Stalking A Trade: Patience Is a Virtue

Almost two weeks ago, we discussed a bull pennant pattern setup drawn by General Electric (NYSE: GE).  A pennant breakout occurred twice in the last two weeks, however neither of them were solid trade setups.  Let's take a look at the chart as of this morning and review why we are still stalking this trade as opposed to holding on to an open position.

GE Daily Chart

The initial post called attention to the bull pennant following the close above that pennant on 22 November 2016.  Notice the caution flag, though.  I pointed out that the breakout occurred on low volume.  When trading any breakout, it's important to confirm that there's true conviction behind the move.  Flag and Pennant breakouts have been popularized in numerous publications, and as a result, market makers will often take advantage of the pattern by targeting the entry stops that they know will exist in large numbers.  What you see in that case are a lot of traders getting trapped by an entry at the right spot at the wrong time, only to have the stock pull back into the original pattern.

The sign to watch is volume.  A breakout on low volume significantly reduces the probability of a successful trade and is a warning sign that you're falling into either a bull or bear trap depending on the breakout direction.  We see that clearly in the week following 22 November.  A couple of lackluster narrow range days on equally low volume followed, and the stock then dropped back into the bottom of the pattern.

But what about that second breakout on 1 December?  That was a nice, strong move to the upside, and look at the volume!  Sure that confirms the move, right?  Well, not so fast.  There was, indeed, high volume that should be the confirmation we're awaiting, however two warning flags kept us out of this move, as well.  The first warning flag was the rising volume on the two days preceding this breakout.  Both of those were down moves with confirming volume.  Why is supply coming into this stock, now? The second warning flag is that horizontal resistance level at 31.50.  Not only did it form an extremely strong and persistent level of resistance in that tight horizontal move from 5 August to 2 September, but the level held firm again when tested four times between 25 November and 5 December. 

That the resistance level sits close to the 61.8% retracement level of the overall pattern is a bit of a warning sign in and of itself.  That it has held firm now for four months is a major warning sign.  It will take some conviction to break through that barrier, and thus far we haven't seen it.

This is why we stalk a trade and seek multiple confirming signals before committing capital to a position.  As swing traders, we know that we're not going to catch the precise top or precise bottom of a move.  Many novice swing traders attempt to do just that, but in reality, it's the quickest path to draining an account that you can find.  Well, maybe the second quickest.  Not having a solid risk management plan with a well-documented exit strategy for a trade is likely quicker.  Either way, we know we're trading the middle of moves, not the full range.  So, in reality, when you factor in slippage, commissions, and actual entry and exit points, there has not been much profit potential for the retail swing trader between the top of that pennant and that overhead resistance line.  Before we commit capital, we need more confirming data points that a move is genuine.

So what are we waiting for here?  Well, a volume-confirmed break of that resistance line would be good.  From a Wyckoffian cause and effect perspective, that resistance line has build up a significant amount of cause.  The move off that line, therefore, can reasonably be expected to produce significant effect.  In fact, point and figure charts (not shown here) point to potential upside targets in the 34 to 38 range.  The time period for such a move would be well outside our swing-trade time horizon, of course, but you see the point.  A significant amount of cause is being built, and that normally results in a significant effect (i.e. price move.)

The point of all this is that we need to seek multiple confirming signals to increase the probabilities of a successful trade.  Pattern breakouts are but one signal.  Volume patterns are a second.  Support and Resistance Lines are a third.  Fibonacci retracement levels are a fourth.  Any combination of those converging in the next greater or next lower time period (e.g. a weekly or hourly chart if we're trading off the daily) would add a fifth.  The more confirming signals we have, the higher the probability of success.  At a minimum, we would like to see two signals, but if we're going to commit to a full position size, we would prefer to see three or four confirming signals.

Such a conservative strategy means missing some opportunities, of course.  Our objective, however, is not to capture every opportunity.  Rather, our objective is first and foremost to protect our capital.  That means managing risk properly, and only committing that capital when the probabilities strongly favor a successful outcome.  Stalk your trade, and display patience before committing capital to a position.  Leave it to others to fall victim to bear and bull traps by attempting to capture every move out of a widely known and well publicized pattern.  Instead, patiently enter after the weak hands have been shaken out of the market, and ride the wave generated by the market makers taking their own positions to the target profit level.  Trade with the market makers, not against them.

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.

What To Watch As IDTI Lines Up For Next Move

As I've mentioned previously, one of my favorite setups is a long lower shadow (preferably a hammer) following a down trend, or a long upper shadow (preferably an inverted hammer) following an up trend.  When found at the potential top or bottom of a trend, both of those candles signal a potential trend reversal if they are accompanied by high volume.  When volume does not confirm the pattern, however, a much deeper analysis may be needed to determine what is truly happening with the stock.

Integrated Device Technology, Inc. (Nasdaq: IDTI) appeared on my scans this morning, and it prevents a fascinating study with multiple options setting up over the next week.  We'll add this stock to the watch list and keep an eye on it since the setup for the next move has only started to develop.  Let's take a look at the daily chart to see what it can tell us.

IDTI Daily Chart

We can immediately see that, following a major gap down on 2 February 2016, the stock traded sideways for the remainder of the year.  The gap was closed several times however no upward breakout was sustainable.  The major pivot point, interestingly enough, is the 50% retracement from the pattern established with the 3 December 2015 high and the 11 February 2016 low.  Thus far, attempts to push above that 50% retracement have been brief and unsustainable.  Thus far.

With that in mind, let's look at the two major setups that we see, one forecasting a move to the downside and the other a move to the upside.

Setup One - Flag Development with Downside Break.

Could we possibly ask for a better flagpole setup than we have starting with the high of 25 November to the low of 2 December?  The low ended with a long-shadow candle, but on lower than average volume.  It wasn't quite a hammer - the wick is a bit too long for me to call it a hammer - but the implications of the long shadow remain the same. 

Remember that pivot point at the 50% retracement?  Well, that's precisely where we sit right now.  Two consecutive long down candles on high volume pushed us back below that 50% level, but unlike the three prior tests of that major support/resistance line, we've immediately retested it with a bullish candle pattern with a long shadow.  That long shadow indicates demand coming into play at the low.

Another major significant pattern to note is that the 2 December retest starts at the bottom of a significant congestion range that ran from 1 November to 11 November.  The bottom of that range was formed with a gap up on 1 November, and it has thus far proven to be a significant line of support.

What we are watching for now is the strength of signals over the next week.  There is a very good possibility that we will trade in another tight horizontal consolidation range bounded by the two thick purple lines drawn on the chart.  Coupled with the flagpole that ended on 2 December, that would create a classic bearish flag pattern.  Given the height of the pole, I'd really like to see at least 4 bars in the flag, and no more than 7 for it to remain a valid pattern.

A downward break following a 4 to 7 day consolidation would set a price target of between 18.69 (the 76.4% extension of the flag pole) and 17.59 (the 100% extension of the flag pole.)  Notice that the 18.69 target sits right smack on top of a support line also created by a brief consolidation period from 3 to 12 August.  If we do break to the downside, that's the likely destination for price.

Watch for this pattern to develop, however it's important not to jump the gun on a trade to the short side.  For this setup to be valid, we need to see that 4 to 7 day congestion period for the flag followed by the break to the downside on high volume.  Don't ignore the volume.  We need it for confirmation of the break to differentiate between a legitimate move and a potential bear trap.

Setup Two - Mirrored Pattern Development with Upside Break.

