MGM Near Rounded Bottom Breakout

MGM Resorts International (NYSE: MGM) formed the left lip of a rounded bottom pattern the week of 3 March 2014.  From there, the pattern developed with near perfection, including a classic bump mid-way through the pattern that would have been an ideal swing trade opportunity had this stock been on our radar at the time.  The right lip of the pattern formed the week of 21 November 2016, and the consolidation period that is still running is typical of this type of formation.

MGM Weekly Chart

Price was rising steadily into the pattern in 2014, as is typical 62% of the time.  The horizontal consolidation we are currently experiencing will mark our entry, should this stock break to the upside as is expected.  More on that when we analyze the daily chart, however.

To get a price target for the pattern, we'll take the low of the pattern from the height of the left rim and then use the 61.8% extension measured from our right rim breakout point.  That gives us a potential target of $36.87 and a nice 3:1 reward:risk ratio.

MGM Daily Chart

The daily chart offers additional evidence of the potential move.  From the pattern low in February 2016, coinciding with the bottom of the "bump" on the weekly pattern, the upward impulse pattern has drawn at least 3 full waves, with wave 4 either in progress or having just completed.  It's wave-5 that we intend to ride for this trade.  The price target obtained on the weekly is within range of a wave-5 target and, in fact, falls about a point shy of that target.  So we can stick with it as a decent measure.

The consolidation that appeared on the weekly forms a tight channel with a slightly downward bias on the daily.  It has numerous touches both top and bottom, making it an extremely reliable formation.  Notice, too, the diagonal trend-line that extends up from the bottom of Wave-2.  We traded briefly below that trend-line, but with today's close, price is once again above it.  We don't yet know if that line will be significant, but with at least four touches, we can't ignore it.

We'll be playing this stock as a traditional breakout, albeit from a rounded bottom.  Our entry will be long on a close above the current channel.  The protective stop will be just below the support line of the channel, and our price target will be $36.87.

The only caution is that earnings are reported before the open on 16 February.  Per our trading plan, we cannot enter a position this close to an earnings date, so we'll have to wait until Friday for an entry, assuming price hasn't outrun us by then.  It's entirely possible, though, that earning could be the catalyst for the move, so be ready to play it after the turbulence that typically marks an earnings day.

Happy Trading.

LPX In Tight Horizontal Channel

One glance at the monthly chart for Louisiana-Pacific Corp. (NYSE: LPX) reveals a chart that has been in a corrective state for virtually its entire trading history.  The small-cap building products manufacturer is gradually improving its balance sheet while also growing market share for its SmartSide product family - a realistic-looking wood-grain siding alternative that purports to be lighter and more durable than other traditional artificial siding products.  This has not been enough to garner interest capable of pushing the stock into a typical 5-wave impulse, however, and as a result, it continues to oscillate in an endless corrective wave cycle.

LPX Weekly Chart

The weekly chart shows a lengthy up sloping channel that is showing no signs of ending its nearly two-year run.  Volume is starting to diminish, however, which does not bode well for any attempt to mount an upward surge.  It takes demand to drive a stock higher, and thus far, we're not seeing much of it.

On Balance Volume on the weekly remains flat, and there's no hint of a divergence either way in the RSI.  Thanks to the undulating nature of the channel, the MACD(5,34,5) has been a rather decent indicator of the turning points, however, so we'll certainly keep an eye on that going forward.

LPX Daily Chart

Now, it's the daily chart that caught my attention in the first place.  The higher lows starting in February, 2016 do form a good support channel, and we note that on the chart, however it's the very tight horizontal channel that formed in December that most interests us.  Just look at the number of three and four day swing trades that channel has produced since the channel formed.

Interestingly, the MACD appears to be providing a very consistent signal for directional shifts going back at least to the November time frame.  Until that changes, we'll continue to take our cues accordingly. 

Where we expect some deviation in the pattern is where we see the diagonal support line now intersecting our channel.  This suggests that our horizontal channel may turn into an ascending triangle.  If that happens, of course, we'll need to watch for a breakout play to either side.  Currently, the intermediate trend is up - and an ascending triangle tends to break to the upside - but that could easily change on a whim.

LPX reports earnings before the open tomorrow, so we'll need to watch what those earnings do to our pattern.  Consensus estimates are for $0.19 EPS and $539.90 Million in revenue for the quarter.  Annual estimates are for $0.84 EPS and $2.26 Billion in revenue.  The pattern for this stock over the past year, though, has been for price to form a spinning top on earnings day, but not do much of anything else.  We'll see what tomorrow brings.

