction of the market trend, so if possible, we'll try to catch each of the upward waves into the pattern. 

Longer term, it's really Wave-III that we want to catch.  That, however, could still be off into the far distance, based on the amount of time it took for Wave-A to run.  For now, let's play the short term patterns to the upside and enjoy the current strength in the overall market for as long as it lasts.

Happy Trading.

Complex Correction and Weekly Double Top In PPG

While a short-term bullish channel has emerged on the daily chart for PPG Industries, Inc. (NYSE: PPG), the weekly chart offers strong clues that the next move may be to the downside.  To better understand the configuration of the daily chart, we'll first start with the weekly.

PPG Weekly Chart

From an Elliott Wave perspective, a strong Wave-1 impulse ran from September 2011 through May 2015.  The end of that wave, in fact, was a 2:1 split that apparently took the wind out of investor's sails and triggered a wave of profit taking that resulted in a 38.2% retracement (so far) of the first wave. 

A Double Top pattern is in effect, although given the "W" shape, some may trade this more as a Double Bottom.  Personally, I use the subsequent action off the top of the "W" to determine if this is a top or bottom pattern, and in this case, the move is solidly to the downside.  Thus, I treat it as a Double Top.

Notice the rising neckline in this case.  That neckline - since it's rising - offers an aggressive entry on the weekly for intermediate term traders looking to play this pattern.  Price closed below that neckline, retraced back to it only to see the neckline hold as resistance, and is now poised to run lower.  That's a pretty decent entry point for a trade that may take several months to play out.  (That's longer than our horizon, but it's a region that many traders do play, so it's worth mentioning.)

There's currently a weak support line that the pattern is following.  Since the next Elliott Wave - a Wave-b - is expected to be to the upside, it's possible that this support line will hold for a time.  It's Wave-c that will likely take us to the price target of the double top, assuming that pattern follows its natural course.

The RSI is simply confirming the overall price action, volume is declining (indicating a breakout in either direction may be setting up) and On Balance Volume is flat, indicating an equilibrium.  So, for now, the weekly is telling us that we are still in a Wave-2 correction, we have a potential Double Top pattern in flight, and the next corrective wave we anticipate is a Wave-b to the short-term upside.  With that in mind, we'll look at the daily chart.

PPG Daily Chart

The dominant short-term feature - and in this case, by short-term we are referring to the trend that started in October 2016 - is a bullish channel that is 23.6% off the pattern low.  Since the pattern high to low on this time frame is Wave-a on the weekly chart, that retracement is noteworthy.  The Wave-b pattern is expected to be to the upside, and there's a very attractive target for that wave around the 61.8% level.  The resistance line for this bullish channel is rapidly approaching that level as well.

Today's candle is an extremely bullish one in this time frame.  It's a hammer that bounced off the lower support line on high volume.  That's a major sign of price rejection and an indication - at least in the short term - that there are a significant number of buyers entering the market along that support level.  It helps that today's low was at the convergence of three separate support lines.  The first is the bull channel that runs from October, the second is the horizontal support line that crosses three separate patterns, and the third is a downward sloping support line that extends back to May 2016 and served as support on multiple occasions since then.  Since each of those lines would generate interest and their associated stop and limit orders, it's no wonder today's volume was higher than usual.

The RSI(9) offers little help on the daily.  It's confirming price action, but that's about it.  There are no signs of a divergence that may help us understand where price is heading.  On Balance Volume is oscillating without clear direction, as well.  It's well off its lows, however it may be hooking back down again, showing signs of distribution.

So how are we playing this stock?  Well, in the short term, we're looking to ride that potential Wave-b, and today's hammer off support on high volume offers a signal we're willing to take.  We'll place a buy stop just above today's high, and we'll place a protective stop just below the channel.  Our price target will be the lower purple resistance line that marks the inner boundary of the resistance channel.

Now, the wave we ultimately want to catch is that Wave-c that could complete the Double Top pattern.  As we approach our price target for Wave-b, we'll start watching for signs of a reversal and attempt to enter short as Wave-c gets underway.  The overall Elliott Wave pattern on the weekly will give us clues as to the distance that wave could travel, and since Wave-c is typically a 5-wave impulse in itself, there should be multiple swing trades on which we may capitalize, even if we miss the first downward thrust.

Happy Trading.

