Dunkin' Brands Ready For Wave-B Below 52-Week High

The resurgence of Dunkin' Brands (NASDAQ: DNKN) as a potential acquisition target pushed the stock to a 52-week high on 16 December.  The high was a hair below it's all-time high set in mid-July 2015.  The merger chatter is not lighting up the news, however, and it's not the first time Dunkin' Brands entered the merger rumor mill.  Some estimates for a hypothetical merger offer put the price in the $65 to $75 range, well above the 52-week high of $55.44.  The surge on rumor was short-lived, however, and DNKN retreated over the following week to close 2016 at $52.44.

DNKN Daily Chart

Using all of 2016 as a canvas, DNKN drew a complete 5-wave impulse pattern that completed on 16 December 2016 following the latest merger rumor.  From there, the stock retraced 38.2% of the Wave-5 move in classic Wave-A action.  This retracement level is one of the primary points at which Wave-A will typically end, and it's significant that it coincides with the top of Wave 3.  Of course, the 50% level and the 61.8% level also loom as prime targets, depending on just how deep this correction goes. 

The RSI(9) Oscillator does hint at significant weakness in the short to medium term.  The bearish divergence coming off the highs leading to the 16 December peak is pronounced, and the divergence in the lows adds strength to the downward signal.  We can infer from this that either Wave A or Wave C (or both) may be deep corrections.

The buying climax on 16 December, as evidenced by the huge volume spike, adds further confirmation when we factor in the lack of follow-through after that one day spike.  We don't have evidence of demand forcing the stock up at this point.

The two long-term trend-lines that formed at the origin of the entire impulse (offering a long-term support line) and the Wave-2 and 3 progressions (offering a long-term resistance line) appear significant.  Notice that the lines are diverging.  The bottom of this correction could be deep indeed, provided no actual merger announcement intervenes and scrubs the entire pattern.

Let's take a quick look at the Weekly Chart for additional guidance.

DNKN Weekly Chart

From the weekly, it appears that the all-time high in July 2015 was the top of a 5-wave impulse that started back to 2011.  If that's the case, then our 16 December high was likely a Wave-B high on a higher order, and we're now into Wave-C in a flat correction on the weekly chart.  That implies about a 6-month downward move that will probably manifest as a five-wave impulse itself.  (Again, this assumes an actual merger doesn't intervene.)

Notice the long diagonal pivot line drawn from the lows on the chart. That line offered support on each of the pullbacks through the impulse wave, and it offered resistance consistently through the Wave-B move.  That it was breached the last week of the year coming off that high is significant and we can expect it to once again resume its resistance role should we attempt to retest to the upside.

Notice the RSI(9) oscillator.  Since the Wave 3 top in March 2014, the RSI was unable to penetrate the 70 mark, although Wave-A brought it below 30 twice.  The RSI shows a very strong resistance level at 70, and although it's an ascending triangle in the oscillator, the indications of weakness are significant.

So where does this leave us?  Well, on the daily, we expect the first A-B-C correction to make it down as far as that upward sloping support line.  That it appears to be a flat correction on the Weekly implies that the daily may well be a complex correction and it will ultimately breach that support line.

What we are watching in the short term is the A-B-C pattern in flight now.  A strong reversal candle may signal the start of B, and if possible, we'd like to catch that wave to the long side. We're not going short on DNKN until we see evidence that Wave-B is complete.  Rather, we're looking for a long play on a strong reversal at either the 38.2% line (where we are now,) the 50% line, or the 61.8% line. 

With the long-term correction suggesting a return to test the $37 range, we believe there will be several viable swing trades to play with DNKN before it ends.  Because of the merger rumors, we have to exercise care in our short plays, and we'll adjust position sides accordingly.  For now, however, we'll put that rumor to the side, at least until there's evidence that it's closer to becoming a reality.  Watch for the reversal signals, and play each of the waves as they manifest.  Remember, where Wave-B ends will tell us what type of a corrective pattern Wave-C will display, so watch it carefully.  In the meantime, let's try to catch Wave-B when it starts.

Happy Trading.

Watching EVHC For Direction Post-Merger

Envision Healthcare Holdings (NYSE: EVHC) and AMSURG completed their merger on 1 December 2016.  The merged entity continues to trade under the EVHC symbol and retains the Envision brand name.  Not surprisingly, the day of the merger generated exceptionally high volume but resulted in a bearish candle in the middle of a consolidation zone that has persisted since mid-August.  We're now watching this stock to see which way it will break now that the specter of the merger itself is behind them.

