Cup and Handle Breakout in KFRC with Flag Forming

All systems appear go-for-launch with KForce, Inc. (NASDAQ: KFRC,) the Tampa, FL based temporary and permanent placement agency that released very strong earnings and revenue numbers on Tuesday, 6 February.  While it took a couple of days for the good news to sink in, a vertical move over the last four trading days pushed the stock to a 2-year high and resulted in a breakout of a year-long cup and handle formation on confirming high volume.

Today's analysis will focus on the daily chart.

KFRC Daily Chart

The cup formation in the pattern started on 2 March 2017 with a failed test of a longer term high set on 8 February, just a month earlier.  The round-bottom cup formed over the remainder of 2017, tapering off into a consolidation pattern to end the year.  The handle represented a nice 12% decline off the right lip of the cup.  Of significance, however, is that volume throughout the entire development of the handle was well below the 50-period volume-EMA.  That's a major sign that the decline into correction territory was without conviction and wouldn't be sustainable.

Following the strong earnings release, we can see the 4-day vertical rise that may well be the development of a flagpole.  We'll watch this for the next couple of days to see if the flag or pennant actually does form.  The spinning top candle on Friday, appearing below the 50% mark for the day, suggests that it will.

A closer look at the handle itself shows that we attempted a breakout on 14 Feb, however we retreated to close precisely at the top of the right rim. The actual close occurred the next day, with a very strong bullish candle.  The spinning top on Friday, however, suggests a pause or pullback to, or slightly below, the breakout line.  Given the choice, a second thrust above the breakout level is the one we'd prefer to play.  Just remember that we're not always given that opportunity.

A closer look at the technical indicators shows a lot of confirmation around that handle breakout.  The RSI(9) broke a down-trending resistance line on that same day.  The MACD(5,34,5) confirmed with a bullish crossover.  The JDK RS Ratio continued an upturn above the 100 level, and JDK RS Momentum followed suit. (It's always a good sign when both the RS Ratio and the RS Momentum indicators are showing improvement above 100.)  Finally, the Relative Strength vs the S&P broke a down-trending resistance line as well.

Volume, as we mentioned, was extremely depressed through the handle formation but began its rise heading into the earnings release.  Breakout day and the day following the breakout experienced the highest volume of the entire formation, and the On Balance Volume indicator turned sharply upward to intersect a horizontal resistance level.

For a short-to-intermediate term trade, this is a long stock only.  There's nothing that we are tracking to suggest a potential short play, here. Our strategy now is to watch the next couple of days for either a flag or pennant to develop or, if that doesn't happen, to play a break above Friday's candle if there's a continued move upward on volume above the 50-day volume EMA.  We do expect a pullback before entry, but we also need to be prepared to go long if the pullback doesn't manifest.

The price target for the Cup and Handle will be $34.23.  If a flag develops, then the price target for that flag play will be $3.34 above the level of the breakout.  Either way, the play at the moment is long.

Happy Trading.

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.

LYV Flirts with Breakout at 52-Week High

Live Nation Entertainment (NYSE: LYV) spent the last two trading days of the week teasing traders with the potential for a breakout above the 52-week high after spending over two months in a horizontal corrective pattern.  That pattern appears to be a Wave-4 in the longer term cycle that started at the end of 2012.  While a 5th wave has the potential to run 20 points or more, there's sufficient reason to watch for a head-fake before jumping in.

LYV Daily Chart

Friday's doji just barely topped the prior day's close.  While the high did briefly pierce the resistance line marking the top of the channel, it was short-lived and the stock settled for just a three cent gain on the day.  The 5-day run up from the bottom of the channel was impressive (from a candle-pattern perspective) but the volume signature for that entire week was extremely lackluster.  It's not a pattern we'd want to see in anticipation of a breakout.

A similar issue appears in the RSI(9).  That hook at the end of the RSI is a warning sign, and we've yet to see any sign that the RSI is signalling strength.  When we look at the JDK RS-Ratio and Momentum indicators, it's the same story.  RS-Ratio is rising but RS Momentum is weakening.  That's a major cautionary tale in itself.

Notice that the start of the week resulted in a bullish crossover on the MACD(5,34,5) and that crossover was preceded by a resistance breakout of relative strength vs the S&P.  Both of those are positive signals, but they outweigh neither the volume pattern nor the RSI(9) warning.

