SHLX At Long-Term Support in Inverse Cup and Handle

Four consecutive quarters of missed earnings and missed revenue estimates took a major toll on Shell Midstream Partners, LP (NYSE: SHLX).  It looked like a positive report on 3 November 2017 would turn it around, and share price did, indeed, rise at a promising rate.  That, however, was undone by news on 2 February 2018 that the company would issue 25,000,000 common units in a series of public auctions, while also providing the underwriter an option for an additional 3,500,000 common units as part of the overall deal.  Shareholders were decidedly displeased, and the share price plunged 16% in just 3 weeks.

In today's analysis, we're going to examine the weekly chart since that offers an excellent overview of what has happened to this stock and also provides a glimpse into what trading opportunities we may see in the near term.

SHLX Weekly Chart

What attracted my attention to the chart in the first place was a large gap down into support on the daily chart.  That manifested as the long red candle you see here on the weekly, the last week of January 2018.  The pattern itself appears to be forming an inverted cup and handle.  If that's accurate, we're now two weeks into the handle portion.  We would expect this handle to run about 4 or 5 weeks, although that could change depending on the health of the overall market in that same period. 

In marking the weekly chart, though, a second confirming pattern emerged as well.  The support line on which the stock currently rests extends all the way back to September 2015, and it has been tested on five separate occasions.   The series of lower highs extend back to that same time period and the resulting pattern is a descending triangle.  Now, one word of caution is in order regarding that triangle.  There's a bit more white space in the pattern than I really like to see.  Based on that, I wouldn't trade that pattern alone, however there is sufficient other evidence on the chart to overcome that pattern issue.

Volume on the declines is rather pronounced.  That was especially true after the February announcement, but we can also see that the On Balance Volume has been trending negatively since 2015.  Money, it appears, is flowing out of this stock, and not into it.  Now, we do have a word of caution, here, because that volume pattern in conjunction with the price sitting on long-term support for three weeks is also consistent with a selling climax followed by an accumulation pattern.  Be on the lookout for signs of major buying by the larger institutions, since we really don't want to be trapped by one final shake-out before the price is pushed higher.

There is not much insider action on this stock; the last reported transaction was a 500 share sale in September 2017 reported by director Margaret Montana.  That was only 1/8th of her total share holdings, and was largely insignificant.  There are, however, a large number of institutional share holders with a significant number of shares in their portfolios.  If we see major movement towards accumulation, it will come from one of them, and will only be evident through a study of the price and volume action.

Looking at the RSI(9), there are some hints that that may, in fact, occur.  Notice the lows of the RSI(9) each time support was reached, and compare that with the RSI(9) in this current move back to support.  Notice that we don't reach those same levels.  Now, it's not quite pronounced enough for me to declare it definitively as a bullish divergence, but the cautionary message is still quite clear.  The downward thrust may, indeed, be weakening and we may be exhausting the number of sellers willing to dump this stock.

The other indicators we're watching are much more bearish.  The MACD(5,34,5) executed a bearish crossover in conjunction with the February announcement.  The relative strength vs the S&P, which has been dismal for the last couple of years, continues its steady decline and is well below a current resistance level.  The JDK RS Ratio is hooking downward (and is already in under-perform territory) and the JDK RS Momentum indicator is declining.

So, how are we going to play this stock?  Once again, we'll let volume be our guide.  A close below that support line with confirming volume would be a sign to go short.  Now, be careful.  Given the strength of that support line - it's lasted 3 years and been tested at least 5 times, remember - it's highly probable that we'll experience a pull-back to that line.  So, if we do go short, they will be very short-term trades designed to protect profits and exit very quickly.  The potential for a bear trap here is extremely high, and we don't want to be the ones gnawing off our own paws.

If, however, we take out the prior week's highs, again, on convincing volume, we're not opposed to a long position.  The top of that descending triangle will provide major resistance, of course, so we'll be looking to exit as we approach that level. 

SHLX reports earnings before the open on 27 February, and it's not our intent to hold any positions in either direction going into the close on Monday.  The next dividend date isn't until April, so that won't factor into any short term trades for the foreseeable future.

This is a stock to add to the watch list.  There are numerous potential trades setting up in the short term, and looking at the patterns, we may find some low risk opportunities to both the long and the short side over the next few weeks.  As always, watch the volume signature for confirmation when assessing the probabilities.

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.

OMC In Descending Triangle on Daily

Omnicron Group, Inc. (NYSE: OMC) attracted my attention with a Zero Line Reversal (ZLR) trigger yesterday followed by a MACD(5,34,5) bullish cross-over today.  That combination suggested movement may be imminent, and therefore the chart was worth a closer look, and indeed, that closer look was certainly warranted. 

OMC Daily Chart

It was the extremely strong move today on very high volume that triggered the cross-over.  The chart pattern, though, is what's intriguing.  Since November, 2016, the stock has formed a descending triangle and today's price action places the close directly on the resistance line. We will watch tomorrow's action closely since we'll either see a breakout of the triangle - a long we would want to trade - or a bearish reversal back into the center of the pattern.

With horizontal support and resistance straddling today's long candle, a potential trade in either direction is likely early this week.  Normally, a descending triangle tends to break to the downside, and the fact that we entered this triangle from the bottom increases those odds, but when we look at the weekly and monthly charts, we'll see that the intermediate and longer term patterns favor just the opposite.

OMC Monthly Chart

The Elliott Wave count on the monthly chart shows an impulse pattern that started back in the early 1990s.  After trading sideways for just over a decade, Wave-III began after the Financial Crisis and is currently in it's 5th sub-wave.  Remember, third waves extend frequently, so we can't assume this is the last sub-wave before another correction.

The monthly pattern is riding the rails along the resistance line in a channel that dates back to 2009. Not surprisingly, if Wave-III is truly approaching its terminus, the RSI(9) oscillator is showing a bearish divergence.  Still, from a monthly perspective, we're not yet seeing signs of the reversal that will mark the start of Wave-IV, although all of the Elliott Wave targets have been satisfied.

OMC Weekly Chart

The bearish divergence is also present on the weekly chart, so the ensuing downtrend may come sooner, rather than later but again, we're not yet seeing signs of the reversal that would mark Wave-III's demise.  What does stand out on the weekly that is not evident on the other charts, though, is an ascending wedge pattern that is rapidly nearing its apex.  An ascending wedge is a bearish pattern that typically breaks to the downside.  The Elliott Wave count on the weekly suggests we still have three waves remaining, however that wedge looks like it will force a decision within the next few weeks. 

The current direction on the weekly, however, is up, not down, and that's what we truly needed to learn from the two longer term charts.

We already alluded to how we plan to trade this stock.  We'll take a long position on a breakout to the upside - something which is poised to occur in the next day or two.  Our protective stop will be just below the triangle support line and our price target will be just above $92.  If, however, we get a bearish reversal, tomorrow, we'll hold off entering any positions until we get a subsequent break either above or below the triangle.  It's the triangle pattern we're looking to play in this stock, so let it show us which way it wants to run.

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.

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.

Descending Triangle in COP Hints at Upside Strength

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

COP Daily Chart

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

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

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

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

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

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

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

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

Happy Trading.

MOS Breaks Upward Out of Descending Triangle But Warning Signs Abound

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

MOS Breaks Upward From Descending Triangle

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

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

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

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

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