How we trade this stock will depend on the pattern that emerges post-earnings.  Until we see evidence that the MACD is no longer reliable, our trades will be long on a bullish crossover and short on a bearish crossover.  Our exit strategy will be to trail a stop $.05 below the low each day and ride it until stopped out.  Our protective stop will be set to just above or just below the signal candle depending on whether we are taking a long or a short position. 

If the ascending triangle does form, of course, we'll change strategies to a triangle breakout and play that accordingly.  Until then, let's enjoy the oscillation this stock is currently providing.

Happy Trading.

NI Forms Horizontal Wave-B Channel

Frequently, the first major warning sign of an impending breakdown in a specific stock comes from the volume signature, to see the full picture we typically need to step back to either the weekly or the monthly chart.  Often the daily noise masks what's really occurring and only on the longer time frame charts will it clearly manifest.  That is certainly the case for Nisource, Inc. (NYSE: NI).

NI Monthly Chart

Looking first at the monthly, we see a very strong 5-wave impulse leading to a Wave-I top in July 2016.  Traders watching the volume patterns, though, were warned of the impending top as early as September, 2015.  Any interest at all in the stock fell off the cliff right at the end of Wave-4, and it's been flat ever since.  This will become even more evident when we examine the weekly chart, but for now, just be aware that the first warning signs started there.

The RSI(9) suggests that the decline is not yet over.  When we compare the price lows of Wave-A and Wave-4 with the corresponding RSI level, we see a distinct bearish divergence.  This strongly suggests that the correction currently in flight will have a relatively lengthy run.  The MACD(5,34.5) would agree, having rolled over into a bearish crossover just after the Wave-5 top.  The shape of that crossover is one that suggests it has a lengthy run ahead of it.

NI Weekly Chart

We'll turn now to the weekly chart.  You can see change in volume signature here, as well, and you can also get a much better feel for just how long that disinterest has persisted.  The entire 5th wave was accompanied by lackluster volume.  Encouragingly, though, the subsequent correction is also generating very little interest. 

The bearish divergence in the RSI is evident on the weekly chart as well, again confirming the conclusion that the correction has a ways to go.  Of interest, however, is the bullish crossover in the MACD.  That's a good indication that Wave-A did end where we suspected, and that we're now into the Wave-B pullback.  The MACD has been a good indication of major wave initiation, so watch for a bearish crossover to signal the start of Wave-C.

The bottom of Wave-A retraced 50% of Wave-5, so it's likely that Wave-C will take us at least to the 61.8% level or lower.  That 61.8% line sits just above a good support line that marks the Wave-i top, so we'll be watching for signs of a MACD bullish crossover around that level.  Of course, we won't know at the time if that's a Wave-III start or a Wave-X start, but either way it will be a tradeable up-wave.

NI Daily Chart

We come at last to the daily chart.  When this first popped up on our scans, this weekend, it looked like it had potential for an imminent trade setup.  Our analysis, however, shows that not to be the case.  The Elliott Wave count is both consistent and defensible.  I did wonder if the lengthy channel we're not exploring could be a wave iv in the current Wave-A, but I really can't find a legitimate count that would produce that result.  So the conclusion I do reach is that Wave-A ended in November and we're well into a flat Wave-B corrective pattern.

The next major direction we can anticipate is a Wave-C move that should be to the down side.  I hesitate playing anything to the upside in this stock unless we see a sudden change in the volume signature that would indicate demand is once again coming into dominance.  What I'm watching is the intersection of the current channel with that diagonal resistance line.  There will be some downward pressure as we approach that convergence, but until then, there's nothing setting up that draws our interest.  We need Wave-C to initiate to find a good reward to risk play, so we'll exercise patience and await that development.

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.

Aflac in Coiled Spring At End of Wave 2

The daily chart for Aflac, Inc. (NYSE: AFL) is a treasure trove of chart patterns, each converging to signal that a major move may be imminent.  Do you trade double bottoms?  We've got you covered.  How about channels?  Yes, we have that, too.  Want a descending triangle?  That's on the chart.  How about an ascending triangle?  That shows up on the weekly chart. Do you trade Elliott Wave patterns?  How does the end of a wave-2 move on the daily coupled with a wave 3 of 3 move on the weekly and monthly sound? 