CXO in Bull Channel But Weakness Abounds

With oil rebounding off the major lows that characterized 2015, the exploration and drilling industry began to recover in early 2016 and enjoyed a slow but steady uptrend  for much of the year.  One such exploration company that continues to trade in a bullish channel is Concho Resources, Inc. (NYSE: CXO).  Concho's area of focus is the Permian Basin in West Texas and Southeast New Mexico, a region that should benefit from any relaxation of environmental controls that currently add pressures to the bottom line and inhibit growth in the industry as a whole.

Overall, the industry experienced a rapid price appreciation in the first half of last year, however, that positive rate of change diminished as oil prices stabilized later in the year.  The result, especially in the case of Concho Resources, is an oscillating price pattern in a bullish channel at a gradual but healthy slope.

CXO Daily Chart

There are warning signs, however, that the channel's strength may be waning.  For all of 2017, price was riding the support line of the channel.  The various bullish candles in the last couple of weeks are starting to look more and more like testing patterns leading into a distribution phase and subsequent downtrend.

On Balance Volume turned down off the highs and continues to slope down.  This is another indication that demand has waned and supply is starting to enter the equation.  Finally, the RSI(9) Oscillator transitioned from a bullish divergence (shown in black trend lines) to a bearish divergence (shown in red trend lines.)  The daily picture cautions that the uptrend may be weakening to the point of breaking to the downside.  If so, expect those two green support lines in the channel to quickly transition into resistance lines.

The weekly chart does nothing to change our view that the trend is on the cusp of change.

CXO Weekly Chart

As we might expect based on the overall pressures in the energy sector, CXO spent the last several years in a long-term correction.  The monthly chart suggests the correction may have ended in January, 2016, but we don't yet have sufficient evidence to reach that conclusion.

Starting with that late January 2016 low, a 5-wave impulse pattern ran its natural course, ending in early December, 2016.  Notice that Wave 5 was an extended wave that included two deep corrections.  The pattern now is in Wave-A of the corrective pattern coming off that 5-wave impulse.  Now, if this is a new impulse on the monthly chart, then that Wave-5 top is also Wave-I on the higher order, however we cannot yet state that as fact.

Just like the daily chart, the weekly uptrend formed a bullish channel that continues to hold price along the support line.  Weakness in the recent pattern coupled with the completion of Wave-A strongly cautions us that the channel could be broken to the downside.

Long-term traders will notice the double top pattern that set up with the Wave-5 completion.  Now, this pattern has yet to confirm since that requires a break of the neckline.  I draw that neckline as being horizontal from the first low, however be aware that there are other possible interpretations that would lower that neckline by at least 5-points.

The next warning sign comes from the RSI(9) oscillator.  A bearish divergence started to manifest with the completion of Wave-3.i.  Since then, the RSI showed continued weakness while the price action experienced a series of higher highs and higher lows.  This weakness would be consistent with the corrective wave pattern we anticipate following the Wave-5 top.

Finally, OBV is flattening and may actually be starting to hook down.  The bearishness of this volume indicator is more prominent on the daily chart, but even here on the weekly we're seeing evidence that distribution may be entering the scene.

This brings us to our view on how we may be playing this setup.  Given all the weakness, I'm hard-pressed to consider a long position, despite the positioning of price on the support line in a bullish channel.  That would change, of course, if we see a strong bullish candle with confirming volume, however that's not the move we expect from this position.  Rather, we're watching for a break of the support line to the downside on confirming volume.  If we get that break, we'll look to enter short on a retest and rejection of that former support line as it transitions into resistance.

We will also be watching for the development of the A-B-C corrective wave.  Wave-A looks to be in progress, so the retrace for Wave-B should give us a clue as to the type corrective pattern this will be and will tell us how to play Wave-C.  It's that Wave-C move that we'd really like to catch if we can read the entry in time.  Watch for that signal since an entry in the area around $145 could move close to 20-points on the downside if the pattern follows a traditional zig-zag correction.

Happy Trading.

Honeywell Showing Strength In Tight Bullish Channel

The second and third quarters of 2016 were not kind to Honeywell (NYSE: HON).  The stock spent much of those two quarters in a horizontal pattern before an 8-point gap wiped out nearly 50% of the entire year's gains.  That drop was very short-lived, however, and anyone that went long on the bounce off long-term support two-days later were well rewarded.  A tight bullish channel paved the way for the remainder of 2016 and into 2017, while Honeywell reclaimed all of the territory lost in early October.

