Cup and Handle Breakout in KFRC with Flag Forming

All systems appear go-for-launch with KForce, Inc. (NASDAQ: KFRC,) the Tampa, FL based temporary and permanent placement agency that released very strong earnings and revenue numbers on Tuesday, 6 February.  While it took a couple of days for the good news to sink in, a vertical move over the last four trading days pushed the stock to a 2-year high and resulted in a breakout of a year-long cup and handle formation on confirming high volume.

Today's analysis will focus on the daily chart.

KFRC Daily Chart

The cup formation in the pattern started on 2 March 2017 with a failed test of a longer term high set on 8 February, just a month earlier.  The round-bottom cup formed over the remainder of 2017, tapering off into a consolidation pattern to end the year.  The handle represented a nice 12% decline off the right lip of the cup.  Of significance, however, is that volume throughout the entire development of the handle was well below the 50-period volume-EMA.  That's a major sign that the decline into correction territory was without conviction and wouldn't be sustainable.

Following the strong earnings release, we can see the 4-day vertical rise that may well be the development of a flagpole.  We'll watch this for the next couple of days to see if the flag or pennant actually does form.  The spinning top candle on Friday, appearing below the 50% mark for the day, suggests that it will.

A closer look at the handle itself shows that we attempted a breakout on 14 Feb, however we retreated to close precisely at the top of the right rim. The actual close occurred the next day, with a very strong bullish candle.  The spinning top on Friday, however, suggests a pause or pullback to, or slightly below, the breakout line.  Given the choice, a second thrust above the breakout level is the one we'd prefer to play.  Just remember that we're not always given that opportunity.

A closer look at the technical indicators shows a lot of confirmation around that handle breakout.  The RSI(9) broke a down-trending resistance line on that same day.  The MACD(5,34,5) confirmed with a bullish crossover.  The JDK RS Ratio continued an upturn above the 100 level, and JDK RS Momentum followed suit. (It's always a good sign when both the RS Ratio and the RS Momentum indicators are showing improvement above 100.)  Finally, the Relative Strength vs the S&P broke a down-trending resistance line as well.

Volume, as we mentioned, was extremely depressed through the handle formation but began its rise heading into the earnings release.  Breakout day and the day following the breakout experienced the highest volume of the entire formation, and the On Balance Volume indicator turned sharply upward to intersect a horizontal resistance level.

For a short-to-intermediate term trade, this is a long stock only.  There's nothing that we are tracking to suggest a potential short play, here. Our strategy now is to watch the next couple of days for either a flag or pennant to develop or, if that doesn't happen, to play a break above Friday's candle if there's a continued move upward on volume above the 50-day volume EMA.  We do expect a pullback before entry, but we also need to be prepared to go long if the pullback doesn't manifest.

The price target for the Cup and Handle will be $34.23.  If a flag develops, then the price target for that flag play will be $3.34 above the level of the breakout.  Either way, the play at the moment is long.

Happy Trading.

PHM Weekly Descending Triangle and Daily Bull Flag

Two seemingly contradictory signals are flashing on the daily and weekly charts for PulteGroup, Inc. (NYSE: PHM).  We'll start our analysis with the weekly chart, since that gives us a broader perspective on the intermediate term trend. 

PHM Weekly Chart

I had to step back to the monthly chart (not shown) in order to put this pattern into context, and it turns out that what we see on the weekly is, indeed, the start of what appears to be a five-wave impulse.  The first motive wave lasts about 18-months, ending in May, 2013.  What follows is at least a double flat correction.  Whether or not that turns into a triple remains to be seen.  For now, Wave-2 appears to be still in flight, although there are hints in the last two weeks that Wave-3 may have started.

The interesting pattern throughout Wave-2, however, is a descending triangle.  The number of touches on the top resistance line are significant, with six touches completing as of two weeks ago.  The support line is much weaker, although it, too, is well defined.  It's important to note that descending triangles break to the downside over 70% of the time, however a downside break in this case would be inconsistent with the Elliott Wave structure.  We'll have to watch that, since it may force us to reconsider our wave count.

I've also shown a diagonal support line coming out of the last Wave-A bottom.  Whether or not that support has teeth remains to be seen, but I show it just in case.  Notice, too, that OBV remains flat, although there have been signs of strong demand entering the scene in recent weeks.

PHM Daily Chart

That pattern that caught my eye, however, is evident on the daily chart.  Following a five-day upward thrust, a tight bull flag pattern formed the last week of January and continues through to the present.  Using 61.8% of the flagpole height as our price target, we have a potential upward breakout target of $23.32.  That'll give us a 3:1 reward to risk ratio, so it's worth further analyzing the chart.