Let's start with the broad view and take a look at the monthly chart. 

AFL Monthly Chart

The long-term impulse wave for Aflac started in 1991.  The Wave-1 rise was steady and included a 2:1 stock split in early 2001, just before the 9/11 market adjustment.  Wave-1 ended at the onset of the 2008 financial crisis.  Along with banks, the insurance industry was crushed in that major economic downturn, and AFL retraced nearly 80% of Wave-1 before it ended.  Wave 2 was a running correction and Wave-3 appears to be in flight.  This sub-divided wave is now showing signs that it's in Wave (iii) of Wave iii of Wave-3.  That's about as lucrative a Wave-3 entry that you can find.  With the monthly pullback to the 10-period EMA, there's nothing negative at all appearing in the long-term trend.

AFL Weekly Chart

The Wave (iii) of iii of 3 configuration is well defined on the weekly chart.  Adding to the strength of that signal is the diagonal support line extending from the low of August 2015.  That support line has several touches, including three in the last six weeks. 

Notice that the weekly chart formed an ascending triangle pattern with price currently resting on the hypotenuse (support) of that triangle.  This line is also just above a horizontal support line that pivoted from resistance off the Wave-i peak in October 2013.  That support line was tested at least four times and price bounced off it on each occasion.  From an intermediate (weekly) to long-term (monthly) perspective, the signals are looking strong for a bullish impulse.

AFL Daily Chart

This brings us to the heart of the matter on the daily chart.  We'll start with the double bottom that formed on 1 November 2016 and 2 December 2016.  The price target for that pattern is $77.79 (61.8% of the height of the pattern added to the neckline.)  Price is trading sideways above the bottom of the pattern, but it has not closed below the pattern so it is still a valid double bottom. Note, however, that it has yet to close above the neckline, so by definition, the pattern has not yet been confirmed. 

The volume pattern at the second bottom - which is an eve bottom - strongly suggests climactic selling.  One relationship we always compare is the range of the price bar compared to the size of the volume bar.  We can see significant supply pushing the price to that second volume, but then we have an extremely narrow range bar on extremely high volume.  Supply is being exhausted.  Then we have a hammer pattern on 9 December with the second highest volume bar of the year.  That was a sign that major demand entered the scene as priced reached the bottom support line. 

What stands out in the short term is the rising volume we're starting to experience while price continues to trade horizontally.  A narrow channel formed starting with a long wick on 14 December, and this pattern now appears to be a coiled spring ready to explode in either direction.  The green support area forms a descending triangle when paired with the diagonal resistance line shown in purple, so price truly could break in either direction.  The Elliott Wave counts show a higher probability that the break will be to the upside, but it's always important to remember that this only shows us probabilities, not certainties. 

We intend to play this current setup to the long side.  What we are looking for is a strong bullish candle that closes above the horizontal channel resistance line on confirming volume.  Our stop will be just below the lower green support line.  A break of that line not only invalidates our entry, but it also invalidates the Elliott Wave count on the weekly and monthly charts.  So if we break that barrier, we definitely need to exit and reassess the pattern.

Because this is a Wave (iii) of iii of 3, we're not going to set a fixed price target.  Rather, we'll want to ride this one as long as we can, gradually moving our protective stops up as each of the sub-waves form.  We'll only want to be stopped out of this one when Wave-4 finally forms.  The Elliott Wave targets, both for the primary wave and the sub-waves, show a minimum target of $87.70 which will be a nice 17-point move from our current position.  Compared to the 3.50 point risk we're assuming with our protective stop, that's a solid 4.85:1 reward to risk ratio.  We'll take that trade.

Happy Trading.

Channels and Triangles Typify GT on Daily and Weekly

When a corrective pattern in a single stock nears the end of its second decade, one may be forced to conclude that it's no longer a correction but rather the "new normal" for that issue's behavior.  Such is the case with the well-known US tire manufacturer Goodyear Tire and Rubber Company (NASDAQ: GT).  When you step back far enough to view the stock on a monthly chart (not shown in this article,) we see a distinctive long-term double top pattern formed at the all-time highs between May 1993 and March 1998.  The neckline was breached in December 1999, and the target met in February 2003.  Since then, the stock has wandered aimlessly, mostly sideways, only occasionally showing signs that it may attempt to initiate a new impulse wave.  Such attempts are short-lived and price action quickly returns to the lower levels reached in the correction. 