Longer term, we expect LYV to breakout and produce a nice Wave-5 bullish run.  The short term, however, may be more of a head-fake.  LYV is scheduled to report earnings after the close on Tuesday, 27 February - just over a week away - and the forecasts are not good at all:

LYV Earnings Forecast from NASDAQ

Volume is the key in this week before earnings.  A breakout on week volume is a nice bull trap.  It would be a potential short play, but we'll avoid any long positions one week volume.  The same is true for a downward move on week volume.  If there's no conviction to the move, we'll stay away from it.  What I'll be watching for in the run-up to 27 February is a volume confirmed move that shows which way the major players are trading.

We'll be keeping an eye on the options action as well.  Right now, there's a tremendous amount of open interest in the at-the-money March 16 47 Calls and the out-of-the-money March 16 44 Puts.  We'll be watching closely for a surge in options activity surrounding any volume-confirmed move.

Also be cognizant of the overall market direction.  Following the correction we experienced two weeks ago, we've seen a rebound back to the 61.8% Fibonacci level between the highs and lows of the corrective pattern.  It's likely that the corrective wave is not yet over, so watch for potential weakness over the next week.  I still expect this to be at least a Zig-Zag corrective wave, and if that's true, we'll again retest the bottom of that first corrective drop.  Avoid taking a long position if the market indicates it's again marching towards that corrective low.

As to LYV, add it to your watch-list and be sure volume confirms any move that prompts you to open a position.  It should be a volatile week in the run-up to their earnings announcement.

Happy Trading.

Has the Time Finally Come for TWTR?

In the midst of last week's market turmoil, Twitter, Inc. (NYSE: TWTR) posted a five-cents per share earnings beat, but also posted a $45.94 million beat on revenue.  Those numbers were enough to drive a return to year-over-year revenue growth following a long history of declines.  Even more to the market's delight, Twitter posted a 7% year-over-year increase in owned and operated advertising revenue.  In the ensuing conference call, CEO Jack Dorsey gave a rosy preview of 2018, saying, "We're investing to make 2018 a year of growth and expect our expenses to more closely align with revenue after a year of significant margin improvement."

The market was most appreciative, drawing a significant break-away gap on Thursday in spite of a 1000+ point drop in the overall market.  Twitter continued to show strength on Friday with a very strong bullish candle that didn't penetrate the lows of the previous day's move.

Now, before we go too far in the discussion, Twitter is not, for me, an investment stock.  While the chart shows a very good potential for upside growth, it does lack the number one component I require in any stock held for investments, and that is a quarterly dividend.  Therefore, I'm looking at Twitter solely as a trade vehicle for short term capital appreciation, and would not be interested in holding Twitter as a longer term investment.

With that said, let's take a look first at the Weekly Chart.  This sets the overall canvas upon which our daily analysis will be drawn.

TWTR Weekly Chart

 What we've placed on this chart are the major support and resistance areas that are likely to impact any large-scale move.  Notice that last week's price action broke across the 200-day moving average (that continues to trend downward) but also broke above a major pivot line that has held since July 2015.There's a good possibility this line will be tested several times over the coming weeks, so factor that into any entry and stop plans.

There's a second resistance line looming around $35, and that, coincidentally enough, marked the high of our gap day.  Price hit that resistance and retreated back to the $30.50 range on that day, although it did recover back to $31.51 the next day.  What we need to take from this, though, is that there are sellers looming around $35 and they will have to be shaken out of the market a bit before Twitter can further advance.  Expect some horizontal movement at that level.

The major resistance zone, though, sits between $50 and $52.50.  That level formed a double top on the weekly chart between July 2014 and April 2015, and the stock retreated from there to its all-time lows.  We have due cause to respect this resistance level.  For me, assuming I'm still long the stock if it reaches that point, I'll exit there and wait.  It may become a good short opportunity at that point.  If nothing else, we can always reenter if it shows a breakthrough across that resistance line on strong volume.

What's encouraging about the weekly chart, though, is the 28-month base formed over the 2 1/3 years prior to Thursday's breakout.  The P&F price target from the breakout of that base would put us at $52.  Not by coincidence does that coincide with the major resistance zone discussed previously.

Okay, with that foundation, let's turn to the daily chart.

TWTR Daily Chart

Most of what appears on this chart is positive, and speaks to a decent move to the upside.  Consider the following:

• Strong breakaway gap after good earnings and forward guidance.  It's even stronger considering that the overall market dropped over 1000 points that same day.
• The breakaway gap also broke out of a strong rising channel that began developing in September 2017.
• Volume from the start of this move two weeks ago shows very strong bullish tendencies, more than doubling the 50-day moving average of volume across the entire period.
• On Balance Volume has been rising steadily since July 2017, showing money gradually moving into the stock.  
• The MACD shows a bullish crossover at the start of the move, and then a nice bullish bump in conjunction with the breakaway gap.
• Relative Strength broke out of a rising resistance line.
• The JDK RS Ratio and JDK RS Momentum lines are both rising rapidly.