HON Daily Chart

To be sure, the election of a potentially hawkish and definitely business-friendly US president helped this stock.  The selection of a "tough talk" Secretary of Defense helped as well, giving a solid boost to the prospects for Honeywell's defense contracts.  With this backdrop, CFO Tom Szlosek helped the company's cause in mid-December, promising very strong cost-cutting measures and projected a very rosy outlook for growth in segments not related to Defense. 

There's very little indication that the climb is being exhausted.  Volume continues to be consistent, and On Balance Volume shows an extremely strong upward slope that is indicative of accumulation.  The RSI(9) Oscillator on the daily is confirming the overall price action, and the Oscillator is nowhere near its extremes to the high side. 

From an Elliott Wave perspective, the stock is in a Wave-(iv) sub-wave at the moment, and there's at least one more major impulse wave to go in the short-term pattern before we reach the top of Wave-3 on the weekly and monthly charts. 

HON Weekly Chart

The strong bullish channel pattern is evident on the weekly chart as well, and that pattern has been in play since October 2011.  The highest order Elliot Waves were determined from an analysis of the monthly chart and are shown in bold black here.  Now, multiple conflicting wave counts are possible, especially as we hit mid-2016, however in any of those counts the wave evidence suggests more room to the upside.

It's important to note the bearish divergence in the RSI(9) on the weekly chart, and we're seeing a downward trend in volume as well.  On Balance Volume on the weekly continues to rise, however so for now it appears demand remains strong.  The slope of the SMA(200) is very healthy and has been consistent since mid-2012.

The trade we see on this chart is to the long side.  With a stop just below the channel support line, I'd prefer to catch a pullback to either the EMA(10) or to that trend line, however I'm willing to enter long from here if I see a sign of strength coming off the open.  While there's a bit of resistance at $120, it's extremely week and not likely to hold once the next impulse starts.  That's a wave we'll try to catch early.

Happy Trading.

MCHP At Bottom of Bull Channel But Chart Signals Caution

Another stock that appeared on our bull channel scans this weekend is Microchip Technology, Inc. (NASDAQ: MCHP).  Unlike the stock we reviewed yesterday, MCHP is sitting at support, which is where we'd like to setup a long entry.  There are some warning signs on the chart, however, that tell us this may not be the right move quite yet. 

MCHP Daily Chart

We started with the monthly chart to get the overall trend for our Elliott Wave count.  Most of it is reflected on the weekly chart that we'll display shortly, and you can see on our daily chart that the longer term Wave-5 ended on 30 November.  That coincided with a lengthy move that rode the top of the channel for about three weeks.

There are a few things that concern me on this chart from a channel trade perspective.  First, that move down from Wave-5 was a major change of character.  That's the longest bar we can find on the daily, and on the weekly the bar rivals the single-week plummet off the top of Wave-3.  Volume was definitely convincing as well.

The retest of that high was on better than average volume, however it was immediately followed by a failure on near-equal volume.  The return to the bottom of the channel was on higher than average volume (on the down days) but the bounce off the channel bottom was on about half the average volume.  That's not the type volume pattern we want to see before entering a long position.  To feel comfortable with that long entry, we need the upward volume on the bounce to be higher than average, not lower by such a large amount.

The Elliott Wave count is also troubling.  On the daily chart, since the end of Wave-5, at least two corrective subwaves have completed.  The setup is for an a-b-c flat correction, however we can't be certain Wave-c has completed.  In fact, from the top of Wave-b, we can draw four viable sub-waves, which suggests there's one more sub-wave to the downside yet to come.  That will likely complete the flat correction, and the bottom of Wave-A.c would be near the lower channel marker. 

On the higher order, this is just Wave-A of the correction, so the next move should be up from there.  Assuming the volume signature agrees, that's the point where we'd like to enter long.  The strong bearish divergence in the RSI(9) Oscillator adds to our conviction that a long entry would be premature at this time.

Nothing on the weekly chart refutes our interpretation:

MCHP Weekly Chart

Something that does jump out at us on the weekly chart is that this stock really likes to trend sideways for long periods of time between impulse waves.  Both Wave-2 and Wave-4 were diagonal corrections and each lasted for a good 18-months.  What this means is that our post Wave-5 correction may well be a complex correction that drags out through all of 2017.  That's not necessarily a bad thing if it chooses to follow the same corrective pattern as the two prior sideways moves.  Just look at the very lucrative swing trades that setup in those two diagonals.

Notice the bearish divergence in the RSI coming off sub-wave-iii. That adds greater strength to the bearish divergence we see on the daily chart.  Also notice the decreasing volume coming off the top of Wave-5 and that subsequent one-day plunge.  That the last weekly bar was down on volume approaching the average tells us there's still more weakness ahead.