For long-term position traders, there's not much to hold any attention.  Even the 1.3% dividend yield will quickly lose any remaining luster as the Fed continues to raise interest rates.  As a buy-and-hold investment, there are certainly more lucrative income stocks, and the long term investor would be better off with the US Treasury's 10-year bond which is paying nearly double what GT is offering and holds none of the risk associated with the equity giant.

Turning our attention to the weekly chart, however, we start to see some decent potential for the short to intermediate term trader.

GT Weekly Chart

What stands out on the weekly is that two-year long horizontal channel that formed with enough touches of both support and resistance to make it a very strong multi-directional setup.  Given the other signals on the chart, however, this is one we'd prefer to play to the long side.  Since we want to enter long on support, there are multiple trend lines to which we will look for a strong reversal signal.  We're sitting on one of those support lines right now, so a reversal here would be a permissible long entry. 

Notice the orange channel that has appeared in the short term.  That orange support line is a better entry point if price retraces and reverses at that level.  Better still are any of the green lines since they have much greater strength are would offer much better protective stops.  The best entry, if we retrace far enough is that horizontal green line that marks the bottom of the channel.  So if you're a longer term trader with a horizon in the two to three month range, this is your chart and there are numerous possible entry levels depending on your risk tolerance.

I prefer to trade on the daily chart, however, and prefer a horizon that is much shorter, measured in days, not weeks, so let's see what the daily is telling us.

GT Daily Chart

The technical screen that called attention to this chart identifies ascending triangles, and I show that triangle with the bold red resistance and bold green support lines.  Both extremes mark excellent entries for a play in the opposite direction, and on a breach (i.e. a close above resistance or below support on high volume) they make excellent entry points for breakout plays.  As long as volume confirms the move, I wouldn't hesitate to take either, although the protective stop needs to account for the likelihood of a pullback and retest of the line.

Of interest at the moment is the short-term Elliott Wave count.  That the long-term pattern is corrective is largely irrelevant at the moment.  We can see that a 5-wave impulse pattern started at the diagonal support line of the triangle, and it culminated at the horizontal resistance line that marks the top of the triangle.  After bouncing off resistance, an A-B-C zig-zag correction ensued, and may have completed.

Notice the diagonal support line marked in purple.  That line has served as a pivot since May 2016 and has numerous valid touches, including two in the current Wave-c pattern.  A bullish reversal on volume at this point will be a good entry with a price target near the horizontal red resistance line.

The potential for Wave-c to continue further, however, is equally significant.  There is an orange channel drawn, and the support line in that channel originates at the October high.  It's a moderately strong support line, and it intersects the green support line of the triangle on 30 January.  We would not be surprised if that's where the price trends since that's only six trading days distant.  That point would be our ideal entry point for a long position if it manifests.

With no divergence showing on the RSI(9) and On Balance Volume still drifting gradually lower, we see that continued decline into stronger support as a highly probable move. GT reports earnings before the open on 7 February, but it trades ex-dividend on 30 January.  Since we have no short setups appearing on the chart prior to then, I'm not concerned about the dividend.  Just remember that the opening price will be adjusted down by $0.10 on that date.  You don't want to be artificially stopped or entered because of the dividend adjustment.

The way we'll play this is relatively simple.  From where the stock currently sits, we only see a long setup for now.  We'll enter long on a strong bullish reversal with confirming volume.  We'll set our price target at the red horizontal resistance line.  Our protective stop will be just below the lower dotted green support line. We'll look to raise that stop to just below the purple line as soon as we see a move that confirms the upward direction.  Be aware of the orange channel line, but don't stress over it.  A strong impulse wave may pause at that line, but it's not likely to reverse there.  Whether or not we take a short position at resistance or on a breach of support will depend on what the overall price and volume patterns look like at that time.  For now, we'll just concentrate on the next move, and we currently see that as a long position.

Happy Trading.

GILD in Horizontal Channel and Longer Term Descending Triangle

A 50% retracement correction on the weekly chart of Gilead Sciences, Inc (NASDAQ: GILD) has settled into a horizontal channel and a longer term descending triangle pattern on the daily chart. Now, the biotech industry is one in which I always elevate my risk assessment since it can be so volatile on a moment's notice.  The industry as a whole is heavily dependent upon the success of individual products in its R&D pipeline and a single disappointment (or success) can dramatically move the stock without warning.  When a pattern such as we see in GILD emerges, however, it's extremely difficult to resist taking the bait since the potential reward far outweighs the increased risk of an opposing news release.

