JNPR Stalling After Multiple Upgrades

A series of analyst upgrades in November and December provided a bit of a boost to Juniper Networks (NYSE: JNPR), already rising thanks to an excellent third quarter earnings release and improved forward guidance.  Mind you, I take analyst upgrades with a grain of salt, since they are more often than not a means of manipulating interest one way or another in the stock.  It's important to remember that the large institutional traders are buying when the retail trader is selling, and vice versa.  So when the institutions are suggest you buy, it's a pretty good indication that they're getting ready to sell.  That's not cynicism talking, it's simply the reality of how the market works.  It's good information to have for swing traders, of course, since we're more than willing to ride the wave of public euphoria up, and then ride it back down on the backs of those institutions that are now selling off the top.

Let's take a look at the daily chart and see what trades may be in the offing.

JNPR Daily Chart

 The after-hours earnings release on 25 October produced a breakaway gap that ended an 8-month consolidation pattern.  The stock found support at the top of that horizontal pattern in a classic pull-back that was a very nice entry signal long for anyone following the stock back then.

Several times over the next month, momentum started to wane, and each time one or more analyst would release an upgrade.  A short-term Elliott Wave pattern started to emerge, and two waves appear to be complete.  Interestingly, from a Wyckoffian perspective, the bottom of Elliott Wave 2 just touches the support line that would be formed by Wyckoff's "Automatic Reaction" bouncing off a selling climax last February.  The breakout in October followed by the pull-back to that horizontal support level is classic of a Wyckoffian break-out and is further confirmation that the large institutions are pushing the stock higher.  Or, they were in October and November, at least.

Here's where things start to get a bit fuzzy, however, since there's a bit of uncertainty in the count of the third Elliott Wave.  What I have labeled is the most probable count as I see it.  It looks to me like Wave-3 is subdividing into a five-wave impulse with the fourth of those sub-waves being in flight now.  If the count I show is correct, then wave-iii is just shy of the height of wave-i and therefore wave-v will be shorter than iii.  I show the maximum height of wave-v (and therefore wave 3) on the chart.

An alternate count, however, which I don't show, would have a wave-i end on 16 November, wave-ii would be the short horizontal pattern that follows, wave-iii is where I label wave-i, wave-iv is where I label wave-ii, and the final wave-v is where I label wave-iii.  In that alternate count, Wave-3 is complete as of 8 December, and the ensuing horizontal pattern would be part of Wave-4.

There's definite merit to the alternative count, however for our purposes, it honestly doesn't matter.  In both cases, the next impulse wave is up, and in both cases, the target area is roughly the same.  What we're looking for in this case is a break above the nearest overhead resistance with confirming volume.  At that point, we'd enter a long position, keep a very close daily trailing stop, and ride it until we're stopped out of the trade. 

There are a couple of signs of weakness on the chart that are of concern, hence the need to keep the protective stop rather tight.  First, we can see that On Balance Volume has turned down, and it started to hook down right after the top on 8 December.  That's an indication that demand has waned and supply is coming into play.

Second, until 8 December, the RSI(9) oscillator was supporting the bullish direction the stock was traveling.  The RSI peak on that date, however, marked a bearish divergence, indicating that momentum was on the decline.  Now, a bearish divergence in the RSI doesn't necessarily signal an immediate reversal.  Rather, it warns us that demand for the stock has weakened, and support for the stock at that level may diminish.

Finally, we have the 8 December candle itself.  The range was long, but the wick comprised over 50% of that entire range and was longer than the main body of the candle.  Volume on that day was well over both the 50-day and the 200-day moving average, and may be an indication of a buying climax.  We have to use caution, of course, assessing the volume pattern in the past week since it always tapers off dramatically around Christmas and New Years.  The 8th, however, was early enough that volume was still a meaningful indicator.

The bottom line is that the wave count suggests that there's another upward wave to go, regardless of how we handle the count.  Indications are that the institutions have been trying to push the stock higher, however there are also indications that the retail market isn't fully on board.  We're currently trading in a tight range between strong support and resistance lines that go back well into 2015.  Based on our wave count, we are expecting a trade to the upside.  We'll take that trade if we get a close above resistance on confirming volume.

On the flip side, if demand continues to weaken, we may see a break to the downside.  A close below the support line with confirming volume will be a signal to enter short.  Whether or not we take that trade will depend on the overall market mood, however at the moment, we're prepared to do so.  A likely target to the downside is around $24, which is the support line that would be formed from the consolidation pattern of the past year.

We'll have to see how this stock behaves after the first of the year.  Watch for a directional break with confirming volume and play that accordingly. 

Happy Trading.