This is a stock for our long-term watch list.  We'll be watching the volume signature on the daily to determine if a long entry is viable as we approach the bottom of the channel.  We'll also watch for signs that the stock is entering another lengthy consolidation period, and if so, we'll look for multiple swing trade positions as the pattern develops.  Let's not be hasty with this one.  It has excellent potential if we give it a chance to develop in its own due course.

Happy Trading.

Autodesk Trading in a Bullish Channel on Daily Chart

Channels, especially if they are channels trending in the same direction as the overall market, can be extremely lucrative for the swing trader.  An aggressive swing trader can play the stock in both directions as it bounces off the extremes of the channel.  A conservative swing trader can enter in the direction of the broader market when the stock touches the boundary most suited for that directional play. 

It's important to remember that, for channel plays, you only want to go long in an area of support and you only want to go short in an area of resistance.  Entering a channel trade outside of those extremes (either within the boundaries of the channel or on a pierce of the extremes) is tantamount to gambling, and that's not a game we like to play with our hard earned capital.

One stock that is trading in a bullish channel right now is Autodesk, Inc. (NASDAQ: ADSK). We'll look first at the daily chart since that's where the pattern first caught our attention.

ADSK Daily Chart

The channel is well defined, as you can see, with at least three touches on both the top and bottom.  The height of the channel at its innermost limits is about 8 points, so there's a very healthy spread there.  The support and resistance zones are about 2 1/2 points wide, so our reward to risk ratio is at least 2 1/2 to 1 assuming we enter at the inner limit and place a stop just outside the outer limit. 

The 200-day moving average is trending up and price is above the moving average, so we're looking at this as primarily a long play.  On this type of trade I tend to be a bit aggressive, so I'd be willing to play the short side as well, but that's really a matter of style and preference.

Now, this is a watch list stock right now, not an immediate setup.  For a long trade, we went to enter in the zone between the green diagonal support areas.  We've missed that point and we're not going to chase any stocks.  For a short entry, we want to enter in the zone between the red diagonal resistance areas. 

The daily chart does offer two warning flags.  First, there's a bearish divergence building in the RSI(9) oscillator.  This uptrend is weakening and may not have much more to offer on the upside.  This strengthens our desire to play a short if we hit that resistance zone.  Second, the last thrust to the top of the resistance zone looks suspiciously like climactic activity.  We can see that demand is weakening in the last couple of up bars.  Again, it's a strong argument for a short if we retest that resistance zone.

Let's zoom out a bit and look at this stock from a longer-term perspective.  The weekly chart was a bit chaotic and did little to offer clarity, so instead we went out to the monthly chart.  That pattern was crystal clear as you'll see here.

ADSK Monthly Chart

There are two possible Elliott Wave counts here, and I've shown the count that makes the most sense to me.  It doesn't matter which is correct, however, since in both counts Waves 3, 4, and 5 are the same.  We land in the same place, and for the purposes of understanding our daily chart, that's all we really need to know.

What has developed into our channel on the daily chart actually starts at the bottom of wave-ii on the monthly chart.  That monthly spinning top in December 2016 may have been the final gasp of Wave-v, although we won't know that until the January 2017 candle completes.  It's a warning sign, though, that we may be nearing the end of this long-term uptrend.

The RSI(9) oscillator on the monthly chart is also urging caution.  While it's subtle, there is a bearish divergence along the highs.  Despite that huge Wave-5 spike as compared to Wave-3, the RSI barely peaked above the 70 line.  So the pattern is definitely displaying weakness.

Volume, on the other hand, is still extremely bullish on the monthly.  We'll have to see how this month's volume signature forms, but there's a crystal clear upward trend in demand through the last couple of quarters.

The bottom line is we'll add this one to our watchlist.  If we retest support, we'll review the RSI, volume, and candle patterns to determine if a long entry is warranted.  Remember, we'll only enter long in that support area.  Likewise, if we retest resistance, we'll review the overall signature to determine if a short is warranted.  Based on what we can see on both the daily and monthly right now, it looks like a short at that level will be a good play, but that could be a week or more into the future, so let's see what develops.

Remember, never chase a stock in a channel play.  Enter long at support and enter short at resistance, but never in between.  We always want the probabilities and the reward to risk ratio in our favor, and that only occurs within those two narrow zones.  Be patient, and let the stock come to you.  Never chase it.

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.