GILD Daily Chart

Here we clearly see the steady decline that dominates the last year.  Notice, however, that the pattern settled into a horizontal channel in mid-October 2016, and it's that pattern that we're hoping to play in the short term.  There have been four consistent touches of the support line in that channel, the latest in the set coming both yesterday and today.  With the stock sitting on a major support line, it behooves us to analyze a potential long setup.

There have been three bounces off that support line since November, 2016.  In all three cases, the move up was swift and covered the six-point channel range in anywhere from two to four days.  Swift, indeed.  On the flip-side, the subsequent move back to the support line has taken from 9 to 19 days, although that period is shortening as the pattern progresses.

In addition to the channel setup, a descending triangle pattern is also in effect.  The resistance line goes back as far as July, 2016 and has registered five separate touches.  The volume signature's a bit troubling, however, since it showed signs of diminished demand over the last couple of days. 

RSI(9) is no help, in this case.  The pattern has pretty much mimicked the price action since the channel began in earnest.  On Balance Volume is still dropping like a stone, so there's some feeling that there's no accumulation occurring at the moment.

The weekly chart is more bearish than the daily, when viewed from a longer term perspective.

GILD Weekly Chart

A full 5-wave impulse completed on the weekly chart in June 2015.  The stock ran out of steam in an extremely short Wave-3, however, and that resulted in a shorter still Wave-5.  Since mid-2015, the stock has traded in a complex consolidation wave that thus far has retraced 50% of the full prior impulse.  That's a fairly solid correction, however the current Elliott Wave count suggests there could be more room to the downside before the correction ends.  It's possible to count out a complete double corrective pattern here which implies that the next impulse wave is ready to begin, however I'm not confident enough in that count to show it here. 

What does show on the weekly, however, is a strengthening RSI(9).  At least on the lows, we're seeing a bullish divergence, indicating a potential shift to an upward bias may be on the horizon.  On Balance Volume on the weekly would appear to agree since it continued strong while the price retraced 50% of the prior impulse.  That's another bullish divergence that indicates longer term strength.

There are two ways we intend to play this stock, based on how the stock wants to move from here.  We'll play a long setup if that triggers, by placing a buy stop order above today's high.  The protective stop in that case will just below the lower support line.  The price target in this pattern will be the horizontal resistance line formed by the last upward move.

At the same time, we'll setup a sell stop order just below the lower channel support line.  The protective stop in that case will be just above yesterday's high.  The target will be six-points below the support line - i.e. the height of the channel.  That six-point channel stepping stone has been a consistent pattern throughout the down-trend for the past 18-months.

When we place this type of an order setup, we do so with a "one cancels other" type order.  As a result, if the long position triggers, the short entry order will be canceled, and vice versa.  From the current chart position, we could have either a channel play based on a bounce off support (the long entry) or a breakout play based on a violation of support (the short entry.)  This is a good means of allowing the stock to move as it will, and just going along for the ride.

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.

PTC In Strong Bull Channel Showing Signs of Distribution

When Parametric Technology Corporation (Nasdaq: PTC) missed earnings by $0.10 per share, and missed revenue estimates by $8.79 million, one would reasonably expect a downturn in stock price, or at least a lengthy consolidation period while the new data were processed and factored into future estimates.  Instead, the response was, "Damn the torpedoes; full speed ahead," albeit on higher volume and increased daily ranges.

PTC Daily Chart

You will often read that technical analysis is more art than science, and nothing illustrates that better than this chart.  You will notice that the charts I post rarely include the more popular indicators such as a MACD histogram, an RSI(14) oscillator, or a Stochastics oscillator.  The reason is simple.  The more I trade, the less I care about technical indicators and the more I care about only two data elements: price and volume.  Aside from the moving averages you see on this chart - which I do reference to help clarify trend - there are only two technical indicators besides the price and volume bars. 

You'll see an orange line representing "On Balance Volume" overlaying the volume histogram.  Again, it's used (in my case) to help identify volume trend.  Is high (or low) volume an indication of accumulation or distribution?  That's all I care about in that case.

You'll also see the bars extending from the left side of the chart.  That's a "Volume by Price" indicator that depicts the amount of support or resistance has thus far occurred at a specific price level.  It helps identify how strong a particular support or resistance line may be.

