Complex Correction and Weekly Double Top In PPG

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

PPG Weekly Chart

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

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

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

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

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

PPG Daily Chart

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

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

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

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

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

Happy Trading.

Quintiles IMS Holdings Showing Weakness on Daily and Weekly Charts

A wedge pattern is not one of my preferred setups.  The breakout from such a pattern is fairly random, and the performance after the breakout is often lackluster at best.  Nonetheless, that's the pattern we're facing on the daily chart for Quintiles IMS Holdings (NYSE: Q), a mid-cap provider of bio-pharmaceutical development services as well as commercial outsourcing services in the health-care field.

Q Daily Chart

Since we know we really can't rely on the wedge pattern alone, let's review what other clues the chart has to offer.  It's hard to miss the twin towers of volume - in this case, supply - that dominate the landscape on 30 November and 1 December 2016.  While that pattern is symptomatic of climactic activity, it's not the first major indicator of weakness in the current pattern.  Look at the decline from 6 October to 1 November.  In that entire period, only four days were positive, and all four were extremely short candles compared with the rest of the save.  In total, over 11 points were traveled, forming both the top and bottom of the wedge.

When we look at the volume pattern, the amount of supply that's evident appears stronger than the amount of demand, and we can see the overall strength of the down days in general. As an added point of confirmation, the On Balance Volume (OBV) indicator (shown in orange above volume) continues to decline.  That's an indication that shares are being distributed, not accumulated, and it's an extremely bearish sign.

Curiously, we don't see a divergence on the daily RSI(9) oscillator.  Instead, it's merely echoing the price action.  In itself, it's not giving us much of a clue as to where Q intends to breakout, although the price action implies a downward break in the short-term.

Finally, notice the peaks on 5 October, 29 November, and 15 December.  With those peaks, we have at least a double top formation with the first two, and the last one arguably creates a triple top.  The pattern is not confirmed, of course, since we've yet to close below the neckline at $70.10, however it's definitely a major flashing warning light.

A double top appears on the weekly chart as well, and that formation is more ominous.  The left peak dates to late July 2015 and the right peak is in late September 2016.  The neckline on this longer term pattern is $55.01.  Note that meeting the price target of the daily chart double top would approach that weekly neckline.

Q Weekly Chart

Here's where things start to get interesting, though.  The weekly chart starts to bring an Elliott Wave pattern into context, and for the moment, at least, we appear to be in the waning stages of a Wave-2 correction.  The low of Wave-2 retraced 61.8% of Wave-1, so it was a deep correction, but in-line with all of the rules.  The next wave we'd expect on the weekly is a Wave-3 impulse that would, in this case, be an up-trend. 

That wedge we see on the daily chart extends out to an ascending triangle on the weekly chart.  That's also considered a bullish pattern.  The volume pattern is somewhat neutral on the weekly.  There's certainly some heavy supply early in the triangle, but following that one climactic week there hasn't been much follow-through in either direction.

The one major caution sign on the weekly chart is the RSI(9) oscillator.  Unlike the daily chart, there is definitely a bearish divergence on the weekly.  That's warning us of potential trouble ahead, and points to a possible downward break, at least for the short term.

Here's a case where we really need to give the stock some reins and see where it wants to lead us.  If we get a downside breakout on convincing volume, I'll play it.  The wedge is showing a potential 7 to 10 point move in either direction, and that's worth trying to capture.  A stop a few percent inside the pattern to give it room for a pullback would still be a good reward to risk ratio, and likely keep us out of a shakeout flip.

A break to the upside, however, may signal the start of Wave-3 on the weekly chart, and we definitely want to ride that one.  Again, however, we need to see convincing volume, especially given the number of failures off that resistance line thus far. 

That, in fact, is the third potential setup.  A failure off resistance will be an excellent short opportunity.  The moves down from resistance have been swift to date, and our stop would be just above the resistance line.  Again, that's a fantastic reward to risk ratio.

Let's see which of the setups will actually trigger.  With several very good plays lining up in either direction, we'll add this to our watch list.

Happy Trading.

ADI Sets Up a Short-Term Double Top Pattern

Following a significant gap up on 22 November 2016, Analog Devices, Inc. (Nasdaq: ADI) hit a strong area of resistance at its 52-week high.  The stock has now bounced off four touches of the resistance line and is showing some short term weakness following a pronounced double top pattern.

ADI Daily Chart

The extremely narrow width of the double top suggests that this is a very short term trade.  Now, it's important to remember that the double top is not yet confirmed.  By definition, confirmation only occurs following a close below the neckline of the pattern.  That doesn't, however, mean we don't have trading opportunities in the interim.

There is a diagonal support line (drawn in dashed green) that extends from a 25 July peak, and that support line sits just below today's close.  It represents a good entry level for a short should we trade below that line with conviction.

