Schlumberger Stuggling Near 52-Week Resistance

Following their 52-week low on 20 January 2016, Schlumberger Ltd. (NYSE: SLB) labored in fits and starts to finally reach a 52-week peak on 1 December.  For the rest of the month, however, the energy giant repeatedly tested the highs only to be beaten back with bearish long-wick candles.

SLB Daily Chart

Multiple signals on the daily chart suggest that a breakout one way or the other is imminent.  At first glance, the pattern is somewhat encouraging.  The short-term pattern from 30 November draws a distinct bullish diagonal support line matching the 10-day Exponential Moving Average.  SLB traced daily lows along that trendline at least eight times in the past three weeks, yet the trendline has held throughout.  That, certainly, is a bullish signal.

The counterpoint, however, is at the top of that pattern.  That trendline originates at a 10 October 2016 top and with four distinct touches.  It was only penetrated briefly on one occasion. The two trendlines together form a rising wedge. Still slightly bullish, but short term at best.

Volume starts to paint a troubling picture, however.  The highest volume in the last three quarters comes on a very bearish shooting star candle on 1 December.  That combination is representative of a buying climax, potentially signalling the end of this uptrend.  Indeed, the next two high volume days, although technically up days, are also very bearish signals.  Since the first test of the 52-week high on 12 December, volume has declined consistently.  There's little to no demand entering the trading scene through a second test of the high on 22 December.

Now look at the three peaks of 18 August, 19 October, and 30 November.  How's that for a perfect triple top setup?  That SLB traded a mere 3% above the high of the triple top while volume continued to decline is yet another bearish signal.  It's easy to interpret this pattern as a sign that the smart money is gradually distributing their shares in preparation for a significant decline.  How significant?  Well, the target would be an 8-point decline from the break of the upward sloping neckline drawn along the pattern bottoms.  That's a full 7 points from where SLB is trading today and would represent a healthy correction.  Given the negative view SLB took of the energy outlook through 2016, such a correction is not out of the question.

Finally, look at the RSI(9) pattern.  From the 2 November pattern low to the 23 December close, the RSI drew a consistent bull channel that matched the price pattern channel drawn by the stock.  The tests of the 52-week high, however, form a bearish divergence in the RSI indicating increasing weakness.  Just as price sits on an upward sloping support line, so too does the RSI.  Watch for a confirming break in both price and RSI to signal the start of a potentially significant decline.

Certainly a solid break on confirming volume above the 52-week high would create a long trade setup, and we would not skip that if it occurs.  The likely move, given the signals on the chart, are two the downside, however, and for that setup we're watching for a southerly break of the upward sloping support line, again with confirming volume.  We are prepared to play whichever trade sets up.

Happy Trading

Descending Triangle in COP Hints at Upside Strength

Conventional wisdom for descending triangles is that they are bearish patterns that produce lucrative downside trades.  Reality, however, is that a breakout can occur either way, and that breakout - in the short term - can be lucrative regardless of the direction.  As we head into the final trading week of the year, we're seeing just such a short term pattern in ConocoPhillips (NYSE: COP) and the current signal is hinting strongly at an upside break in the short term.

COP Daily Chart

The current triangle started with what appears to be a continuation gap on 12 December.  From that point, the stock has traded in a tight sideways pattern that appears to be setting us up for another significant short-term move.  There are two words of caution here, though.  While I call it a continuation gap, there's the potential for it to be an exhaustion gap.  The stock did gap up with gusto at the open on the 12th and it pushed to news highs before retreating significantly to close well below its open.  A true continuation gap should have a close in the direction of the gap, not opposed to it.

Additionally, a long-shadow on the 15th briefly closed the gap.  That trait is also not typical of a continuation gap, and it does give us pause when considering the significance of the gap itself.  Instead, we'll focus on the other subtle hints that the chart is offering. 