Baxter International Signals Start of Next Move

One of my favorite swing-trading scans searches for stocks that draw a hammer candle at a major low or an inverted hammer at a major high.  In the context of Japanese Candlestick charting, a hammer is formed when the open and close are both near the top of the trading range for the period.  The low for the day is significantly below both the open and close, and the high for the day is either at the open or close or it's just barely above them.  When you see the hammer on a chart, it truly looks like a good old-fashioned sledge hammer.  The inverted hammer is the opposite.  Just stand that sledge hammer on its head and you have that pattern.

The significance of the two comes when they are at a major low (for the hammer) or a major high (for the inverted hammer.)  In both cases, they signal a high potential for a trend reversal.  In the case of a hammer, you have a stock that has been trending downward.  After the open, the stock plummets even further, but at that point, demand starts to enter the scene and the stock rises to ultimately close near its daily high.  This often happens when the low encounters a major support line, triggering buy stops for bottom feeders waiting to enter the market.  In the case of the inverted hammer, the opposite behavior occurs.  In both cases, confirmation the following period is essential, and for it to be a good signal, the hammer or inverted hammer should occur on high volume.

Baxter International (NYSE: BAX) appeared on my scans last night, tracing a classic hammer pattern on high volume at what appears to be the bottom of an Elliott "C" wave in an A-B-C corrective pattern.

BAX Daily Chart

Here is a chart where the theories of both Elliott and Wyckoff work hand-in hand.  From an Elliott Wave perspective, I show two possible wave counts.  The Fibonacci retracement levels drawn from the count represented in green line up perfectly, in fact, and that's the count that appears to be the more accurate interpretation. 

The most striking characteristic of this chart is the huge volume signature that dominates May, 2016.  From a Wyckoffian perspective, this would indicate a major change in character and would signal the start of the distribution phase in which market insiders begin a lengthy campaign to sell the shares they purchased at wholesale prices during an extended period of accumulation.  The objective of the market insiders at this point is to hold prices in a tight horizontal range while they sell off their shares over time.  This, in fact, is what we see from the chart.  After that climax marked by the top of Elliott Wave 3, we see a somewhat lackluster fifth wave, followed by a very controlled A-B-C flat corrective pattern.  Notice the nice upward push on high volume just after Wave A completed as the market makers needed to push the stock back up to levels where they wanted to sell.

This brings us to our current analysis and yesterday's hammer candle at what may be the end of Wave C.  Notice that the low of the hammer rests on the 38.2% retracement of the entire pattern.  That's a very convenient support level and the volume signature suggests demand came into play at that point, pushing the stock back up fairly close to its open.  As signals go, it would be stronger if the close were above the open, however the lower close does not invalidate the hammer.

What we don't know, at this point, is which way this stock will trade following the completion of Wave C.  There are three possibilities.  The stock could enter a complex correction pattern tracing another A-B-C wave cycle or an X-A-B-C cycle.  In either case, the direction of travel from here is up.  Or, a new Wave 1 pattern in a 5-wave impulse could initiate, driving the stock higher.  Similarly, a new Wave 1 pattern could initiate driving the stock lower.  The hammer suggests that this is the least likely of the scenarios, but again, we need confirmation.  Today's candle will provide tremendous clues as to where this stock is headed.

When looking at the chart, it's hard to miss the curve of that 200-day moving average.  On July 1, 2015, Baxter spun-off Baxalta which resulted in a major distribution to shareholders.  This positive event had a negative impact on some of the technical indicators such as the 200-day MA that still have a look-back to that time period.  In this case, it's best to ignore the 200-day as it's meaningless following that spin-off.

So here's how we plan to play this stock:

• We will monitor the candle patterns for the next couple of days to determine if Wave C has truly ended.  We will also be looking for confirmation that the hammer signal is valid.
• If the hammer is valid and we close above the hammer, we will take a long position.  Our price target will be 48.70, marked by the overhead resistance level shown in a blue dotted line.  If we are into an X, A, or 1 wave, then that is the most likely short-term target.
• If the hammer is invalidated and we subsequently close below the low of the hammer, then we'll stay on the sidelines.  There's a major support line only two points below the low of the hammer, and that does not provide enough reward for a trade to the short side.

This will be an interesting pattern to watch.  There are numerous upside plays here, and overall the company has been performing extremely well.  They've a very long history - several years, in fact - of consistently beating earnings and revenue estimates.  They have a new drug - Prismocitrate 18 - entering Phase 3 Clinical Trials with 160 ICU patients in the US and Canada participating, and they are one of the primary renal care providers in the nation.  All things considered, there is more to the upside than downside with this stock.

Happy Trading.