We're seeing strength in the RSI(9) oscillator, especially as compared to the last major high on the chart.  The overall RSI has flashed a bullish divergence at least since the beginning of December.  The same is true for the OBV which shows an extremely strong rise coinciding with the flag pole development.  The demand signature for those five days is especially strong.

In fact, the only cautionary tale on the chart thus far is the bearish crossover in the MACD(5,34,5) indicator.  Watching the pattern, however, it's easy to predict that a breakout of the flag will coincide with a bullish crossover, and that's a signal for which we'll be watching.

Trading this stock is relatively straightforward.  It's a classic bull flag trade, so we'll go long on a breakout of the flag.  Our protective stop will be just below the flag, and our target is $23.32.  If we see a bullish crossover of the MACD prior to breakout, we'll take that signal and enter long at that point.  You can see on the chart that it's been a reliable signal for this stock, so it'll be worth the risk to play the potentially early entry.

The next earnings date isn't until April, and the next ex-dividend date is expected to be in March, so there's nothing artificial in the way of a trade.  We'll play this one as it develops.

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.

PLAY in Bull Flag After Earnings and Guidance Gap Up

Dave and Buster's Entertainment, Inc. (NASDAQ: PLAY) reported earnings on 6 December 2016 and continued a multi-year streak of better than expected EPS and revenue.  For Q3, they beat earnings by $0.11, and they beat on revenue by $11.96 million.  The restaurant and entertainment giant also increased their forward guidance for the fourth quarter, although they did caution in their earnings call that they expected their tremendous earnings growth to "normalize" in 2017.

The stock surged at the open on 7 December, gapping up by $6.50 and continuing the strong surge throughout the trading day.  Not surprisingly, volume was off the charts as demand for the stock soared.  Since then, PLAY traced a fairly tight bull flag that thus far has bottomed just above that 7 December open. 

PLAY Daily Chart

Volume throughout flag development continued to decline, and price is now gravitating towards the high of the flag trend-line.  Using just the pattern for guidance, the upward price target on a breakout is extremely attractive.  The 76.4% extension of the flagpole height would take us to $63.96 as measured from the current breakout point.

The current uptrend started with a breakout from a month long consolidation that formed right on top of the 200-day simple moving average.  The breakout was convincing on higher than average volume, and even the post-breakout consolidation had an upward trend to it.  The earnings gap appears to be a continuation gap, at this point. We've no evidence (yet) to suggest that it's an exhaustion gap, which means the bottom of the pattern on 7 December should roughly approximate the mid-point of the overall move.  That would certainly be possible if the current flag pattern is wave iv of a Wave 1 impulse.

Now, normally I don't look at fundamentals when analyzing a short-term trade, however given the size of the move being signaled it does appear to be prudent to see if it's practical.  Let's take a quick look at Morningstar's Industry Comparison for PLAY.  A few key ratios jump out at us:

• P/E is 28.0 compared to 25.6 for the industry.
• PLAY is trading at 5.6 times book compared to an industry average of 13.2 times book.
• Price per sales is comparable at 2.5 versus 2.4.
• Margins are a bit low compared to the industry, showing room to grow.

The challenge with PLAY is that they are fairly unique in the industry.  Their restaurants combine dining and entertainment in a game-room style setting that targets both children and adults.  Locations in malls that offer large Cineplex style theaters have no comparable competitors and have a fairly unique operating model that has a proven track record.

A price target of $63.96 would boost the P/E to 34.6.  That level is high, certainly, but is it unrealistic?  Dunkin Brands sits at 38.2, Domino's at 72.6, and Panera Bread at 35.1, yet none of those brands offer entertainment as well as dining.  Given the rate of growth PLAY continues to experience, even if "normalized" in 2017, that multiple will likely decline, continuing to make this an attractive stock.

CEO Steve King summed up the growth potential in his Q3 earnings call: "As a reminder, we are targeting 10% or more unit growth per year including combination of large and small store formats as we mentioned likely to be 12% to 13% next year. Our 2017 target is that 11 to 12 stores with that growth rate of 12% to 13% as in years past, you see entire spectrum of stores between 25,000 and 45,000 square feet and currently we have 23 signed leases and nine of those units under construction."

 The conclusion I reach is that the price target signaled by both the continuation gap and the flag pattern is indeed a realistic and achievable target.  For now, this appears to be a long only trade with little indication that there's a play to the short side.  What we will be watching for is a close above the flag pattern, at which point we'll enter long.  A protective stop will be the bottom of the flag channel, and we'll set the price target at $63.96.  As usual, we'll begin to tighten our stops at the 50% and 61.8% extensions since either of those could cause either consolidation or correction. Watch for the break of that flag, however, since we do want confirmation of the continuation gap.