There aren't many negatives to speak of:

• The RSI(9) is at a level that has proven to be extremely resistant on the last four moves.
• The candle on the breakaway gap day was decidedly bearish, closing within 10% of the low.  In fairness, though, that did come on a major down day in the market, and Friday's candle was decidedly bullish.
• The breakaway candle bounced off major resistance found on the weekly chart.

So, where does this leave us?  Well, given the glowing forward guidance from Twitter on Thursday, we've got at least a quarter for this stock to run without negative news weighing on it.  If TWTR can break through the resistance at $35, then it has a very good shot at running to $52. That's precisely how we're going to play it.  I don't intend an entry until TWTR breaks the resistance line above Thursday's candle.  We'll take 1/2 profits at $48.35 (the 78.6% Fibonacci level of the entire range,) establish a trailing stop set to the prior day's low, and allow the remaining half to run until we get stopped out.  The key, though, is to be patient and let it break that $35 level with volume. Do keep in mind that we expect that line to be tested once or twice as a support line, so don't set your initial stop too high. 

Happy Trading.

Cup and Handle May Signal FLO Recovery

Following three consecutive quarters of earnings beats and some positive forward guidance, Flowers Foods, Inc (NYSE: FLO) may have finally turned it around.  A string of quarterly revenue misses dating back to November, 2015 put extreme pressure on the share price which bottomed at $13.56 in August of 2016.  Since then, the company embarked on a restructuring plan that is still a major work in progress.  The results are beginning to materialize, however, with their earnings beat announced on Wednesday, 7 February.

What caught our attention in the wake of last week's stock market turmoil was the relative strength FLO demonstrated while much of the broader market was getting crushed.  Tuesday through Friday were all up days with significant strength.  In fact, there was a missed short term opportunity with FLO since it drew a double bottom with a very strong bullish candle on Tuesday, then confirmed the double bottom with a breakout on Thursday.  The stock is now already trading too close to the double bottom price target for it to be a profitable play there, however.

For those interested in an intermediate term play, it's worth looking at the Cup and Handle drawn by the stock on the daily chart from February through the breakout of the Handle at the end of the last trading session. 

FLO Daily Chart

The target price from the breakout is $23.52, representing the 78.6% extension of the right rim of the cup from the bottom of the cup.  Now, there's a fair amount of resistance right at the breakout level, so do expect the stock to retrace back to that resistance level at least once.  The bounce off that retest would be the safest entry, and given the underlying volatility in the market, that's precisely when I intend to enter. 

Looking at some of the other technicals lining up on the chart, we can see that this breakout also involves a channel that formed from the low of the cup last August. That channel did breakout once before, and you can see that it offered a bit of support towards the end of 2017 before collapsing.  Be cognizant of it, however, it's also more likely that the support will hold the second time around.  (If it doesn't, get out of the trade fast.)

There are two cautionary tones in the RSI(9) and in the MACD(5,34,5.)  Both are showing a bearish divergence which should give us pause.  The MACD just drew a bullish crossover, but I'm concerned about that divergence.  It's another reason to wait for a pullback to support before entering.

Relative Strength - the bottom-most indicator I'm showing - is sitting right on a resistance line.  I'd really like to see RS break through that line and hold before entering as well.  When you look at the JDK-RS line and the JDK-RS Momentum line, all indications are that it should do just that.  RS is improving, and more importantly, the momentum of the RS line is improving. 

We're going to play this as an intermediate length trade.  I expect it to take several weeks to reach the target after a true breakout - meaning, after a breakout and then a pullback to or just below the breakout level.  By waiting for that pullback, though, we'll be able to set a much more aggressive stop just below the handle top, and set ourselves a much better risk/reward ratio.  It should also give the overall market time to settle down a bit and show us its true next move.

Add this one to your watch list and wait for the pullback.  There's no point in rushing the trade given the volatility in the broader market.

Happy Trading.

Rising Wedge Signals Trouble For PAA

Despite a bullish channel pattern on the weekly chart, Plains All American Pipeline L.P. (NYSE: PAA) is showing all bearish signals across multiple time frames from the daily through to the monthly charts.  For our analysis, we'll start with the broadest view on the monthly.