Traders are creatures of habit, and, at least in the short term, patterns have an uncanny habit of repeating themselves.  There's a high potential for this happening with IDTI.  Take a look at the two areas I've highlighted in the light orange rectangles.  Do you see any similarities between them?  Both cover roughly the same range in roughly the same amount of time.  Both volume signatures are uncannily similar.  Both end in a long shadow candle, although the 2 December candle is a bit more bullish with a close above the open.  The two patterns certainly do have the same look and feel to them.

In fact, you can even walk back further in the chart to the prior wave and see roughly the same setup.  The difference in that wave is that much of the downward move was covered in a single gap down, and the volume signature was much higher. Despite those subtle differences, we're seeing essentially the same move.

Now let's consider the three waves that have tops on 27 July, 5 October, and 25 November.  What we can clearly see here is a succession of higher highs, accompanied by higher lows (3 August, 13 October, and if it holds, 2 December.)  In fact, when you start with the 52-week low of 2 February, there is a crystal clear up channel formed with three significant touches of the bottom of the channel.

What we are watching for in this setup is a break above the upper congestion line marked in purple.  We expect volume to confirm the size of the candle that creates the break, however we are not expecting high volume on that break.  An upward break would suggest a continuation of the bullish channel, and that would setup a longer-term play to the upside.  Based on the two prior bullish moves, we should anticipate a two step move, not one.  A seven-to-ten day consolidation period at the mid-point of the move has been the norm, so plan for it.  Either decide to ride it out, or take profits and then re-enter when the move resumes.  Either option works.  (A third option is to take partial profits and let the remainder of the position ride it out.)

If this setup materializes, our price target is between 26.61 and 28.13 marking the 76.4% and 100% lengths respectively of the previous wave.  Excellent risk management, however, is needed since the top of the current wave sits right at the 61.8% extension of the previous wave.  That will be a major resistance level and could well be the source of the anticipated consolidation period.

So there you have it.  Two potential plays coming out of the current pattern.  Let's not anticipate one or the other.  Rather, let the market play out and let's ride the setup that materializes.

Happy Trading.

PTC In Strong Bull Channel Showing Signs of Distribution

When Parametric Technology Corporation (Nasdaq: PTC) missed earnings by $0.10 per share, and missed revenue estimates by $8.79 million, one would reasonably expect a downturn in stock price, or at least a lengthy consolidation period while the new data were processed and factored into future estimates.  Instead, the response was, "Damn the torpedoes; full speed ahead," albeit on higher volume and increased daily ranges.

PTC Daily Chart

You will often read that technical analysis is more art than science, and nothing illustrates that better than this chart.  You will notice that the charts I post rarely include the more popular indicators such as a MACD histogram, an RSI(14) oscillator, or a Stochastics oscillator.  The reason is simple.  The more I trade, the less I care about technical indicators and the more I care about only two data elements: price and volume.  Aside from the moving averages you see on this chart - which I do reference to help clarify trend - there are only two technical indicators besides the price and volume bars. 

You'll see an orange line representing "On Balance Volume" overlaying the volume histogram.  Again, it's used (in my case) to help identify volume trend.  Is high (or low) volume an indication of accumulation or distribution?  That's all I care about in that case.

You'll also see the bars extending from the left side of the chart.  That's a "Volume by Price" indicator that depicts the amount of support or resistance has thus far occurred at a specific price level.  It helps identify how strong a particular support or resistance line may be.

That's it.  My trading does not rely on technical indicators, it relies on chart analysis and attempting to decipher what the market specialists are doing so we can trade alongside them, and not opposite them.  My experience has been that trading solely on indicators is one of the easiest ways to lose money, and my personal preference is to do just the opposite.

So let's take a look at PTC and try to decipher what's going on.

This stock appeared on my radar today following the hammer candlestick (circled in green) that closed the stock's trading for the week.  That the hammer followed two wide-range down days is significant, so that meant giving this chart a closer look.

At a casual glance, we can see that the stock underwent a major change of character starting October 24th.  Volume started to increase and the stock declined significantly on increasing range.  It bottomed before the close on the 26th, and this is where we have the first major indication that the smart money has an interest in this stock.

PTC released their earnings after the close on the 26th. That entire three-day decline was in anticipation of the earnings announcement, not as a result of it.  As we stated at the start of this article, PTC missed on both earnings and revenue.  The stock, therefore, should continue heading south when the market opens the next day, right? 

Wrong.  In fact, PTC gapped UP at the open by $2.45!  It then soared upward another $1.50 before finally settling back to close at $45.59, representing a 4.7% gain on the day following a bad earnings announcement.  It then continued to gain for two more days before a three-black-crows candle pattern drove it back to the low traced on the 26th.  But look at the volume on those three days as compared to the actual ranges of the bars.  Now look at the volume on the four up days that followed.  Clearly, the volume is contradicting the move down.

So what happened?  Well, we know that this stock started to climb steadily higher following a low on February 8th.  The move has been steady but daily ranges have been narrow, and the large volume days had come with the stock opening and closing in a tight range.  What this means is that there was heavy institutional buying.  Market specialists were accumulating this stock long before the public became interested in it. 

In fact, as the public started to jump on the bandwagon, what do we see? Two consecutive down-gap days, only one on higher volume, in late June as the specialists move price back to a level at which they prefer to accumulate shares. 

So that brings us to the current situation.  What do we believe is happening?  Well, based on the patterns we're seeing unfold, it appears that those same market specialists are preparing to take their profits.  It's been a nice ride, and the stock has almost doubled in price since the accumulation campaign started.  What we see at the end of October is the first of the tests to see how much demand remains, and as we saw November 4 through 10, there was quite a bit.

November 30 and December 1, the next two down days on significant volume, represent the start of the next test.  Those two days occurred without any negative news, so there was no fundamental reason for the decline.  Rather, it's part of the distribution phase test as the market specialists sell their shares to a public that is very impressed by that lengthy bullish channel that dominated 2016.

Notice the hammer candle that formed yesterday.  The range was very narrow, however volume was above average.  Demand still came into the stock on decent volume and notice that it came in right at the 61.8% retracement level of the last upward move.  Notice, too, that it did not penetrate the 50% retracement level.  Are the large institutions done?  Probably not.  They accumulated shares for 8-months, and it's going to take more than a month to distribute them.  More likely, we're in for a period of consolidation before the next move.

Can this pattern be traded?  In the very short term, yes, but it won't be for the faint of heart.  If price breaks the 50% retracement, there's a good probability that it will bounce back up to the overhead resistance line set by the pattern highs.  Odds that it will penetrate that level diminish rapidly, however.  The caution flag here, though, is that this does appear to be a distribution campaign, so the insiders are counting on the public buying, here.  At some point - it could be next week, it could be next month, or it could be next quarter - the distribution campaign will conclude and the market specialists will cease holding the stock at its current levels.  When this stock finally plummets, that rate of decent will be extreme. 

Should you chose to trade this pattern, be sure to watch the volume signatures as compared to the daily candles.  The combination will offer the best clue as to whether another test of the low will be offered or whether the bottom will fall out swiftly. My preference here is to play the short side, not the long.  We'll wait for the stock to approach the top of the channel pattern - adjusting that channel if it switches to a horizontal pattern - and take short positions on short-term reversal candles with confirming volume signatures.  This way, when the rug is finally pulled, we'll be on the right side of the trade, and not holding a long position as the stock dives past our stops.