EVHC Daily Chart

What's interesting, however, are the two daily candles that followed the actual merger.  Both were high range, although the candle on 2 December was one of the longest on the chart.  Interestingly, while it had a large body, the upper and lower shadows were nearly equal in size and, in their entirety, provided some excellent guidance as to the location of support and resistance for the new pattern.

Today's candle was even more telling.  What appeared to be a strong bullish candle at the top, we closed the day after tracing an inverted hammer.  The upper shadow ran into heavy resistance as it penetrated the consolidation zone that ran from March through July 2016, and quickly retreated below the overall high/low 50% retracement level.

Both candles were on higher than average volume, but on the whole the volume was not consistent with the overall size of the candles.  Today's volume, in fact, was higher than yesterday's, giving added strength to the inverted hammer signal.

The synergies and efficiencies of the two merged companies are still a big unknown, and I think we're seeing that in the two post-merger trading days.  We'll be watching this stock for some sign that it will ultimately form an impulse in either direction.  It's entirely possible that the prior consolidation period was used for accumulation by the larger operators, but thus far we haven't seen convincing evidence that they're ready to start a campaign to the upside just yet.

Given the inverted hammer coupled with today's volume signature, we're watching for a play to the short side with a potential pullback target of that dotted red line that forms a convincing diagonal support line.  That yesterday's candle bounced off it did not escape notice, however today's pattern implies that there's possibly one more test of that line to come.

That, in fact, is the way we plan to play this stock.  If we get confirmation of a downward move, we'll play a short position targeting that support line to exit the trade.  What we're really looking for, however, is a retest of that support line.  We'll take a long position there and look for a target at least to the 61.8% full pattern retracement level.  That point looks to be the next resistance test level and it would be a good target to exit a long trade.  A bounce off support will be the lower risk trade of the two, and we'll size our positions and stops accordingly.

This is definitely a stock to add to your watch list.  The wide-range consolidation zones offer excellent swing trading opportunities themselves, and this stock has the potential to move sharply once it begins an impulse wave in earnest.  Keep an eye on the volume activity as well as the breakout levels for a signal as to when this will be a good play to either side.

Happy Trading.

Staples and Office Depot Rumors - But What's Changed?

Office supply giant Staples (Nasdaq: SPLS) was up almost 2.5% pre-market on reports of advanced talks to merge with rival Office Depot (Nasdaq: ODP).  The latter was also up about 1.5%  on the rumor.  There are no details available regarding the proposed deal, so it's hard to say whether the current pricing is accurate. 

This is not the first time Staples and Office Depot have appeared at the merger altar.  The last time, however, was 1997 and federal regulars squashed that deal citing anti-trust concerns.  They had no such concerns in 2013, however, when they permitted the merger of Office Depot and Office Max.  Neither were required to divest any stores, and the FTC acknowledged then that the competition in that space had increased considerably.

There is never any assurance that deals of this nature will proceed, even without regulatory anti-trust concerns.  Trading on rumor of merger is always speculative, and unless you play in the after-hours market, you're typically looking at the taillights of that price movement.  That's likely the case today, although there may be more room in the Office Depot price as details are revealed.

The question, though, is what's changed since 1997 that would allow such a merger?  The answer is simple: the entire industry has changed.  In 1997, Staples was primarily a stationary store.  Today, stationary is still a large part of their business, but they are also a major technology store, selling laptops, desktops, and virtually every component imaginable for a device in that space.  They are into the tablet space, the cell phone space, the office furniture space, and the software space.  Staples is no longer your neighborhood stationary superstore.  Neither, for that matter, is Office Depot.

As Staples' focus has adjusted to the changing times, so, too, has their competition.  In addition to similar box stores (like Office Depot,) Staples is also in the same market as technology giant Best Buy.  Wal*Mart and Target also offer a similar array of products at equally competitive prices.  Staples and Office Depot are both, however, dwarfed by Amazon, especially when you consider the wide spider web of Amazon marketplace partners. 

With the stunning growth of online sales in that industry, and with Amazon emerging as a global retail force, fears of anti-trust in a deal between Staples and Office Depot are greatly diminished.  Of course, you can never truly predict what the FTC will do in these situations, but thinking globally, it is safe to say that the prospects of this merger being approved are significantly greater today than at any time in the past. 

Trading on this type of rumor remains speculative, at least if your objective is quick price action profit, but longer term it's likely that Staples will emerge as a much stronger, more profitable company once the efficiencies arising from the merger are realized.  That's the way I'm looking to play this.  I like the wide range of products offered by Staples, and I like the convenience of having their brick and mortar presence for those "emergency" purchases.  I also like the efficiencies that would be gained by merging these two companies, and the potential benefits that will bring into their online sales space.  So this will be one to watch, but outside of short term trades, I'd like to see the details emerge before determining a good entry and longer-term price target.