MSI Showing Weakness On 52-Week High

Motorola Solutions, Inc. (NYSE: MSI) reached a 52-week high in trading on Thursday, 8 December 2016.  The pattern leading to the high coupled with the reversal on Friday, however, signals potential short-term weakness that may well be tradeable.

MSI Daily Chart

The candle drawn on Thursday's high was a doji, and it did so on extremely weak volume.  A doji of this shape - only a two cent difference between open and close, with a long tail and short wick - is, in and of itself, and extremely unreliable signal.  The pattern represents indecision.  It's a day where neither the bulls nor the bears were able to take control.  The long lower shadow tells us that there was an attempt by the bears to take the market lower, however that was beaten back and the stock closed essentially right where it opened.  The extremely low volume also tells us there was very little interest in the stock, either way.  There was neither demand nor supply, indicating that the smart money was sitting in "wait and see" mode.

The next day - Friday - drew a long bearish candle.  We now have a multi-day pattern to analyze.  The short uptrend from last week ended with a strong bullish candle on Wednesday.  Thursday's doji gapped up at the open and left a long shadow.  Friday resulted in a long bearish candle that retraced most of Wednesdays white candle.  That pattern is known as an Evening Star Doji and is one of the stronger short-term bearish reversal patterns we follow.  The key, here, is short-term. 

Let's now turn our attention away from the candle pattern and see what other information we can glean from the chart.

First, let's look at the RSI(9) oscillator.  The peak of this oscillator in the short-term pattern we're studying occurred, not on a high, but on a strong bullish candle the day before a high on 15 November.  The next day traced what was then a 52-week high, but the RSI retreated slightly.  Our most recent 52-week high this past Thursday drew an even lower RSI peak.  What we're seeing is a bearish divergence in the RSI.  The stock has traced higher highs but the RSI has traced lower highs.  It's a signal of impending short-term weakness.

Next, notice the upper green dashed line.  This was drawn from a high on 6 September through the high on 16 November.  Notice that it also formed resistance in the 3-day Evening Star Doji pattern that ended trading this week.  We now have two forms of resistance that are impeding upward progress - this upward diagonal resistance line and the 52-week high horizontal resistance line.

Let's now consider what volume is telling us.  I always include two moving averages on volume: A 200-day simple moving average line that is very smooth, and sets a baseline for long-term volume patterns, and a 50-day exponential moving average that gives us a measure of how volume has behaved in the last quarter.

The stock's rise started on 4 November 2016, and did so on volume significantly above the 200-day moving average.  That was a confirmed bullish move.  Volume, however, has been average at best since then, and only once touched that 200-day average in the current upward move.  The 52-week high and the day following that high were well below even the 50-day average.  Interest in moving this stock has waned.  Volume is currently not confirming any move, which is a major caution sign for continued upward movement.  There must be demand in order to move a stock higher.  Conversely, stocks can decline - and decline rapidly - on either high supply or lack of demand.  What we're seeing at the moment may be an indication that demand has, at least for the moment, dried up.

So where does that leave us?  Well, for the moment, this is not a stock that I would play to the upside.  Not, at least, until we see some signal that demand has re-materialized and the Evening Star Doji is violated.  Notice the short-term Fibonacci Retracement drawn from the 2 December low to the 52-week high.  (The numbers are to the left of the pattern.)  A violation of the 23.8% retracement level would be a short entry I'll consider.  A price target range in such an entry is highlighted in green, ranging from the 76.4% to 100% retracement levels of the pattern.  A protective stop would be just above the high of Friday's candle.

There are several areas between entry and target that could require a quick exit.  As in most patterns, the 50% and 61.8% retracement levels can form support.  Any pause at those levels would require an exit.  There is also that diagonal dashed red support to consider.  That line proved to be major support during the prior short-term pullback, so we need to be aware of it as our trade develops.

Notice, too, that before we get to our price target region, we must also traverse the 10-day and 20-day moving averages.  Now, a reversion to the mean theory would favor a return to at least the 20-day.  Be aware, though, that either of them could provide support, causing a decline to stall at that level.  Again, if the trade weakens, then it's time to exit.

The final major point of concern is at 14:00 EST on Wednesday, 14 December.  The US Federal Open Markets Committee (FOMC) is widely expected to announce an increase of 0.25 points to short-term Fed interest rates.  That increase is already factored into the market, however that announcement will also include forward guidance and a general assessment of the US and world economy.  Predicting how the market as a whole, never mind individual stocks, will react to a FOMC announcement is a task best left to players of Three Card Monte.  Personally, I plan on extreme volatility on the afternoon of the announcement, and I assess the status of any open positions heading into the 14:00 announcement to determine if I'll close them or ride either the wave or the rip tide.  More often than not, I'll close the position.  I can always reopen it if conditions warrant after the announcement.

Bear in mind that the current signal is a short-term trade.  If it manifests, we expect to be out of the trade in one to three days.  The overall stock does not suggest long-term weakness, and neither does the overall market.  Plan your position sizing and your risk management strategy accordingly.

Happy Trading.