Chart reading is very much like detective work.  Look for the clues being offered and attempt to glean what the smart money is attempting to do.  It's more work than simply watching for a cross on an oscillator, but it will improve your capital protection and your risk management significantly.  That, after all, is the key to profitability.  Protect your capital and manage your risk. 

Happy Trading.

Jobs Report Mostly Positive But LFPR and Earnings Decline

The much anticipated November Employment Situation Report was released by the Bureau of Labor Statistics, this morning. The "jobs report" is issued monthly and has a major impact on financial markets worldwide.

This morning's report offered mixed news, however.  The key takeaways are:

• Unemployment declined to 4.6%. That's below the 4.9% consensus estimate.
• The Civilian Labor Force Participation Rate declined to 62.7%.  
• Number of people employed part time for economic reasons is unchanged at 5.7 million.
• Number of people marginally attached to the labor force increased by 215,000.
• Number of discouraged workers remains unchanged at 591,000.
• Total NonFarm Payroll Employment rose by 178,000 versus a 170,000 consensus estimate.
• Professional and Business Services rose 63,000.
• Health Care Employment rose 28,000.
• Construction Employment rose 19,000.
• Employment in other major industries remains unchanged.
• The average workweek for all employees was unchanged at 34.4 hours.
• The average hourly earnings for all employees declined by 3 cents to $25.89.

Despite the drop in Labor Force Participation Rate and the drop in Hourly Earnings, the report was primarily mostly positive.  As we've stated numerous times, we prefer to focus on the LFPR instead of the published Unemployment Rate since the LFPR more accurately reflects the number of Americans currently out of work.

The rise in Professional and Business Services, Health Care, and Construction are marginally encouraging, however the increase of only 178,000 across all industries was well below the whisper numbers circulating yesterday.  Job growth, while gradually increasing in 2016, is still well below the pace needed to sustain GDP growth in the 3% to 4% range.

The average hourly earnings survey did drop by 3 cents for all employees, however it increased by 2 cents for all private sector production and non-supervisory employees.  For the year, hour earnings is still up 2.5%.

What all this indicates is that the US economy continues to grow, however that growth remains slow.  With regards to the FOMC decision in two weeks, this report is unlikely to influence them in either direction, although from a PR perspective, I would not be surprised to see Fed Chair Janet Yellen latch onto the 4.6% number in her post-meeting announcement.  A "5%" target was oft cited in 2015 as part of the criteria used by the Fed in setting interest rate policy.

Since this morning's announcement, the Dow, Nasdaq, and S&P futures have all fallen into negative territory, although not by any significant margin.  The open, today, looks to be flat to slightly down, however there appears to be nothing in the Jobs Report to unnecessarily either spook or excite traders heading into this weekend.

Next up in the major news cycle is the Italy Constitutional Referendum set for this Sunday, followed by next Thursday's ECB meeting.  Keep an eye on both as they have the potential to rock international markets.

Happy Trading.

AIG Draws Bull Flag In Mid-Elliott Wave 3

American International Group (NYSE: AIG) formed a strong bull flag pattern after tracing sub-wave (iv) in Elliot Wave (3).  The flag follows a 7.35 point surge in six trading sessions.

AIG Daily Chart

A selling climax marked the start of the last upward thrust and the subsequent six trading days that formed the flagpole saw a volume signature that confirms the move.  Since then, the stock has traded in a classic flag pattern on below-to-average volume.

The Elliott Wave count tells an interesting story, as well.  Both wave (1) and wave (3) are comprised of five distinct sub-waves.  Wave (2) was similarly comprised of a classic (a)-(b)-(c) corrective pattern.  Looking at the development of wave (3), we are now in sub-wave (iv), and (iv) completed an a-b-c sub-wave itself.  The next move could be a breakout of the flag pattern into sub-wave (v) to complete wave (3). 

The price target for the flag pattern is 69.51.  This is consistent with Elliott Wave projections of sub-wave (v) with our flag target hitting the 76.4% length of sub-wave (iii.)  Even more enticing is the fact that, once price breaks the top of the flagpole, there's no overhead resistance going back at least 18-months.

AIG reports earnings after the close on 9 February 2017, so there won't be any earnings concerns in our trade horizon.  Be aware, however, that the stock will trade ex-dividend on Tuesday, 6 December 2016.  The dividend is $0.32 and has a pay-date of 22 December.  Historically, dividends have not hurt the performance of the stock post-ex-dividend, however when planning your stops do be aware that 32 cents will be deducted from the stock's price at the open on Tuesday.

Also be aware that there are four news items coming in the next two weeks that may have market impact.  The first is this Sunday (4 December) when Italy votes on a major Constitutional Reform referendum.  Next up is the 8 December ECB (European Central Bank) meeting.  Then, on 14 December, the US FOMC meets and is widely expected to raise interest rates for the first time in 2016.  Amidst all of this financial news is a potential recount of the Presidential Election vote tally in three states.  While that is not likely to change the outcome of the election, it will likely dominate the news heading into the 13 December deadline for declaring each state's electors.  Be aware of the potential volatility any of these items can create.

Here's how we're trading this stock.

• Based on the chart, we do not foresee a trade to the short side.  That can certainly change, however it's not currently a consideration.
• If the stock closes above the flag, we will take a long position.  Our target will be 69.51 and our stop will be just below the flag pattern low.
• If we're still in the stock on 5 December and the pattern still supports maintaining a long position, then we'll take the dividend at the close.

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.

Estée Lauder a Short Play Following Pullback

The second half of 2016 has not been kind to The Estée Lauder Companies, Inc. (NYSE: EL).  Two consecutive quarters of revenue misses were enough to send the stock tumbling over 20 points.  Their recently announced acquisition of Two Faced for $1.45 Billion may have temporarily halted the slide, however the benefits of that acquisition will likely occur too late to prevent a deeper dip in the short term.

EL Daily Chart

 Notice on the daily chart a bit of a spike in volume at the 52-week high in late April.  The behavior of EL for the week leading into that volume spike hints at climactic behavior and the start of a distribution phase by market specialists.  Indeed, that appears to be what followed as we see the stock amble sideways for a good 3 1/2 months. 

The current downtrend for the stock started with a buying climax on August 18th (marked on the chart with "O".  Look at the volume signature on the 18th and 19th.  Supply was clearly abundant, and the stock had no place to go but down.  August 18th marks the start of the current 5-wave impulse.

Following the second consecutive missed revenue quarter, EL plummeted over 9.5 points in just four sessions.  Now, here's where the chart interpretations can get interesting.  We've marked the end of wave 3 on the chart with the low of November 16th, however that is by no means certain.  From the end of Wave 2, we can count three clearly defined sub-waves.  Wave 3 is a 5-wave impulse, so there should be more room to the downside to complete Wave 3.  We've played it safe in our current interpretation, but let's not be surprised if it's actually Wave 3 that continues, and not Wave 5. 

Although it's not shown on the chart, there's a very strong resistance level at the 76.4% mark around 81.33.  That would represent a 61.8% retracement of the current Wave 3 pattern, so we should be prepared for a pullback to that level before the downtrend continues.

The final piece of the puzzle is the Accum/Dist line below the chart.  This is a great indicator that shows whether or not shares are being accumulated (meaning there's high demand for the stock) or if shares are being distributed (meaning there's an oversupply of the stock.)  We can see from the slope of that line that supply has been overpowering demand, and there's no indication yet that supply has been exhausted.  In fact, today's 1.16% drop on high volume with a close at the low of the session suggests that there's plenty of supply remaining to push the stock lower.