PAA Monthly Chart

Since inception, PAA drew a strong 5-wave impulse leading to what appears to be a Wave-I top in September, 2014.  Wave-II appears to be in progress now, forming what is shaping up to be either a zig-zag or a flat correction.  Wave-A retraced over 61.8% of Wave-I, however, which is an extremely deep corrective pattern.  From its current position, Wave-C is somewhat limited to the downside, otherwise the entire wave count will be invalidated.  (Wave-II cannot retrace 100% of Wave-I to be a valid count.)

The RSI(9) oscillator does signal a bearish divergence on both the highs and the lows, however, so continued weakness appears to be in the offing.  From the overall monthly pattern, we do expect a Wave-C to the downside, however given the volume signature in December 2015 through February 2016, we believe significant demand exists between $15.00 and $17.00, so it's not likely for Wave-C to travel below those levels.  Watch for a shallow correction from the current level.

PAA Weekly Chart

On the surface, the weekly chart would appear to offer a contrary interpretation.  A strong, tight bullish channel marked price starting in February 2016 and continuing through to the present.  Note, though, that price has traveled horizontally since November 2016 and has been riding the support line for most of 2017.  On Balance Volume is rising, however price is not rising in conjunction with the indicator.  Both the RSI(9) indicator and the MACD(5,34,5) have rolled over into a bearish configuration.  Similarly, the 200-day moving average is above price, has rolled over, and is now descending.  These are all indications that a downward price move is pending.

PAA Daily Chart

That brings us to the daily chart.  The most recent trend, starting in September 2016, formed a rising wedge pattern.  That, as we've discussed in other posts, is a bearish signal.  Price tends to break downward from a rising wedge pattern, although the price target from such a pattern is somewhat unpredictable.

The other major warning sign is a diagonal trend line that starts in April 2016 and had seven firm touches before being penetrated to the downside on 12 January 2017.  Since then, it has acted as resistance with three touches. 

Volume since the first of the year has been bearish as well.  Notice the extremely weak volume over the first week of February, and notice the falling volume in general for all of 2017.  Interest in the stock appears to be waning, and demand is required to drive price higher. 

From a fundamental perspective, we see that PAA lowered its dividend from $0.70 to $0.55 in October, 2016.  This is accompanied by nine consecutive quarters of missed revenue, and 5 out of 10 quarters of missed earnings.  "Troubled" would be the best way to describe the company.  Trading at a P/E of 78.38 - nearly triple its nearest competitor - it's hard to envision much in the way of an upside, even with the favorable energy infrastructure outlook fostered by the current US Administration.

The only play we see for PAA is to the short side.  We are looking at two possible entry points.  The first is a short trade on a close below the support line of the wedge.  In that case, we'll place a protective stop just above the horizontal resistance line around $33 and we'll set a price target at the horizontal support line around $25.

The second potential play is if price rises a bit further within the wedge.  In that case, we'll watch for a reversal at one of the three major resistance lines: the diagonal resistance line (in red), the blue horizontal resistance line, or the top of the wedge.  A reversal at either of those points will signal a short entry with a protective stop above the next highest resistance line.  Again, our target will be the horizontal support line around $25, although we'll watch for an early exit if the wedge support line appears to hold.  Watch this one carefully since the breakdown, when it comes, may be swift.

Happy Trading.

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.

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.

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.

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.

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.

XL in Ascending Triangle Nearing Breakout

While XL Group PLC (NYSE: XL) displays nothing but corrective action on the long-term charts, the daily chart is displaying a well-pronounced Ascending Triangle pattern with price within range for a breakout to either side.  The weekly chart offers our first set of clues on direction, however, so we'll begin our analysis there.

XL Weekly Chart

There are enough Elliott Wave impulse rules violations for me to conclude that price action is still in a corrective pattern.  Coming off the second high in December, 2015, there is a 5-wave pattern that would lead down to a Wave-A (in June, 2016) and it's possible to draw a 3-wave pattern up to Wave-B in October, 2016.  The current pattern is an ascending triangle - or a diagonal, in Elliott Wave parlance - and in its position at the start of Wave-C we do need to be mindful of a potential break to the downside to complete that wave.

What dominates the weekly chart, however are the numerous channels that are consistently tested over the prior six-years.  Of particular interest (aside from the upper and lower boundaries of the main channel) is that very strong pivot line in pink near the middle of the channel.  Price is now resting just above that channel and it's also encountering a second diagonal support line coming up from the Wave-A bottom. 

Volume is signalling a strong breakout as well.  While it's been declining since that single strong weekly candle the week of 7 November 2016, it has now contracted into a coiled spring, indicating a potential violent breakout in the near term.  Let's look at the daily chart for more clues as to direction.