Happy Trading.

Bull Flag in BX Above 50% Retracement

Blackstone Group, LP (NYSE: BX) broke above resistance and then penetrated the 50% Fibonacci retracement level on strong volume to end last week's trading.  Since then, the Financial asset management stock has consolidated into a traditional bull flag pattern, showing strength to the upside.

BX Daily Chart

What's encouraging about this flag is that it has formed above the strong resistance level marked by the August 2016 peaks.  The top of the flag is at the next resistance level on the chart, however as that will be part of any breakout from the flag, it's not an area with which we are concerned.

It's work noting the multiple bottoms that occurred in January, February, and July.  The flag now sits at the neckline of those bottoms.  The double bottom pattern that completed in October and November reached its target price in the current flagpole surge, and is partly responsible for the consolidation that's formed this flag pattern. 

The RSI(9) oscillator is confirming the bullish trend with a series of rising highs and rising lows that match the highs and lows on the price chart.  That, for the present, is signalling additional strength to the upside.  You'll recall that we primarily use the RSI(9) oscillator for divergence or confirmation patterns, although a cross of the 21 moving average (in red) is also a fairly reliable signal in itself.

What remains to be seen is if the volume pattern is indicative of climactic activity or if will confirm a resumption of the uptrend.  What we are watching for is a close above the flag pattern on high volume.  Our price target on a long position is such a setup is between 31.88 and 32.47, marking the 61.8% to 76.4% extensions of the flagpole.  The 61.8% level sits at another resistance line, so we do have to be cognizant of potential consolidation as price reaches that level.

The stock has a dividend yield of 5.70%, so the prospects of higher interest rates should not impact it for the foreseeable future.  Stocks with a yield closer to 2-3% will experience greater impact as they begin to compete with shorter term bonds that are seen as much safer instruments.

The next earnings announcement is before the open on 26 January 2017, which is well beyond the time frame for any swing trade we may open.  Likewise, we don't anticipate another dividend being recorded before the first week of February.

The single caution flag on the chart is a very strong area of resistance that is a convergence of a horizontal resistance line, the 61.8% retracement line, and the 23.6% extension line.  It's worth noting that the first day of the flag (after the pole top) hit resistance at precisely that location, and it retreated on very high volume.  Whether or not there's still significant supply at that level has yet to be tested, but we do need to be prepared for a swift exit if we stall there again.  A third test of that line may be the one that penetrates, but there's significant downside risk in the interim if we bounce off it on this attempt.  It would be better to exit at that point and wait for that third test before hopping in for the remainder of the ride.

Keep in mind that trading in general will begin to diminish next week, as traders begin to exit for the holidays.  Next Friday marks the start of Christmas weekend, and the holiday is celebrated on Monday the 26th.  Expect lighter than normal volume next Friday as traders turn it into a 4-day weekend. Once this stock triggers the setup, we'll look to be in the trade no more than four days, and want to be out of it before the close on Friday regardless.  The week between Christmas and New Years will be extremely light volume, and that poses a bit more risk to our trading style than we prefer.

Happy Trading.

AIG Draws Bull Flag In Mid-Elliott Wave 3

American International Group (NYSE: AIG) formed a strong bull flag pattern after tracing sub-wave (iv) in Elliot Wave (3).  The flag follows a 7.35 point surge in six trading sessions.

AIG Daily Chart

A selling climax marked the start of the last upward thrust and the subsequent six trading days that formed the flagpole saw a volume signature that confirms the move.  Since then, the stock has traded in a classic flag pattern on below-to-average volume.

The Elliott Wave count tells an interesting story, as well.  Both wave (1) and wave (3) are comprised of five distinct sub-waves.  Wave (2) was similarly comprised of a classic (a)-(b)-(c) corrective pattern.  Looking at the development of wave (3), we are now in sub-wave (iv), and (iv) completed an a-b-c sub-wave itself.  The next move could be a breakout of the flag pattern into sub-wave (v) to complete wave (3). 

The price target for the flag pattern is 69.51.  This is consistent with Elliott Wave projections of sub-wave (v) with our flag target hitting the 76.4% length of sub-wave (iii.)  Even more enticing is the fact that, once price breaks the top of the flagpole, there's no overhead resistance going back at least 18-months.

AIG reports earnings after the close on 9 February 2017, so there won't be any earnings concerns in our trade horizon.  Be aware, however, that the stock will trade ex-dividend on Tuesday, 6 December 2016.  The dividend is $0.32 and has a pay-date of 22 December.  Historically, dividends have not hurt the performance of the stock post-ex-dividend, however when planning your stops do be aware that 32 cents will be deducted from the stock's price at the open on Tuesday.