The candle pattern also favors a short-term downside move.  Yesterday's candle was very close to a bearish engulfing pattern, and the two-day pattern that includes today certainly did complete it.  Further, we've now traded back below the low of the gap that started the upward move to the 52-week high. 

Volume has been on the decline since the gap day, with the only other significant volume move coming on a major test of supply on 1 December.  That move closed the entire gap with the longest solid bar in either direction on the entire chart.  The move back up to the 52-week high was on gradually decreasing volume, indicating the demand for the stock was beginning to wane.

The sense of weakness is confirmed by the bearish divergence in the RSI(9) oscillator.  The relative strength in the subsequent upside move didn't come close to approaching the highs drawn in the RSI during prior move.

There are four potential plays setting up on this chart:

1. Aggressive traders may wish to play a further move to the downside.  A good entry would be just below both the diagonal support line and the 38.2% retracement line of the full height of the double top.  A slightly more conservative entry would be just below the low of today's candle.  Either way, an entry at this point would set a short term target of the upper green shaded area.  Protective stops should be close.  We want a quick exit if there's no strength to the downside.
2. A more conservative entry would be following a close below the neckline.  The target in that case would be the lower green shaded area.  Be aware of some support just above that area (blue dashed line), and also be aware of the potential for a pullback before the final move begins.  It's increasingly common for market makers to take out those short sell stops, then drive the price back up above the entry point to shake out the weak money before finally allowing the pattern to play out.  Be careful not to set protective stops in that zone between the 76.4% and 100% levels since that's where they will be gunning to take them out.
3. If neither of those moves occur, a third potential play will be on a close above the 52-week high provided that move occurs with confirming volume.  In that situation, a protective stop would be just below the 23.8% line marked on the chart, and we'll want to set a daily trailing stop below the prior day's low, following the stock up until we're stopped out of the position.
4. Finally, today's candle is a spinning top - indicating indecision - and it's also the narrowest range of the last seven days.  This offers an opportunity to setup trades in both directions.  This would involve placing a buy stop just above today's high and a sell stop just below today's low, pairing them with a one-cancels-other order.  (If the buy triggers, the sell is cancelled, and vice versa.)  The protective stop for each opening order would be set and the same level as the opposite order. This type of setup allows us to capitalize on the indecision signaled by today's candle, although we do run the risk of a wide range taking out our protective stop before the move completes.  Because of the narrow stop, this type of trade shows lower risk, however that same narrow stop does increase the risk of it being tripped.

When analyzing a chart for a short-term trade, it's helpful to consider how we'll play it regardless of the direction of the move.  While the chart may be signalling a downside move, as it does in this case, we should never turn a blind eye to the possibility of the exact opposite move developing.

Happy Trading.

XLNX Tests Highs in Cup and Handle Pattern

Xilinx Corporation (NASDAQ: XLNX) completed a double top pattern that extended from August to October, meeting the price target for that pattern in mid-October.  The stock is now tracing an imperfect Cup and Handle pattern and is poised to breakout to the upside.

XLNX Daily Chart

That the pattern is imperfect is evidenced by the steep decline following the double top.  That decline constitutes the left side of the cup, and in an ideal pattern that would be a rounded pattern, not a sheer drop.  The right side of the pattern, however, rising from the low, does form a nice arching bowl, complete with a well-defined handle.

The top of the handle formed at a very strong resistance line, marked with a dotted tan line on the chart.  Yesterday's session signaled a test of that resistance, with a very strong candle on high volume.  The setup has potential of an imminent breakout with a price target of 57.39 for the overall pattern.  There is some overhead resistance at the top of the double top as well as at the 52-week high, so be careful in the early stages of the breakout.  That setup could just as easily produce a triple-top bull trap, so proper risk management is essential.

Here's how we're playing this one:

• Since there is the potential for a bull trap and the cup and handle pattern is flawed, we're reducing our position size by 1/3.  
• If the stock breaks to the upside, we'll go long with a 57.39 price target.  Our stop will be just below the low of the handle.
• If the handle breaks down and the stock moves to the downside on high volume, we'll attempt to catch a short position with a price target of 49.54.  That represents a major support line formed by the bottom of the cup as formed by the true bodies of the candles at the low.
• There's not enough evidence on the chart to play a triple-top short since that would require a breach of that 49.54 support level.  That's a major support line, so we'll have to watch for confirmation before entering a short at that point.

Risk Management will be critical in this trade.  Remember, we have a major OPEC announcement coming at 10:00 AM EST today, and that may introduce volatility into the market for at least the rest of this trading day.  Money Management is always at the core of our trading strategy, so that, by now, should be second nature.  Still, given some of the uncertainties in this pattern, we think it prudent to reduce position size as a cautious measure.

Happy Trading.