That's it.  My trading does not rely on technical indicators, it relies on chart analysis and attempting to decipher what the market specialists are doing so we can trade alongside them, and not opposite them.  My experience has been that trading solely on indicators is one of the easiest ways to lose money, and my personal preference is to do just the opposite.

So let's take a look at PTC and try to decipher what's going on.

This stock appeared on my radar today following the hammer candlestick (circled in green) that closed the stock's trading for the week.  That the hammer followed two wide-range down days is significant, so that meant giving this chart a closer look.

At a casual glance, we can see that the stock underwent a major change of character starting October 24th.  Volume started to increase and the stock declined significantly on increasing range.  It bottomed before the close on the 26th, and this is where we have the first major indication that the smart money has an interest in this stock.

PTC released their earnings after the close on the 26th. That entire three-day decline was in anticipation of the earnings announcement, not as a result of it.  As we stated at the start of this article, PTC missed on both earnings and revenue.  The stock, therefore, should continue heading south when the market opens the next day, right? 

Wrong.  In fact, PTC gapped UP at the open by $2.45!  It then soared upward another $1.50 before finally settling back to close at $45.59, representing a 4.7% gain on the day following a bad earnings announcement.  It then continued to gain for two more days before a three-black-crows candle pattern drove it back to the low traced on the 26th.  But look at the volume on those three days as compared to the actual ranges of the bars.  Now look at the volume on the four up days that followed.  Clearly, the volume is contradicting the move down.

So what happened?  Well, we know that this stock started to climb steadily higher following a low on February 8th.  The move has been steady but daily ranges have been narrow, and the large volume days had come with the stock opening and closing in a tight range.  What this means is that there was heavy institutional buying.  Market specialists were accumulating this stock long before the public became interested in it. 

In fact, as the public started to jump on the bandwagon, what do we see? Two consecutive down-gap days, only one on higher volume, in late June as the specialists move price back to a level at which they prefer to accumulate shares. 

So that brings us to the current situation.  What do we believe is happening?  Well, based on the patterns we're seeing unfold, it appears that those same market specialists are preparing to take their profits.  It's been a nice ride, and the stock has almost doubled in price since the accumulation campaign started.  What we see at the end of October is the first of the tests to see how much demand remains, and as we saw November 4 through 10, there was quite a bit.

November 30 and December 1, the next two down days on significant volume, represent the start of the next test.  Those two days occurred without any negative news, so there was no fundamental reason for the decline.  Rather, it's part of the distribution phase test as the market specialists sell their shares to a public that is very impressed by that lengthy bullish channel that dominated 2016.

Notice the hammer candle that formed yesterday.  The range was very narrow, however volume was above average.  Demand still came into the stock on decent volume and notice that it came in right at the 61.8% retracement level of the last upward move.  Notice, too, that it did not penetrate the 50% retracement level.  Are the large institutions done?  Probably not.  They accumulated shares for 8-months, and it's going to take more than a month to distribute them.  More likely, we're in for a period of consolidation before the next move.

Can this pattern be traded?  In the very short term, yes, but it won't be for the faint of heart.  If price breaks the 50% retracement, there's a good probability that it will bounce back up to the overhead resistance line set by the pattern highs.  Odds that it will penetrate that level diminish rapidly, however.  The caution flag here, though, is that this does appear to be a distribution campaign, so the insiders are counting on the public buying, here.  At some point - it could be next week, it could be next month, or it could be next quarter - the distribution campaign will conclude and the market specialists will cease holding the stock at its current levels.  When this stock finally plummets, that rate of decent will be extreme. 

Should you chose to trade this pattern, be sure to watch the volume signatures as compared to the daily candles.  The combination will offer the best clue as to whether another test of the low will be offered or whether the bottom will fall out swiftly. My preference here is to play the short side, not the long.  We'll wait for the stock to approach the top of the channel pattern - adjusting that channel if it switches to a horizontal pattern - and take short positions on short-term reversal candles with confirming volume signatures.  This way, when the rug is finally pulled, we'll be on the right side of the trade, and not holding a long position as the stock dives past our stops.

Chart reading is very much like detective work.  Look for the clues being offered and attempt to glean what the smart money is attempting to do.  It's more work than simply watching for a cross on an oscillator, but it will improve your capital protection and your risk management significantly.  That, after all, is the key to profitability.  Protect your capital and manage your risk. 

Happy Trading.