Also be aware that there are four news items coming in the next two weeks that may have market impact.  The first is this Sunday (4 December) when Italy votes on a major Constitutional Reform referendum.  Next up is the 8 December ECB (European Central Bank) meeting.  Then, on 14 December, the US FOMC meets and is widely expected to raise interest rates for the first time in 2016.  Amidst all of this financial news is a potential recount of the Presidential Election vote tally in three states.  While that is not likely to change the outcome of the election, it will likely dominate the news heading into the 13 December deadline for declaring each state's electors.  Be aware of the potential volatility any of these items can create.

Here's how we're trading this stock.

• Based on the chart, we do not foresee a trade to the short side.  That can certainly change, however it's not currently a consideration.
• If the stock closes above the flag, we will take a long position.  Our target will be 69.51 and our stop will be just below the flag pattern low.
• If we're still in the stock on 5 December and the pattern still supports maintaining a long position, then we'll take the dividend at the close.

Happy Trading.

BK Ends Sub-Wave (3) with Bull Flag

Bank of New York Mellon (NYSE: BK) rode the Financial Sector's post-election wave to a new high on November 15, surging to 47.96 on high volume.  In what has become a very familiar pattern in the week following the US Presidential Elections, a strong flagpole pattern emerged.  As with other stocks that we've reviewed this week, the subsequent trading sessions consolidated into a well-defined flag pattern.

BK Daily Chart

 The major uptrend for this financial sector giant started on February 11th, and it has traced a very distinctive Elliott Wave impulse pattern ever since.  Notice that Wave 1 encompassed a 5 sub-wave impulse that ended in June, 2016.  Wave 2 was a complex corrective wave, and retraced about 61.8% of Wave 1.  That corrective wave lasted for almost 4 1/2 months before Wave 3 kicked off on October 13. 

Based on our Elliott Wave analysis, Wave 3 has not yet completed.  Thus far, we've traced three complete sub-waves and are in the midst of sub-wave (iv).  There's still one more upward move coming in Wave 3, and that's the wave we hope to catch. 

Two price targets come into play to the upside.  First, we have a flag pattern that's been in play for over a week, and that target is 50.36 on an upward breakout.  (One caution to note, however, is that the time-duration of the flag is becoming troubling.  The proportion of flag to pole is very close to invalidating the pattern.  Keep an eye on this if it goes on much longer.)

The second pattern to consider is the Elliott Wave price target.  Thus far, Wave 3 has not yet reached the full length of Wave 1.  Typically, Wave 3 is the longest of the three impulse waves of the five wave set, although it doesn't have to be by rule.  The actual rule states that Wave 3 cannot be the shortest of waves 1, 3, and 5, but it doesn't have to be the longest of the three.  Based on that, we set our initial target to the actual length of Wave 1, recognizing that it's possible for Wave 3 to fall short of that without violating the rule.  For our flagpole target to be valid, in that case, we need wave 3 to rise 11.85 from the height of Wave 2.  A rise of only 10.45 is needed to satisfy that requirement.

Now, our current sub-wave is a bit of a problem since Wave (iii) falls just short of Wave (i).  That means that Wave (v) must be shorter than Wave (iii.)  Fortunately, the flagpole target is a full 2 points below that level, so a truncated Wave (v) will still be able to hit our price target.  Thus far, the pattern we're seeing appears valid on multiple counts.

Let's take a look at some other aspects of the chart to see what they're telling us.  Look, for instance, at the bullish channel that formed at through each of the waves as drawn in tan dotted lines.  The upper channel line, when extended out to the right, now intersects our flag pattern precisely where we're trading today.  That line may well form a support line if the stock breaks to the upside. 

The other interesting characteristics we see are the two spinning top candles that formed yesterday and today.  (We'll ignore the doji that formed on the day after Thanksgiving since it was a short, low volume trading day.)  The spinning tops indicate indecision in this context, meaning this stock can break in either direction. Volume has been consistent throughout the flag pattern, however.  We'll have to wait to see which direction the market decides to take this one, although the overall chart increases the probability of an upside break.

Here's how we're playing this one.

• If it breaks to the upside - meaning, it has closed above the flag pattern with confirming volume - we will go long, setting a price target of 50.36.  Our stop will initially be below the pattern low.
• We will trail our stop to reduce and then to eliminate risk.
• If the stock breaks to the downside, we will stay on the sidelines.  The pattern in general suggests high risk associated with a downside break, so we won't be looking to play a short on this one.