The base of this triangle formed at a very strong line of support that dates back to October 2015.  Notice that it served as strong resistance in a pullback on 15 December 2015.  That COP broke through this line with a gap and has held the line on eight consecutive days is a message we can't ignore. 

The next bit of evidence is a bullish channel marked in dashed green lines.  The slope is clearly established at the bottom of the channel with three well marked touches.  Extending that line to the top of the channel also produces three clear touches, and the two days surrounding the gap appear to transform that upper boundary into a support line.  We can see how that line held on 15 December, in fact.  It's important to note that we closed right on that line on Friday.  Now, volume on the last trading day before Christmas is historically light, as is trading the week between Christmas and New Years, so some caution is needed when reading any signals that may arise over the next four trading days.

Let's turn out attention next to the 52-week high-low Fibonacci retracement levels. After bouncing around between the 38.2% and 61.8% level for a good eight months, the latest surge pushed COP above the 76.4% level where it has remained.  That in itself is considered a bullish move and is a major signal that the downtrend was successfully reversed.

Given the strength projected for oil in the coming year, strong guidance from COP, a major oil production deal from OPEC, and a rising US Dollar, we believe the signals from COP are to the upside.  The company completed planned 2016 distributions, generating $1.3 Billion in revenue, well above it's original $1 Billion target.  Taking those distributions into account, the forecast for 2017 is still encouraging, with up to 2% year over year growth in the offing.  Additionally, they started their planned $3 Billion share buybacks in November, adding further strength to the underlying issues.

COP is now on our watch list for a potential long trade.  What we need to see, however, is confirmation that both the major S/R line in bold-dashed blue and the upper channel line in dashed-green will hold.  We also need to see a close above the hypotenuse of the triangle on convincing volume (seasonably adjusted.)  You can see on the chart that I've added the Fibonacci lines that mark the section from the triangle base to the 52-week high.  A reasonable price target for that upward break is the 76.4% extension at $55.78.  That line corresponds to a horizontal resistance level (not drawn) going back to that consolidation region from October to December 2015.

Throughout this period and into the beginning of 2017, it's important to keep the broader market in mind as well.  We're starting to see a bit of a pause in the strong uptrend that's characterized the market as a hold since the US elections in early November.  How the market will behave after the first of the year is anyone's guess at the moment.  A post-inauguration pullback - or even a correction - is likely, given the strong run that ended the year.  The point is, watch the broader market and be sure the broader market is moving in the right direction should COP breakout shortly.  A trade counter the broader market will likely fall short of price projections and could adversely effect our reward to risk positioning.  It's something to keep in mind as we watch for a break.

Happy Trading.

Marriott Running Out of Gas in Wave 3

Marriott International, Inc. (NASDAQ: MAR) broke out of a ten-month long horizontal consolidation on 26 October 2016, beginning a healthy climb to a 52-week high and peaking on 16 December.  The rise continued despite a very disappointing earnings release on 7 November in which the hotel giant beat EPS by only $0.02 and missed on revenue by $380 million.  In fact, the stock didn't even appear to pause to read the announcement, surging north on both the 8th and 9th of November before taking a brief two-day breather. 

MAR Daily Chart

What we see from the pattern, however, is a five-wave impulse that started after tight one-month consolidation period that preceded the upward climb.  The volume pattern in the days leading up to the breakout and the compactness of that consolidation from late September to late October 2016 are indicative of significant institutional interest.  Once the institutions decided to accumulate, there was very little - including disappointing earnings - that would stop the upward thrust of the stock.

Wave 1 ended on 14 November after completing five well-defined sub-waves.  Wave 2 was brief and flat, although it did include an a-b-c sub-wave correction.  We're now well into Wave 3.  Now, following the pattern from Wave 1, it looks like there are two possible wave counts in progress.  One - the one I marked - shows sub-waves i, ii, and iii complete with iv in progress.  There's another possible count that I didn't include, however, and that's for the points currently labeled ii, iii, and iv at the top of the chart to really be an (a)-(b)-(c) corrective pattern that will complete wave ii.  Which count turns out to be correct will be determined as the rest of the pattern plays out.  From a directional perspective, it doesn't matter.  The next direction is up.  Where it does matter, however, is from a move magnitude perspective.