XL Daily Chart

Well, from the June 2016 low, it's easy to envision a Wave-1 completion in late July, a Wave-2 completion in November, and a Wave-3 completion in mid-November.  The current wave, then, would be a Wave-4 (which matches the formation of a diagonal in the Elliott Wave schema.)  If this count is correct - and it's hard to draw a different plausible count - then the breakout would be to the up side for a Wave-5 that could rack up as many as 5-points in the move.  That, coincidentally, would take us to just above the 100% price projection of the ascending triangle.  Now, I never like to use 100% price projections, so I'd be more inclined to set the conservative target at the 61.8% level around $40.19.

Volume is showing strength on the daily chart as well.  Notice how volume contracted significantly over the last two weeks, but it has surged over the last two trading days.  OBV is also rising, giving us an indication that the stock is under accumulation.

Looking below the chart, we see two very bullish indicators in the MACD(5,34,5).  There was a Zero Line Reversal around 12 January, and that was followed by a bullish crossover today.  The crossover's somewhat weak and is the second in as many weeks, however it's still more bullish than not.

Given the distance we've already traveled in the triangle, the only way we will play this is as a breakout.  A reversal off either trend line at this point does not generate sufficient profit potential to make it worthwhile.  Instead, what we will do is place a buy stop just above the resistance line in the triangle.  Our protective stop will be just below the support line of the triangle, and the price target will be the 61.8% triangle-height extension from the breakout.

Remember, the charts show a probability of an upward breakout, not a guarantee.  That's all we are ever able to trade - probabilities.  There are no guarantees in swing-trading.

Happy Trading.

NWL At Resistance in Wave-A of Correction

The scan that brought Newell Brands, Inc. (NYSE: NWL) to my attention tonight looked for bullish crossovers in the MACD(5,34,5) indicator.  Now, remember, I don't use an indicator based trading system, so this scan is only intended to identify stocks that are worthy of analysis.  Since this was a bullish crossover scan, I was expecting to see a stock that was signalling a move to the upside.  What I found, however, was a stock with more downside potential in the short-term.

NWL Monthly Chart

Looking first at the monthly chart, we see that NWL was in a corrective pattern for well over two decades.  Without expanding the chart further to the left, in fact, we really don't know if the current pattern is merely a continuation of that correction.  For our purposes, however, it truly doesn't matter.  We're looking for trades that complete in a few days, not a few years.

What we can see from the monthly is that a motive wave started at the end of the financial crisis in 2009.  A full five waves also completed in August, 2016.  A corrective pattern following that 5-wave impulse is now in progress. Whether or not Wave-A is complete on the monthly, however, remains to be seen.  The retracement level, however, suggests there's more room to move to the downside. 

The RSI(9) oscillator on the monthly chart shows a strong bearish divergence.  That divergence ran virtually the entire length of the uptrend, in fact, signalling intense weakness could follow.  The MACD agrees.  While the MACD ascended in conjunction with the uptrend, it did so with numerous signal line crossovers indicating an overall weakness in the move.  A bearish crossover immediately followed the peak, and the distance between the main line and the signal line is widening.  That, too, suggests the downward move is not yet over.

NWL Weekly Chart

The weekly chart tells a similar story.  We see a strong motive wave leading to the peak in August, 2016, although that Wave-4 correction was deep and very short, time-wise.  Coming off Wave 5, however, the sub-waves comprising Wave-A are issuing a cautionary tale.  The most likely wave count shows three complete sub-waves and Wave-iv either complete or in progress.  That implies another downward push to get to the end of Wave-v, which would also end Wave-A.  When we look at the length of Wave-i, we can see a potential decline of another six-points before we reverse into Wave-B. 

Volume is declining, which adds to the bearish sentiment, although it looks like supply has waned significantly in the last few weeks.  It's not coming close to the volume experienced in Wave-iii, although in a counter-trend wave, that really isn't much of a surprise.

RSI(9) on the weekly is, at the very least, confirming price action.  When we look at the lows, we can conclude that a bearish divergence is evident, although it can be debated that the last valley wasn't low enough to support that conclusion.  Given how low it was compared to the prior valley in price and indicator, it does suggest to me that there's plenty of weakness remaining. 

MACD, on the other hand, does show a bullish crossover, and it does not confirm the divergence suggested in the RSI.  That MACD signal is the only indication we have that the downward move in Wave-A may be at an end.  For now, however, I'm trusting the wave count and the overall price pattern, and that tells me there's more room to the downside.