As always, watch the volume signature on a break to either side.  If volume does not confirm the pattern, wait for a pullback and a second break.  With all the attention the financial sector is receiving in the post election cycle, this stock has a high potential for false breakouts in either direction as the market makers attempt to shake loose the weaker hands.  Always watch for confirmation before entering the trade.

Happy Trading.

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.

CE Drawing Bull Flag Pattern On Daily Chart

Hot on the heels of an Acetic Acid price increase in China, Celanese Corporation (NYSE: CE) is drawing a distinctive bullish flag pattern on the daily chart.

CE Daily Chart

The announcement came on November 23, and signals a strengthening of economic conditions for the chemical giant in the Asian markets.  As the daily chart shows, the news came as no surprise to market insiders who had been pushing demand since the 11th.  That demand forms a distinctive 7-point flagpole on stronger than average volume.

More telling is the volume accompanying the flag itself.  Notice the lack of supply accompanying the minor declines in price into the 23.6% retracement level.  That level may serve as support for the flag, although there's a better support level hovering at the 61.8% retracement level.  From an Elliott wave perspective, there are two potential wave counts from the current pattern.  In the first situation, it's possible that a 5-wave impulse has completed and we're now into an "A" wave retracement, although the shallowness of the retracement currently rules out that interpretation. If it is, however,  then a 61.8% retracement would be the norm.  On the other hand, this could be an extended wave "1" formation, in which case we're in sub-wave "iv" of that impulse.  If that's the case, then a shallower retracement to 38.2% is more likely, and it's the one currently supported by the last week's candles.

Which count is correct, once the stock resumes an upward move, is irrelevant from the swing trade perspective.  Either way, the next wave will be an upward wave, and that's the wave on which we intend to capitalize.  What does matter, however, is the potential profit, and our initial analysis is focused on that bull flag.  The pole length is 7.15, and we'll use the 76.4% value (5.46) to estimate our profit from the breakout point.  Currently, that would be 84.06, although the longer the flag takes to break, the lower that target will be.  No matter, the profit potential remains the same.

Now, everything's not rosy on the daily chart.  Look at the last three major upthrusts on this chart.  All three of them have traced pretty much the same length, and all three have pretty much the same slope.  The prior two ended with a consolidation period that looks suspiciously like the consolidation we've seen in the last week.  Now, the reason we have cause to believe that this one may be different and may be the start of a new major bullish impulse is that the flagpole started with a breakout over a major resistance level formed by three separate peaks and a horizontal channel.  The pole also did so on very high volume, so there was a lot of institutional support for this surge.  The volume pattern implies this one is different.

The weekly chart, however, also urges caution.  Let's look at it.

CE Weekly Chart

The weekly chart completed a perfect A-B-C wave pattern in July 2012 before starting a slow but steady channel-bound rise to where we are today.  The cyclical nature of this stock is evident when you look at the overall pattern, and that's where we must exercise some caution. 

The base of the channel is clearly defined, and that represents the lowest level of support for long-term investors.  The upper bounds of the channel, however, are a bit more ambiguous.  The uppermost line connects the two highest spikes, and if our daily scenario plays out, that will likely be the upper resistance level that will constrain our trades.  The middle line represents the initial upper boundaries of the channel, and you can see that a breach of that boundary is quickly followed by a retreat.

Therein rests the concern.  We penetrated that boundary three weeks ago, and have remained above it - barely - for two weeks.  This warrants scrutiny.  If we are truly in the start of a new bullish impulse, then that line will become support.  If, however, the price retreats and stays below that line, then our play will be a short through to the bottom of the channel.

The weekly chart provides a long-term view of the trend, and also provides insight into strong support and resistance lines that will impact the daily chart.  In this case, the breakout above the three peaks that formed through 2015 and early 2016 is significant.  What has yet been seen, however, is if that breakout is a bull trap, if there will be a pullback to test that line, or if we're heading north without pause. 

So here's how we intend to play this:

• If we close above the bull flag on higher than average volume, then we will go long.  Our stop will be just below the low of the flag and we will adjust that stop daily to first reduce risk and then to eliminate it.  Our price target will be 5.46 above the flag top, wherever that happens to be when it's breached.
• If we close below the bull flag on higher than average volume, and the middle channel line on the weekly chart is breached, then we will go short.  Our stop will be just above the high of the flag, and our price target will be the bottom of the flagpole at 71.94.  Depending on volume patterns, we'll consider taking partial profits at the support line of 72.96.

Let the market decide which way it wants to run, and follow it.  As one famous options player puts it, "Don't anticipate; participate."

Happy Trading.