Here's how we're playing this stock.

• If the stock breaks below 76.65 with confirming volume, then we will take a short position.  Our stop will be above 79.63, which is the current high of the pattern.  Our initial price target will be 73.06, which is 76.4% of the height of wave 1 as subtracted from wave 2.
• At 73.06, however, we will only exit 1/2 of our position.  Since there's a good possibility that this is still Wave 3, we'll want to ride this as far as we can.  Therefore, we will trail a stop for the remaining 1/2 ten cents above the previous day's high, adjusting that stop daily until we are stopped out of the position.
• At present, there is no long setup showing on the map that matches our trading horizon.  Now, that could change if we get a double bottom setup around 76.37, however that has yet to manifest.

Clearly, taking a short position in the extremely bullish market we've had for the past three weeks is increased risk.  Be sure to factor that into any decisions regarding position size and exit strategies.

Happy Trading.

XLNX Tests Highs in Cup and Handle Pattern

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

XLNX Daily Chart

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

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

Here's how we're playing this one:

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

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

Happy Trading.

BK Ends Sub-Wave (3) with Bull Flag

Bank of New York Mellon (NYSE: BK) rode the Financial Sector's post-election wave to a new high on November 15, surging to 47.96 on high volume.  In what has become a very familiar pattern in the week following the US Presidential Elections, a strong flagpole pattern emerged.  As with other stocks that we've reviewed this week, the subsequent trading sessions consolidated into a well-defined flag pattern.

BK Daily Chart

 The major uptrend for this financial sector giant started on February 11th, and it has traced a very distinctive Elliott Wave impulse pattern ever since.  Notice that Wave 1 encompassed a 5 sub-wave impulse that ended in June, 2016.  Wave 2 was a complex corrective wave, and retraced about 61.8% of Wave 1.  That corrective wave lasted for almost 4 1/2 months before Wave 3 kicked off on October 13. 

Based on our Elliott Wave analysis, Wave 3 has not yet completed.  Thus far, we've traced three complete sub-waves and are in the midst of sub-wave (iv).  There's still one more upward move coming in Wave 3, and that's the wave we hope to catch. 

Two price targets come into play to the upside.  First, we have a flag pattern that's been in play for over a week, and that target is 50.36 on an upward breakout.  (One caution to note, however, is that the time-duration of the flag is becoming troubling.  The proportion of flag to pole is very close to invalidating the pattern.  Keep an eye on this if it goes on much longer.)

The second pattern to consider is the Elliott Wave price target.  Thus far, Wave 3 has not yet reached the full length of Wave 1.  Typically, Wave 3 is the longest of the three impulse waves of the five wave set, although it doesn't have to be by rule.  The actual rule states that Wave 3 cannot be the shortest of waves 1, 3, and 5, but it doesn't have to be the longest of the three.  Based on that, we set our initial target to the actual length of Wave 1, recognizing that it's possible for Wave 3 to fall short of that without violating the rule.  For our flagpole target to be valid, in that case, we need wave 3 to rise 11.85 from the height of Wave 2.  A rise of only 10.45 is needed to satisfy that requirement.

Now, our current sub-wave is a bit of a problem since Wave (iii) falls just short of Wave (i).  That means that Wave (v) must be shorter than Wave (iii.)  Fortunately, the flagpole target is a full 2 points below that level, so a truncated Wave (v) will still be able to hit our price target.  Thus far, the pattern we're seeing appears valid on multiple counts.

Let's take a look at some other aspects of the chart to see what they're telling us.  Look, for instance, at the bullish channel that formed at through each of the waves as drawn in tan dotted lines.  The upper channel line, when extended out to the right, now intersects our flag pattern precisely where we're trading today.  That line may well form a support line if the stock breaks to the upside. 

The other interesting characteristics we see are the two spinning top candles that formed yesterday and today.  (We'll ignore the doji that formed on the day after Thanksgiving since it was a short, low volume trading day.)  The spinning tops indicate indecision in this context, meaning this stock can break in either direction. Volume has been consistent throughout the flag pattern, however.  We'll have to wait to see which direction the market decides to take this one, although the overall chart increases the probability of an upside break.

Here's how we're playing this one.

• If it breaks to the upside - meaning, it has closed above the flag pattern with confirming volume - we will go long, setting a price target of 50.36.  Our stop will initially be below the pattern low.
• We will trail our stop to reduce and then to eliminate risk.
• If the stock breaks to the downside, we will stay on the sidelines.  The pattern in general suggests high risk associated with a downside break, so we won't be looking to play a short on this one.

As always, watch the volume signature on a break to either side.  If volume does not confirm the pattern, wait for a pullback and a second break.  With all the attention the financial sector is receiving in the post election cycle, this stock has a high potential for false breakouts in either direction as the market makers attempt to shake loose the weaker hands.  Always watch for confirmation before entering the trade.

Happy Trading.

NTRS Forms Bullish Pennant On High Volume Flagpole

Northern Trust Corporation (NASDAQ: NTRS), a Chicago based financial services holding company, formed a well-defined pennant after tracing a strong 4-bar flagpole on high volume.

NTRS Daily Chart

In addition to the classic pennant formation, the current uptrend completed three waves and is currently in the fourth.  Note that, for a short term price analysis, we're looking at the last of the impulse patterns starting on July 6th, not the major impulse that started at the low on February 11th.  The longer term wave is certainly a valid one, however the time horizon for the next wave in that analysis is longer than our preferred holding period.  So, for now, we'll focus only on the shorter wave analysis.

Starting with the flagpole, we will use 76.4% of the height of our pole as the measure for our price target.  Using this standard, the target for our pennant in an upward breakout is 88.71.  If, however, the pattern fails and breaks out to the downside, we will use the first major support line at 75.84 as our target.  Remember, at this point we don't know which way this pattern will break, although the volume signature at present is pointing us towards an upside breakout.

Our Elliott Wave analysis also points towards a fifth wave upward breakout with a target of 90.29.  Now, that target would take about two months to play out and would likely be a five sub-wave pattern itself, so while we're using it to confirm the potential strength of an upward breakout, the time horizon is too long for our preferred holding period of under a week.  Rather, we'll stick to the pennant targets since we can anticipate a swift short-term spike towards either of our targets.

Looking at key dates for this stock, we can ignore earnings within our holding period.  They next report on January 18th and we'll be out of any position long before then.  The other key date, however, does impact the analysis, however.  NTRS goes ex-dividend tomorrow (November 30th) with a $0.38 dividend.  For you dividend players, that means you need to own the stock at the close today, and the pay-date for this dividend is January 1, 2017.  It's important to factor in that dividend in our chart analysis, however, since those 38 cents will be taken off the stock price tomorrow at the open.

Here's how we're playing this stock:

• On a break to the upside, we will go long, setting a price target of 88.71.  Our stop will be just below the low of the pattern.
• On a break to the downside, we will go short, setting a price target of 75.84.  Our stop will be just above the high of the pattern.
• In both cases, "a break" indicates a close either above or below the pattern with volume that confirms the move.
• Also in both cases, we will trail our stops seeking first to reduce and then to eliminate risk.