NWL Daily Chart

The five-wave impulse we see on the daily is actually the five sub-waves that comprise the Wave-4 to Wave-5 move on the weekly chart.  This does give us a good measure of the full retracement pattern in Wave-A against the prior motive wave.  Thus far, Wave-A retraced 50% of Wave-5, so there is certainly more room to the downside.  From the weekly, we determined that another 6-points to the downside were likely to complete Wave-A, and on the daily we can see that such a move would land on the 61.8% retracement level.  That's a very common retracement level for a Wave-A move, and that adds credence to the analysis.

The current pattern leading into Wave-A comes into much better focus on the daily.  The three sub-waves that completed already are well defined, and Wave-iii subdivided into five sub-waves that are also very well defined.  Wave-iv is a bit more complex, and it appears to be an irregular a-b-c corrective wave with Wave-c ending in a diagonal.  It's likely, based on this, that Wave-iv is complete and that suggests the next move is to the downside to finish Wave-v. 

I'd now like to draw your attention to the resistance lines that are all converging over the course of the next three days.  There's a significant amount of pressure on the stock at this level, and when we look at the volume signature for today's long bullish candle, we can see that the conviction to the upside is really not that strong. 

The RSI(9) shows fundamental weakness that has plagued the stock since the Wave-5 high, and that weakness continues through the current move.  The MACD experienced a bullish crossover today, however that indicator has been extremely choppy for the past couple of weeks and I would not consider it reliable at the moment.

The pattern formed by the short-term resistance and support lines shows a symmetrical triangle pattern with price rapidly approaching the apex.  We need to watch the next move closely.  It's certainly possible, from the current position, that the stock breaks through resistance and starts a Wave-B move.  It's more probable, however, that price moves to the downside and tests support (at a minimum) and possibly breaks to the downside. 

We're going to trade this stock based on the breakout direction.  If we see a break above resistance with confirming volume, we'll take that trade to the long side.  That would indicate that Wave-B is in progress, and we'd set a conservative price target around $51.84, coinciding with the bottom of the 29 July exhaustion gap and the 61.8% retrace of Wave-A.

If, however, we break below support, we'll take that trade to the short side.  Our price target will be in the $41.72 range, coinciding with a support line, the 61.8% retracement of Wave-5, and the price projection obtained from the weekly.  In either case, the protective stop would be above the resistance pattern for a short trade and below the support pattern for a long trade.  Either way, there's a decent reward to risk ratio, although it does look a bit better to the short side.

Happy Trading

Zig-Zag Correction in AEP Sets Up Long for Wave-c of B

On a day when the Dow Jones Industrial Average (INDEX: DJIA) retreated 122 points to close back below the 20,000 milestone, American Electric Power Company (NYSE: AEP) registered a .38% gain and pushed to the top of a two-month long horizontal channel, while setting up for a potential upside breakout.

The monthly chart shows a stock that started its current 5-wave impulse pattern at the end of the financial crisis in 2009.  Wave-I completed in July, 2016 and the stock is currently running its course in a Wave-II corrective pattern.  Note that, while we show Wave-A as complete on the monthly, that is not a conclusion we can truly reach just yet.  The first downward move only covered a 23.6% retrace, so there's a lot more potential to the downside.  We'll need to see how this behaves.

AEP Monthly Chart

The RSI(9) on the monthly chart shows a bearish divergence, and the length of that divergence suggests that this correction could cover a lot of ground.  Note that the MACD does not show a divergence on the monthly, but it has provided very reliable crossover indications at the beginning and end of each wave.  Given the reliability throughout Wave-I, from a monthly perspective we should be able to use it to signal the start of Wave-B.  From the current pattern, it does not look like we've reached the bottom of Wave-A, so there appears to be more weakness in store.

 The weekly chart's wave count tells a slightly different story with respect to Wave-A.

AEP Weekly Chart

Here, we can see the formation through the Wave-I top, and it looks like Wave-A was a valid 5-wave impulse. We also see the reaction off what appears to be the Wave-A bottom with Wave-a, and it looks like Wave-b has gone horizontal.  From the current setup, it appears this overall corrective move will be a Zig-Zag, so the monthly is correct in signalling more weakness towards the downside.  The weekly, however, is telling us we have a bit of room to the upside before that next drop occurs.

As in the monthly, there's a bearish divergence evident in the RSI(9).  The divergence is also evident in the MACD on the weekly, as we compare the heights of the last three highs.  As was the case in the monthly, the weekly crossovers have been reliable signals.  There's a bit of a warning flag in the current MACD, however, in that it could develop into a Zero Line Retrace pattern.  We have to watch the movement of the main line here, since the way it's hooking, it could just brush the zero line and then turn down again.  A crossover at that point would be an extremely bearish signal.

So now let's turn to the daily chart to figure out how we want to trade this stock.