What To Watch As IDTI Lines Up For Next Move

As I've mentioned previously, one of my favorite setups is a long lower shadow (preferably a hammer) following a down trend, or a long upper shadow (preferably an inverted hammer) following an up trend.  When found at the potential top or bottom of a trend, both of those candles signal a potential trend reversal if they are accompanied by high volume.  When volume does not confirm the pattern, however, a much deeper analysis may be needed to determine what is truly happening with the stock.

Integrated Device Technology, Inc. (Nasdaq: IDTI) appeared on my scans this morning, and it prevents a fascinating study with multiple options setting up over the next week.  We'll add this stock to the watch list and keep an eye on it since the setup for the next move has only started to develop.  Let's take a look at the daily chart to see what it can tell us.

IDTI Daily Chart

We can immediately see that, following a major gap down on 2 February 2016, the stock traded sideways for the remainder of the year.  The gap was closed several times however no upward breakout was sustainable.  The major pivot point, interestingly enough, is the 50% retracement from the pattern established with the 3 December 2015 high and the 11 February 2016 low.  Thus far, attempts to push above that 50% retracement have been brief and unsustainable.  Thus far.

With that in mind, let's look at the two major setups that we see, one forecasting a move to the downside and the other a move to the upside.

Setup One - Flag Development with Downside Break.

Could we possibly ask for a better flagpole setup than we have starting with the high of 25 November to the low of 2 December?  The low ended with a long-shadow candle, but on lower than average volume.  It wasn't quite a hammer - the wick is a bit too long for me to call it a hammer - but the implications of the long shadow remain the same. 

Remember that pivot point at the 50% retracement?  Well, that's precisely where we sit right now.  Two consecutive long down candles on high volume pushed us back below that 50% level, but unlike the three prior tests of that major support/resistance line, we've immediately retested it with a bullish candle pattern with a long shadow.  That long shadow indicates demand coming into play at the low.

Another major significant pattern to note is that the 2 December retest starts at the bottom of a significant congestion range that ran from 1 November to 11 November.  The bottom of that range was formed with a gap up on 1 November, and it has thus far proven to be a significant line of support.

What we are watching for now is the strength of signals over the next week.  There is a very good possibility that we will trade in another tight horizontal consolidation range bounded by the two thick purple lines drawn on the chart.  Coupled with the flagpole that ended on 2 December, that would create a classic bearish flag pattern.  Given the height of the pole, I'd really like to see at least 4 bars in the flag, and no more than 7 for it to remain a valid pattern.

A downward break following a 4 to 7 day consolidation would set a price target of between 18.69 (the 76.4% extension of the flag pole) and 17.59 (the 100% extension of the flag pole.)  Notice that the 18.69 target sits right smack on top of a support line also created by a brief consolidation period from 3 to 12 August.  If we do break to the downside, that's the likely destination for price.

Watch for this pattern to develop, however it's important not to jump the gun on a trade to the short side.  For this setup to be valid, we need to see that 4 to 7 day congestion period for the flag followed by the break to the downside on high volume.  Don't ignore the volume.  We need it for confirmation of the break to differentiate between a legitimate move and a potential bear trap.

Setup Two - Mirrored Pattern Development with Upside Break.

Traders are creatures of habit, and, at least in the short term, patterns have an uncanny habit of repeating themselves.  There's a high potential for this happening with IDTI.  Take a look at the two areas I've highlighted in the light orange rectangles.  Do you see any similarities between them?  Both cover roughly the same range in roughly the same amount of time.  Both volume signatures are uncannily similar.  Both end in a long shadow candle, although the 2 December candle is a bit more bullish with a close above the open.  The two patterns certainly do have the same look and feel to them.

In fact, you can even walk back further in the chart to the prior wave and see roughly the same setup.  The difference in that wave is that much of the downward move was covered in a single gap down, and the volume signature was much higher. Despite those subtle differences, we're seeing essentially the same move.

Now let's consider the three waves that have tops on 27 July, 5 October, and 25 November.  What we can clearly see here is a succession of higher highs, accompanied by higher lows (3 August, 13 October, and if it holds, 2 December.)  In fact, when you start with the 52-week low of 2 February, there is a crystal clear up channel formed with three significant touches of the bottom of the channel.

What we are watching for in this setup is a break above the upper congestion line marked in purple.  We expect volume to confirm the size of the candle that creates the break, however we are not expecting high volume on that break.  An upward break would suggest a continuation of the bullish channel, and that would setup a longer-term play to the upside.  Based on the two prior bullish moves, we should anticipate a two step move, not one.  A seven-to-ten day consolidation period at the mid-point of the move has been the norm, so plan for it.  Either decide to ride it out, or take profits and then re-enter when the move resumes.  Either option works.  (A third option is to take partial profits and let the remainder of the position ride it out.)

If this setup materializes, our price target is between 26.61 and 28.13 marking the 76.4% and 100% lengths respectively of the previous wave.  Excellent risk management, however, is needed since the top of the current wave sits right at the 61.8% extension of the previous wave.  That will be a major resistance level and could well be the source of the anticipated consolidation period.

So there you have it.  Two potential plays coming out of the current pattern.  Let's not anticipate one or the other.  Rather, let the market play out and let's ride the setup that materializes.

Happy Trading.

MOS Breaks Upward Out of Descending Triangle But Warning Signs Abound

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

MOS Breaks Upward From Descending Triangle

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

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

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

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

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