It's important to watch the volume signature on this breakout.  The flag and pennant patterns are extremely popular, and they are therefore prime targets for market makers seeking to take out entry stops, thus trapping the trader on the wrong side of the intended direction for the stock.  We can see that this stock was marked up rapidly on very high volume over a period of four days.  Equally interesting and important, however, are the two down-days in the pennant. Notice the volume on both days.  (Ignore the volume on 11/25 - that was an early close on the day after Thanksgiving, so it tells us virtually nothing.)  The candles across the pennant have been very consistent in range, as has the volume signature.  Price is being held at this level by the market specialists, although it's too early to tell if this is in preparation for another accumulation phase or a setup for distribution.  We need the breakout to tell us that.  Watch the chart, study the volume, and ride on the coattails of the market makers when the breakout occurs.

Happy Trading.

OPEC Poised for Oil Production Cut on Wednesday

The 171st Meeting of the OPEC Conference is scheduled to meet this Wednesday, 30 November, in Vienna, Austria.  It's widely anticipated that OPEC (Organization of Petroleum Exporting Countries) will agree to cut oil production by at least 2.5% in their 10:00 AM EST announcement.  OPEC last cut oil production in August, 2008.

Until this afternoon, the largest wild-card in the equation was Iraq, however they announced today that the fourth largest oil exporter in the world will cooperate with OPEC and called for a 4.546 million barrels per day reduction in production.  Iran is similarly considering a cap on production, although they have yet to announce any projected levels.

Oil spiked on the news from Iraq, however it settled down before the close, today as the news was digested by commodity traders.  As of this writing, WTI Crude is trading at 46.92 and Brent Crude is trading at 48.02.

It's important to note that four of the top ten oil producers in the world - Russia, the US, China, and Canada - are not members of the OPEC cartel.  None have signaled either support or opposition to the OPEC plan, although all would benefit from a production cut accompanied by higher oil prices in 2017.

Ironically, the initial call for a cut in production came from Saudi Arabia, the world's largest producer.  Starting in 2014, Saudi Arabia increased production dramatically, driving oil prices from their $100 per bbl range down to as low as $26 per bbl.  Their intent at the time was to cripple the US shale market by driving price below a profitable level for the hydraulic fracturing wells used in the shale fields.  While the price cuts did initially cripple the shale industry, price eventually stabilized in the mid-40s, thus mitigating the impact.  Saudi wells could absorb the short-term impact on profitability, however as we head into the fourth year of abnormally low prices, the impact is now being felt across the Saudi Arabian economy.

Analyst expect at least a 2.5% production cut on Wednesday.  This will likely cause significant volatility in the oil market for the short term, and we can expect to see an overreaction to the upside until the actual impact of the cut is determined.  With refining currently at or near capacity, it's likely that the cuts will have little end-user impact over the long term, and we can expect oil to stabilize in the low to mid 50s in 2017.  That's still lower than it should be, however it's far better for the economy as a whole than the excessively low range we saw in 2015 and parts of 2016.

Complexities Abound in Trade Deficit Discussion

The US Census Bureau released advanced October trade deficit numbers on Friday, signaling a 9.6% increase in the International Trade imbalance.  Similarly, both wholesale and retail inventories declined by 0.4% month over month. (Seeking Alpha: International Trade.)

Historically, a trade deficit is not necessarily a problem, and economists have split over the years on the actual impact of a trade imbalance either way.  Traditionally, countries with strong, growing economies achieve a trade deficit as compared to countries with stagnant or declining economies. We see this today when we compare the trade deficits between the US and Japan, for example.  This makes sense in the context of healthy economies placing higher demand for goods and services than can be satisfied internally, thus the imbalance on imports.  Similarly, a country in recession cannot afford to import, thus their imbalance on the side of exports.

The other positive aspect of the trade imbalance comes in the form of investment.  Typically, the nation with the trade deficit has the healthier economy and thus enjoys an influx of investments from foreign sources.  These investments boost the Treasury bond markets, corporate and municipal bonds, equities, and Forex. It's most obvious when there is negative news overseas and the US markets experience a surge in Treasury bond and Utilities Sector investments as foreign traders seek a flight to safety.

Beginning in the mid-1980s, however, there was a subtle but not insignificant shift in the causes and impacts of the trade deficit as viewed from the US side of the ledger.  With the relaxation of trade restrictions with China, Russia, and other Eastern Bloc nations came a wave of technology exports that, initially, were extremely beneficial to numerous US industrial sectors.  This was followed by a slew of increasingly permissive free trade agreements intended to further lubricate the flow of goods and services in both directions.

What the latter actually created, however, was a means by which entire industries could circumvent US labor, environmental, and safety laws.  The results were goods that could be produced in third world countries at a fraction of the cost of that same production in the US since those third world countries bore none of the financial burdens imposed by US regulations and US labor requirements.  Little has changed in that regard, today.

With the restrictions on technology trade lifted, these same third world countries were able to improve the quality of the product they produced to the point where they were either en par or surpassed the quality of the same product produced in the US.  No longer was "Made in Japan" a symbol of "junk" but rather it became a symbol of high quality as evidenced by the dominance in the 1990s of brand names such as Sony or Toyota.  We see the same surge coming out of the Korean peninsula today with the rise of Samsung (current problems notwithstanding) and Hyundai.

The situation on the service side is equally grim.  US customer service and call centers now abound in the Philippines, Costa Rica, and India. The reason is simple: labor costs.  High paid technology resources - resources that would command a $150,000 per year salary (plus another 30% in benefits) in the US - are now outsourced to companies in India, Bangladesh, Costa Rica, the Philippines, and a host of former Soviet Bloc nations simply because they can be paid less than 1/3 that salary and not receive benefits.  In many companies the mantra is clear - if it can be off-shored, then it will be off-shored.

The regulatory imbalances and the labor law imbalances remain, however.  The developed world is effectively turning a blind eye towards sweatshop labor and environmental disaster, provided the third world continues to ship inexpensive yet high quality products.  This is coming at a severe economic cost.

On top of this loss of critical jobs to overseas subsidiaries, there is also the rapid march towards automation.  Self-service checkout lines, unattended gas stations, self-service airline check-in, and even the full automation of large warehouses such as those run by Amazon are all adding to significant job loss across the nation.  (Bloomberg: How Amazon Triggered a Robot Arms Race.)

The October 2016 Labor Force Participation Rate as reported by the U.S. Bureau of Labor Statistics was 62.8%.  This rate measures the number of people that have jobs in the US aged 16 to 65 that are not students, disabled, in the military, or officially retired, and, in my view, is the truest measure of the employment situation we have.  What this shows is that 37.2% of the population eligible to work is not working.  That's 95 million Americans that should be working but do not have jobs.  This doesn't factor in all those that are underemployed, having part-time jobs where they want full time, or having lower skilled jobs due to jobs in their areas of proficiency being unavailable.

This is the hidden dynamic behind the trade deficit put into context in the 21st century. While we don't recommend an immediate repeal of international trade deals - the impact of that would be economically catastrophic - we do need to increase the profitability of bringing service, technology, and manufacturing jobs back into the US.  This doesn't mean the imposition of tariffs.  All trade tariffs are immediately passed on to the consumer, so a trade tariff is simply another sales tax that the consumer will ultimately pay.  Rather, the objective - and it's a very long term objective for it to be achievable - is to raise the labor standards and environmental standards in third world countries.  For US companies with overseas facilities, we can certainly consider the delta between US costs and their overseas costs to be taxable income.  The objective must be to incrementally raise the costs of the overseas holdings to the point where it's more economical to return those services to the US.  That cannot be achieved in the short term, however, and requires the cooperation of other industrial nations, cooperation that will be difficult to achieve, at best.  Still, the path we are on right now is one that leads to a very lengthy economic decline and a resetting of the standard of living we've come to enjoy in this nation.  That may still be a generation or two away, but without taking action on securing our own industrial and service viability, that destination is inevitable.