AEP Daily Chart

There's a bit more strength showing on the daily chart than we see on either the weekly or the monthly.  First, that horizontal pattern we've experienced for the last two months came on a break of a strong diagonal resistance line.  When we complete the upward move, we need to watch the behavior as we once again approach that line since it could be a strong support line in the future.

The horizontal channel that formed starting in early December did so bounded by two very strong horizontal support and resistance lines that ran the length of 2016.  The upper line was a major pivot line, flipping from support to resistance and back again several times over the prior year.  Each time, it proved to be a very strong signal line.

What we show on the chart from Wave-A is what looks to be an a-b-c Zig-Zag that will lead to a Wave-B top that corresponds to another major resistance line that has shown staying power in the past.  From there, if it's a true Zig-Zag, we can expect a lengthy downward move in Wave-C, and that would explain the bearish divergences showing on the weekly and monthly.

For each of the significant waves, once again we see that MACD provided a good signal, so we're watching it here for a sign that Wave-b is in flight.  Today, in fact, we did get a signal line crossover (which is what flagged this chart in my scans) and the stock moved to the top of the horizontal channel, poised for a potential breakout play.

The MACD is also showing signs of a potential Zero Line Retrace (ZLR) which, approaching it from the top, would herald another move to the upside.  That's consistent with the short-term expectation of a rise to complete Wave-c of Wave-B.

So that is the move we are currently looking to trade.  On a break of overhead resistance, we will enter long with a protective stop just below the lower support line.  Notice how the height of Wave-a extended from the bottom of Wave-b takes us to the next major overhead resistance line.  There is also a potential resistance line that is not shown, but sits very close to the 76.4% extension.  We'll use that as our conservative price target, since this next move has a high probability of ending between the 76.4% and 100% extensions.  That move will complete Wave-B, and when you look at the length and shape of Wave-A, we believe there will be several swing-trade opportunities in Wave-C as well.  Market conditions at the time will determine which of those waves we attempt to trade.

Happy Trading. 

MDT Cup and Handle Setting Up Long

I've stated several times in the past year that I do not trade based on indicators.  My decisions to enter or exit a trade are made based on a price and volume analysis, and my trading plan requires me to trade in the direction of the overall trend of both the stock and the market.  "The market" in this sense, depends on the stock being considered.  The default chart layout that I use includes a correlation line (which I don't normally show in these articles) between the stock and each of the major indices: S&P 500, S&P 600, S&P 400, NASDAQ Composite, and the Dow Jones Industrial Average.  Whichever index shows the highest correlation value for that stock is the one I use as "The Market" for that stock, and it's the trend the price must follow for me to enter a trade.

In today's article, we will analyze Medtronic, Inc. (NYSE: MDT), a Large Cap Health Care stock that trades on the NYSE.  Based on that, we would expect MDT to correlate to either the Dow Industrials or the S&P 500, wouldn't we?  Well, here are the full set of indicators I use to analyze my stocks, shown for MDT on daily chart.

MDT Daily Chart Indicators

Well, there's a surprise!  MDT, at least for now, correlates best with the NASDAQ Composite, and it has done so since at least late November.  So when we look at market trends, for now we need to look at the NASDAQ Composite index, and possibly the S&P 500 since that is also showing a strong correlation.  The Mid cap, Small cap, and Dow Industrials are pretty much irrelevant in this case.

Now, the reason I mention indicators at all is because I do use them to scan for stocks worth analyzing.  The scan that found MDT, today, was a "MACD ZLR scan."  This scan looks for stocks where the MACD(5,34,5) Line approached the zero line from the top, barely brushed it, and then moved higher.  Since "close is close enough" in trading, I use a range of 2% above and 2% below the zero line to calculate "zero".

For Stockcharts.com users, here is the scan.  You may copy and paste this directly into the Advanced Scan Workbench and modify the basics to meet your own trading preference.

[type = stock] AND [country = US] AND [sma(63,Daily Volume) > 1000000] and [[exchange is NYSE] or [exchange is Nasdaq] or [exchange is Amex]]

and [Close >= 20.00]
and [Close < 100.00]

and [2 days ago macd line(5,34,5) >= [2 days ago max(252, macd line(5,34,5)) - 2 days ago min(252, macd line(5,34,5))] * .02]
and [yesterday's macd line(5,34,5) <= [yesterday's max(252, macd line(5,34,5)) - yesterday's min(252, macd line(5,34,5))] * .02]
and [yesterday's macd line(5,34,5) >= [yesterday's max(252, macd line(5,34,5)) - yesterday's min(252, macd line(5,34,5))] * -.02]
and [today's macd line(5,34,5) >= [today's max(252, macd line(5,34,5)) - today's min(252, macd line(5,34,5))] * .02]

and [
[group is ConsumerStaplesSector]
or [group is CyclicalsSector]
or [group is EnergySector]
or [group is FinancialSector]
or [group is HealthCareSector]
or [group is IndustrialSector]
or [group is MaterialsSector]
or [group is TechnologySector]
or [group is UtilitiesSector]
]

This is for long setups only.  You can use it for short setups by changing the first and last MACD test to be a <= comparison and changing the first and last MACD calculation to be -.02.  The middle two MACD tests remain unchanged.