LHO Completes Double Bottom - Poised For Next Move

LaSalle Hotel Properties (NYSE: LHO), a real estate investment trust (REIT) that specializes in upscale luxury hotel properties in prime markets around the US, completed a classic double bottom pattern on November 17.  Dubbed a "Big W" pattern for obvious reasons when you look at the chart, the double bottom itself is a very reliable trading opportunity.  Now that the pattern has completed, however, we'll look at our options for setting up the next play with this stock.

LHO Daily Chart

The double bottom started at Point A on the chart, with the first leg completing at point B.  The bound back up to "C" completes the retrace leg, and we quickly return to the second bottom at point "D".  Stock pattern guru Thomas Bulkowski would classify this as an Eve & Adam double bottom due to the rounding effect at point B.  That does matter, since the potential rise is influenced by the shape of the bottoms.

If we measure the length of leg A-B, take 76.4% of that leg, and add it to point D, we come up with a price target around 27.70.  That target was met on November 17th, so we can consider the double bottom pattern complete.

It's important to note the candle that appears on November 17th as that target is reach.  The long upper wick on the candle, accompanied by higher than average volume suggests climactic activity where supply has now overtaken demand.  The likelihood of this stock climbing higher in this pattern is greatly diminished.  Indeed, we see the stock amble sideways for the next week.

Look closely at the activity on November 22nd.  We have very high volume on a day where the stock opened up, drove higher, and then plunged to its lows before closing below the open.  Similar behavior on much lower volume was seen the day before.  The range for the day was small, at least as compared to the candles that made up the entire prior leg up, yet our volume was very high.  From a Volume Price Analysis perspective (VPA,) this should be shooting warning flares all over your charts.  Remember that only the large institutions can really drive volume to that level.  Retail traders simply don't have the capital to do it.  Large institutions traded a lot of shares that day, but the price basically went nowhere.  Now, whether they were holding price down to accumulate large quantities or they were holding price down to unload large quantities, we don't yet know.  It's a sign, however, that the next move for this stock should be a fast, explosive move in either direction.

With that in mind, here's how we'll play this stock:

• The final leg of the "W" formed a flagpole, and the pattern for the past week was a clear bullish flag.  If we close above the flagpole, then we will take a long position, setting our price target at 31.11.  That's 76.4% of the flagpole height added to the current top of the flag.  Our stop in this case will be the mid-point of the flag on breakout day.
• If, however, the breakout is to the downside, signaled by a close below the bottom of the flag, then we will take a short position, setting our price target at 23.06, the low of the double bottom.  Once again, our stop will be the mid-point of the flag on breakout day.

We expect the move in either direction to be swift, matching the slope of that final leg in the "W".  If the stock meanders or doesn't move with the velocity we anticipate, then we'll exit the trade.  Lackluster movement would invalidate our interpretation of the behavior over the past week.

Once in the trade, we need to be cautious of overhead resistance on the long side, as well as a level of support on the downside.  There's really only one area of resistance of concern, and that's the dashed line at the top of the "W" pattern.  Other than that, there's not much constraining price movement.  On the downside, however, there's an extremely strong support level around 25.20 were a solid support line coincides with the 38.2% retracement level of the entire double bottom pattern.  The potential for a bit of consolidation at that level is significant.  If we're short, we'll tolerate that for a day or two, but after that we'll exit the trade.  Since we pay interest on short positions, each day it meanders sideways is another day that interest takes away from our potential profits.  When I'm short, I want the stock to move, not sit there in neutral.

As always, manage your trade to reduce and then to eliminate risk.  Take your profits at the first indication that the trade is no longer playing out as planned.  Always remember that risk management and money management are the keys to profit, and as always, know your exit strategy before you enter the trade.

Happy Trading.

CE Drawing Bull Flag Pattern On Daily Chart

Hot on the heels of an Acetic Acid price increase in China, Celanese Corporation (NYSE: CE) is drawing a distinctive bullish flag pattern on the daily chart.

CE Daily Chart

The announcement came on November 23, and signals a strengthening of economic conditions for the chemical giant in the Asian markets.  As the daily chart shows, the news came as no surprise to market insiders who had been pushing demand since the 11th.  That demand forms a distinctive 7-point flagpole on stronger than average volume.

More telling is the volume accompanying the flag itself.  Notice the lack of supply accompanying the minor declines in price into the 23.6% retracement level.  That level may serve as support for the flag, although there's a better support level hovering at the 61.8% retracement level.  From an Elliott wave perspective, there are two potential wave counts from the current pattern.  In the first situation, it's possible that a 5-wave impulse has completed and we're now into an "A" wave retracement, although the shallowness of the retracement currently rules out that interpretation. If it is, however,  then a 61.8% retracement would be the norm.  On the other hand, this could be an extended wave "1" formation, in which case we're in sub-wave "iv" of that impulse.  If that's the case, then a shallower retracement to 38.2% is more likely, and it's the one currently supported by the last week's candles.

Which count is correct, once the stock resumes an upward move, is irrelevant from the swing trade perspective.  Either way, the next wave will be an upward wave, and that's the wave on which we intend to capitalize.  What does matter, however, is the potential profit, and our initial analysis is focused on that bull flag.  The pole length is 7.15, and we'll use the 76.4% value (5.46) to estimate our profit from the breakout point.  Currently, that would be 84.06, although the longer the flag takes to break, the lower that target will be.  No matter, the profit potential remains the same.

Now, everything's not rosy on the daily chart.  Look at the last three major upthrusts on this chart.  All three of them have traced pretty much the same length, and all three have pretty much the same slope.  The prior two ended with a consolidation period that looks suspiciously like the consolidation we've seen in the last week.  Now, the reason we have cause to believe that this one may be different and may be the start of a new major bullish impulse is that the flagpole started with a breakout over a major resistance level formed by three separate peaks and a horizontal channel.  The pole also did so on very high volume, so there was a lot of institutional support for this surge.  The volume pattern implies this one is different.

The weekly chart, however, also urges caution.  Let's look at it.

CE Weekly Chart

The weekly chart completed a perfect A-B-C wave pattern in July 2012 before starting a slow but steady channel-bound rise to where we are today.  The cyclical nature of this stock is evident when you look at the overall pattern, and that's where we must exercise some caution. 

The base of the channel is clearly defined, and that represents the lowest level of support for long-term investors.  The upper bounds of the channel, however, are a bit more ambiguous.  The uppermost line connects the two highest spikes, and if our daily scenario plays out, that will likely be the upper resistance level that will constrain our trades.  The middle line represents the initial upper boundaries of the channel, and you can see that a breach of that boundary is quickly followed by a retreat.

Therein rests the concern.  We penetrated that boundary three weeks ago, and have remained above it - barely - for two weeks.  This warrants scrutiny.  If we are truly in the start of a new bullish impulse, then that line will become support.  If, however, the price retreats and stays below that line, then our play will be a short through to the bottom of the channel.

The weekly chart provides a long-term view of the trend, and also provides insight into strong support and resistance lines that will impact the daily chart.  In this case, the breakout above the three peaks that formed through 2015 and early 2016 is significant.  What has yet been seen, however, is if that breakout is a bull trap, if there will be a pullback to test that line, or if we're heading north without pause. 

So here's how we intend to play this:

• If we close above the bull flag on higher than average volume, then we will go long.  Our stop will be just below the low of the flag and we will adjust that stop daily to first reduce risk and then to eliminate it.  Our price target will be 5.46 above the flag top, wherever that happens to be when it's breached.
• If we close below the bull flag on higher than average volume, and the middle channel line on the weekly chart is breached, then we will go short.  Our stop will be just above the high of the flag, and our price target will be the bottom of the flagpole at 71.94.  Depending on volume patterns, we'll consider taking partial profits at the support line of 72.96.

Let the market decide which way it wants to run, and follow it.  As one famous options player puts it, "Don't anticipate; participate."

Happy Trading.

GE Posts Bullish Pennant Break

Disclaimer: This article is not a buy or sell recommendation.  You must do your own analysis and consider your own risk, money management, and trading strategy before placing any trades.
 
GE showed up on my radar a bit late, so a potential good trade opportunity was missed.  Despite that, it still provides a good lesson in items to watch when analyzing a chart for a short term swing trade.

GE Daily Chart

The trading opportunity came about as GE broke out from a bull pennant pattern on Tuesday.  The flagpole was well defined although the pennant waved in the direction of pole, which is less than desirable.  The breakout occurred Tuesday, and using 76.4% of the height of the flag as our target, we come up with a potential price target of 32.88.  But let's examine the rest of the story.

For openers, we can see that there has been a considerable amount of overlap in trend patterns on this chart going back to the beginning of the year.  By definition, when there's overlap of multiple waves, then we are in a consolidation pattern, not an impulse pattern.  So let's keep that in mind.

We can see that the pattern leading down to the flagpole was a 5-wave pattern. Now, a case could certainly be argued that the two waves prior to that could have been an "A" and "B" wave, which would make the prior wave a "C".  This means we are now in one of three possible waves - an "X", a new "A", or the start of a new impulse wave, making this Wave (1).  For the moment, it's irrelevant since all three of those tend to be 5-subwave patterns.  For the purposes of this analysis, we can treat them equally.

An area of concern on the chart coincides with where our stock is trading right now.  Look at that month-long consolidation period, and look at the strength of the Volume at Price indicator at that level.  We can anticipate a period of consolidation here before the stock decides to either continue its upward climb or retrace back to the start of the flagpole.

Another warning sign comes on the breakout itself.  Volume was extremely light, so there wasn't a lot of enthusiasm for the upward push.  The day after the breakout, there was a very narrow bar, again on light volume.  I'm not seeing a lot of demand driving the price upward.

Thus far, GE has retraced 61.8% of the prior wave, which again forms a natural resistance zone, and there is also horizontal resistance waiting for us at the 76.4% level.  That level corresponds to a failed retest of the prior day's high on April 1, 2016.

Our price target lines up very well with the 52-week high that actually precipitated the stock's decline on July 20th.  That increases our confidence that our target is a good level to either exit the stock completely, or to at least take partial profits and tighten the stops.

So here's how we're watching this stock and potentially playing it.  Today is an early close, and volume will be extremely light.  I won't be entering any position today.  My normal trading window is from about 10:15 to 15:30 Eastern Time.  This avoids the extreme volatility of the open and the close and helps prevent entry at a time where market makers are gunning for stops and limits.  It also allows us to see where the market makers are positioning themselves since we want to be on the same side of the trade as they are.  So with a 13:00 close today, I'm sitting this one out.

I'll be watching that resistance line carefully.  If we see penetration of that line with some gusto, then we'll hop into a long position.  Stops, however, will be extremely tight since I expect at least one more retest of that resistance line before we head north towards the price target. 

A play to watch is for consolidation at the 76.4% level followed by a retest of the resistance line.  If the stock shows a bullish candle pattern on that retest, then that would be the perfect opportunity to jump in, setting a stop just below the low of that resistance pattern.  But we need a bit of patience, since it may take another week or so for that pattern to play out.

The dotted horizontal lines are the Fibonacci Time Zones.  Zone 0-1 marks the time it took for the flagpole to complete.  We're using that as a reference to see just how much enthusiasm there is for an upward thrust, and we're also using it to gauge the width of any subsequent consolidation periods.

There are no earnings announcements on the horizon, nor is a dividend imminent.  We have time to watch this stock play out and to see which pattern ultimately comes into focus.  For now, the play is long, however a failure to break through that resistance line could rapidly change that perspective.  Keep an eye on this one and see which way it breaks.

Happy Trading.

Solanezumab Failure has Eli Lilly Down But Not Out

Disclaimer: This article is not a buy or sell recommendation.  You must do your own analysis and consider your own risk, money management, and trading strategy before placing any trades.

Pharmaceutical giant Eli Lilly and Company (NYSE: LLY) suffered a serious blow, yesterday, with the announcement that their premier Alzheimer's drug Solanezumab failed Phase III testing.  The latest study failed to demonstrate a statistically significant improvement in the slowing of cognitive decline as compared to a placebo.  Shares of LLY plummeted over 11% at the open.  As a result of the study, Eli Lilly is also taking a step back to assess the status and progress of other Alzheimer treatments they currently have in their development pipeline.

The tale-of-the-tape, however, shows some serious potential for traders in all time frames.  Let's examine the weekly, daily, and hourly charts for LLY to see what information we can glean.

LLY Weekly Chart

 Let's start with the weekly chart.  A selling climax in September of 2012 ended the prior consolidation period for this stock and started the bullish impulse wave that continues through today.  The weekly pattern has thus far traced three well-defined Elliott Waves (marked (1), (2), (3) respectively,) and is currently in Wave (4). 

As of yesterday, we've retraced 61.8% of Wave (3).  The alternation rule is satisfied since Wave two was short and relatively flat - only about a 38% retracement of Wave (1).  Given the weekly pattern, we can expect a resumption of the bullish impulse into a Wave (5).  Since Wave (3) is longer than Wave (1), there are no restrictions on the height Wave (5) will travel, although it will typically run between 68.2% and 100% of the length of Wave (1).  If yesterday marked the end of Wave (4) - and to be clear, we do not know that, yet - then we have a minimum price target range of 79.25 to 88.77.  Note the caution sign, however.  There is very heavy resistance around 71.00, so once the uptrend resumes, we can expect a bit of a pause and consolidation at that level.  What this chart does tell us, though, is that there should be another bullish impulse coming, and there's potential for price movement between $15 and $24 to the upside.  Since we're looking at a weekly chart, however, do consider that the time-frame for the full Wave (5) move is approximately 20-months.  Playing all of Wave (5) is not a short-term strategy.

LLY Daily Chart

Now let's turn our attention to the daily chart.  This is the chart we use both to assess potential trades and to plan exit strategies.  The methodology we follow uses three charts - the daily for the overall setup and strategy, the weekly for the long-term trend of the stock or market, and the hourly for the entry strategy.  So what is the weekly telling us?

First, it tells us that the bad news really came as no surprise.  Look at that nice double top pattern that developed in August and October, and look at the swift and steady decline that followed the failure to retest those August highs.  Sure, we had a bounce in November - the entire market had a bounce in November, but the volume on the bounce was very lackluster.  It doesn't come close to the volume we saw in late June when the stock covered essentially the same ground on its way to the August high.  What can we conclude from this?  The smart money had an inclination that bad news was on the horizon and they gradually turned shares over in preparation for it.  Their long-term plan suddenly comes into focus when we look at the hourly chart, but more on that later.

The gap up last week was on better than average volume, but as we saw the next day, it was unsustainable.  A test of that high failed, and the stock meandered downward in a lackluster fashion for the next week.  The behavior and pattern strongly suggests that the stock would close the gap before much longer.