What this setup does is identify stocks that have shown signs of a resurgence to the uptrend.  I use it to attempt to locate stocks that may be exiting a Wave-2, Wave-4, or Wave-B corrective wave.  Remember, though, that all trades are based on the price and volume action, not the indicators.  They are only used to find stocks that must then be properly analyzed.  

So, after that rather lengthy introduction, let's take a look at MDT.

MDT Daily Chart

The dominant features on the chart start with that significant gap down on 22 November.  From its position at the time, identifying the type of gap would have been problematic.  It's position makes it unlikely it was a breakaway gap since a downtrend was already in progress, although it could qualify as a continuation gap.  Subsequent price action, however, suggests that this was really an exhaustion gap.  The volume pattern around the gap suggest a selling climax, and the downward move met a lot of demand on 3 January with a strong bullish reversal candle.

The post-gap pattern now resembles a cup-and-handle formation.  It's even more pronounced if you draw the cup excluding the three low spikes and stick to the bottoms of the candle bodies.  Now, normally we think of cups-and-handles as appearing at the top of an uptrend and representing a pull-back followed by a resumption of the uptrend.  There's nothing that requires such an entry into the pattern, however, and the general psychology of the market participants creating the pattern remains the same when it represents a reversal off the bottom.  In both cases, we have a pattern high from which there was a significant pull-back. The high was retested - the right rim of the cup - and price showed a weak retreat on declining volume off that retest - the handle. 

In many ways, the handle also resembles a flag or pennant, and it can certainly be traded as such. When the right rim of the cup is relatively steep, as it is with MDT, it can act as a flagpole and provide a price target nearly identical to that of the cup-and-handle price target.

Before we talk about our trade strategy, there are a couple of other chart items we should review.  There's a weak resistance line formed from the last bullish spike before the gap and the last retest of the cup.  That resistance line is where price closed on Friday, constituting a third-touch of the line.  If price retreats from here, that line could gain significance, so we do need to watch behavior early in the week.

Notice that both the RSI and MACD show a bullish divergence.  That's encouraging and suggests a resumption of an uptrend that is still in progress on the weekly and monthly charts.  (I'll post them at the end of this article, but not discuss them due to the growing length of today's review.)  One word of caution, though.  Both the RSI and MACD are momentum indicators. While they measure two different aspects of price, we do need to be careful when using them together since they can give a false appearance of signal strength.  If you trade based on indicators, I recommend using only one momentum indicator along with a volume indicator, a trend indicator, and price action. 

With all this in mind, there are two ways we can trade this stock.  Current price action signals an aggressive long entry on a break above the diagonal resistance line.  Protective stop could be set below the low of Friday's candle, below the low of Thursday's candle, or most conservatively, below the low of the handle.  As each setting increases risk, be sure to adjust position sizing to mitigate that increased risk. 

Using this aggressive entry, the conservative price target is the high of the cup.  It's a high probability target in that it would represent a third test of that high.  For an entry at this point, though, that's really the only safe conclusion we can reach.

The second more conservative approach is to wait for a close above the high of the cup rim.  A protective stop would be just below that support line that also represents the 50% retrace of the gap to low pattern.  The price target, however, is shown above in green, representing a range straddling the 100% retrace of the gap combined with the 61.8% extension of the cup-and-handle formation.  This setup has a higher reward to risk ratio than entering on the handle, and it allows time for the stock to penetrate the resistance at the cup rim.

Depending on market behavior, I'm tempted to play both setups, but that's a decision I'll finalize when I see how the futures are looking before the open Monday and Tuesday.  If there isn't sufficient strength to push the stock quickly from this level to the rim, I'll pass on that trade and watch for a rim break before entering long.  Patience is always a virtue in trading.

Here are the weekly and monthly charts, respectively.  They're included so you can see the additional analysis that setup what we are watching on the daily chart.

Happy Trading.

MDT Weekly Chart

MDT Monthly Chart