Notice, however, that red line I've drawn on the chart.  Prior to yesterday, we'd have expected that line to represent a very strong support line, and we would have played a long position on a test of that line.  That line represents the 38.2% retrace of the entire Impulse, the 50% retrace of Wave (3), and the 50% retrace of yesterday's gap.  With traders in all time-frames spotting significance at that level, we can expect a period of consolidation and testing as price approaches and attempts to penetrate that line.  Of course, following yesterday's gap, that's no longer a major support line but is now a major resistance line.  Either way, we can play it.

LLY Hourly Chart

Finally, let's look at the hourly chart.  In this case, it not only helps us plan an entry strategy, but it also gives us insight into what the smart money - i.e. large institutions and market makers - are doing.  Remember, the market maker is almost always on the opposite side of the retail trader, but if we want to profit, we need to be following, not opposing, that market maker.

So what did the smart money do, yesterday?  The went bargain hunting and bought a tremendous quantity of LLY throughout the day.  The navy blue line represents yesterday's open.  Now, normally, I ignore volume on an hourly chart, but yesterday's can't be dismissed.  Look at the candle and the volume in that first hour.  There was so much demand at that point that the stock moved over 2 points upward in the first hour.  That trend continued through lunch before the bars narrowed and price settled into a narrow range.

Going into the last hour, the stock had gained almost 4-points from the open.  The last 15-30 minutes of trading normally sees extremely high volatility as day traders close their positions.  You can glean a lot of information in that period.  Wednesday's close was particularly significant since the market is closed today for Thanksgiving and tomorrow has a 1:00 PM close.  Many traders turn it into a 4-day weekend, and volume will be extremely light tomorrow.  As a result, short-term traders - both day traders and swing traders alike - do not like to carry risk through the close on the Wednesday before Thanksgiving.  Too much can happen before the market opens on Monday.

Did we see the smart money unload their shares yesterday afternoon?  Not even close.  Oh, it was slightly down in the last hour, but you'd expect that.  The range, however, was extremely narrow, and the volume was en par with midday.  The smart money not only held onto their shares, but they also kept price in a very narrow range.

So, how are we going to play this stock?  There are numerous potential strategies that could play out: 

1.  A four to seven day consolidation period could follow yesterday's action, creating either a flag or a pennant with a downward breakout.  If that happens, then we'll be looking to play a short when the flag or pennant is violated.  Our price target in that case would be 53.75. (I normally set the target at 76.4% of the height of the flagpole, either adding it to or subtracting it from the violation price depending on direction.)
2. A four to seven day consolidation period could follow yesterday's action, creating either a flag or a pennant with an upward breakout.  If that happens, then we'll play a long position when the flag or pennant is violated.  Our price target would be 78.84, although we would expect that to be a five sub-wave impulse that we'll likely play separately.  
3. Without a flag or pennant pattern developing, we'll look to play a sustained break of yesterday's high with a long position, setting the target at 70.75, just below that major resistance level.  
4. Once price is playing around that resistance level, we will watch for two things.  If there is a second failed test of that resistance level, then we'll play a short back down to yesterday's low.  If, however, a second test succeeds and it's penetrated, then we will wait for the stock to drop back down to that resistance line in a retest.  At that point, we'll look to go long  with a target back to around 76.50.  (Notice the resistance lines forming at that level.)

You'll notice that we're not looking to play a short if yesterday's low is taken out unless that happens following a flag or pennant.  Due to yesterday's decline, there's a 4-day short-sale restriction in effect, so we have plenty of time to assess  any plays to the downside.  Until mid-next week, the only plays are up, and that's just fine for now.  Once that short-sale restriction is lifted, however, be cautious of a downside surge that could produce a price trap.

However you chose to play this, be sure to determine your exit strategy in advance.  One of the primary rules of swing-trading is to know how you will exit the trade before you ever enter the trade.

Happy Thanksgiving!

Is the Dow Rally a New Impulse Wave or a Bull Trap?

The Dow Industrials average has been on a tear since November 7th, rising over 990 points in two-weeks.  The question we have to ask, though, is if we're seeing the start of a new bullish impulse wave or if this represents an end-of-year bull trap.  Let's look at the daily chart:

Dow Industrials Daily Chart

A short but very productive impulse wave started on February 11, 2016, and that wave pushed the market to a high on April 20th.  If we consider that Wave 1, then Wave 2 ran pretty much through the remainder of 2016.  It was a fairly flat consolidation that culminated with a very tight two-month congestion leading up to the US presidential elections.

The current impulse wave - which may very well be Wave 3 - started November 7, the day before the election.  From there, the market surged skyward, gaining 990 points in a week.  This flagpole formed the foundation for a classic pennant pattern that we appear to have broken yesterday.

Now, the rosy interpretation of this chart places a price target at 19,920 for that flagpole pattern, and it should be obtained relatively quickly - no more than a week or two.  Similarly, the target for Elliott Wave 3 is 20,500, and that lines up rather well if the flagpole target ends at a sub-wave consolidation before continuing to the peak. 

All of this is plausible, especially as we head into a period traditionally marked by a Santa Claus Rally.  That's when this could get a bit ugly, though.  The alternation rule states that Wave 2 and Wave 4 must differ in form and time.  Wave 2 was long and relatively flat.  Therefore, Wave 4 must be short and deep.  Expect a very sharp correction that takes out anywhere from 50% to 61.8% of the Wave 3 gains, and expect it to happen very quickly.  That's as much as a 1650 point drop before Wave 5 commences.


Are there other warning signs on the horizon?  Certainly.  The Dow just achieved an all-time high, but it did so on relatively low volume and with two consecutive narrow range bars.  This implies there really wasn't a lot of enthusiasm pushing the rally, and we may shortly see some climactic action as the large investment houses wind down for the holidays.  This rally would have been much more convincing if accompanied by high volume.

There are also a couple of major events on the horizon that could easily turn this rally into a bull trap.  First, it's a near certainty that FOMC will raise interest rates when they meet on December 14.  In fact, the futures market has priced in a 98.2% chance of a rate increase.  Fed Chair Janet Yellen has also signaled an intent to raise rates twice more in 2017 (data permitting, of course.)  So that would likely mean a June and December hike, and that's precisely what you see if you look at the futures market.

In the midst of this slight tightening of US monetary policy, the UK will be moving towards an Article 50 invocation.  Prime Minister May has targeted the end of March for that major milestone, although the UK courts have added a measure of doubt to the timetable.  Whenever it's done, however, it will certainly have a sobering impact on the EU and British markets.  The combination of Brexit and US interest rate hikes will certainly send shock waves through the world markets. 

So, what does all this mean for us as traders?  Well, that we are in a bullish impulse at the moment cannot be doubted.  We're going to continue playing the long side as long as that impulse remains in effect.  Now, Friday's an early close and will be ultra-low volume, so I'll be sitting that one out.  But once the market opens on Monday, my bias will be to the long side.  The closer we get to 19,500 and then 19,900, however, the tighter my stops will be, and the more I'll be watching for sub-wave 4.  That sub-wave and then the actual Wave 4 will be two that we will want to catch to the short side.  Both will be deep, but both will be short, so remain vigilant.  There won't be much of an opportunity to hop into those waves once they are in full swing.

For now, have a Happy Thanksgiving here in the States, enjoy a nice 4-day stretch away from trading, and let's see where the market decides to take us next week.