If the count I've marked is the correct one, then wave iii is much shorter than wave i, meaning wave v has no breathing room at all.  It must, by definition, be shorter than wave iii in this scenario, which means it will barely pass the 52-week high before the impulse is over.  Tiny, indeed.

If, however, the alternate count is correct, then we've yet to see the wave iii move, and that has plenty of headroom for full development.  The problem is, we can't know for certain, so we need to turn to other signals for guidance.

You'll recall that I've said on numerous occasions that I don't trade based on indicators.  There are numerous trading systems that rely exclusively on indicators, and I've tried a number of them. They don't, however, fit my trading style, and I've never really been successful relying just on the indicators to enter or exit a trade.  I'd much rather read the chart and use the indicators to add additional pertinent data into my analysis.

There are four indicators that I typically use to increase the data at hand, and you see all of them on the chart included in this article.  The first is above volume, and it's the On Balance Volume indicator.  I use the slope of the indicator to tell me if the stock is being accumulated (rising slope) or distributed (falling slope.)  You can see that the slope has been up throughout this move although there's a slight hook down for the last couple of days.  No surprise there, so no additional data comes into the equation.

The next is right below the chart, and that's a 9-period RSI (Relative Strength Index) overlaid with a 21-period Exponential Moving Average of the RSI.  I use the EMA as a signal line, and it gives me a pretty good view of the direction the stock is likely to take for the next few days.  As you've seen in other posts, I also use the RSI as a divergence indicator.  The RSI is considered a momentum indicator and the formula for the index is designed to measure the strength of recent moves, either up or down.

You can see on the chart that the RSI first dropped below the 21-day EMA on 19 December - a bearish signal - and then crossed below the 70 mark on 21-December.  That's a second bearish signal, and it's also one that many traders use to either enter short positions or close long positions.  Today's long bearish candle is no surprise given the number of stops that must have been tripped in the process.  The bottom line, though, is the RSI is warning us that momentum has waned and a period of weakness may be in the offing.

The third indicator on the chart is the Slow Stochastic.  Remember that the Slow Stochastic is a smoothed version of the Fast Stochastic, but I find that it provides a more accurate view with less false moves.  The two settings I use is a 14-period %K line and a 3-period %D line.  Similar to the RSI, the %K crossed below the %D on 20 December.  That's an extremely bearish indication since the Stochastic is designed to track the closing price as it relates to the overall range.  As prices start to close near the bottom of its daily range, the indication is that demand is waning and a further decline is likely.

Equally significant is today's cross of the %K line below the 80 mark.  Just like the RSI, traders use that cross-over as a signal to enter short or close long positions.  When both the RSI and Stochastic are in agreement like this, it's an extremely bearish signal.

The final indicator I use, and you can see it on all my charts, is the Volume by Price indicator.  Those are the horizontal bars you see to the left of the price chart.  They provide a very good graphical indicator of the amount of support or resistance a stock may have at a given level.  For example, look at the length of those bars between 65 and 70.  There's a significant amount of interest there - or at least, there has been in the past.  Now, compare that to where we're trading right now.  There's historically been very little if any interest at this level.  In other words, there's not much holding the stock up, right now.  At this level, it's like trying to walk across as chasm on a bridge made of balsa wood.  Tread lightly, or you're crashing to the canyon floor.

What I'm seeing is a chart that's telling me that Marriott is running out of steam at this level.  For the moment, I don't see much demand either holding the stock up or attempting to push it higher.  Now, that may change after the first of the year, but for the present, I'm not looking at entering a long position.  Not, at least, until I see some indication the smart money is still interested in this stock.  Instead, what I'll be looking for is a sign that the floor's about to drop out.  If that happens, I'll look at a short position to ride this stock back down to the first major support level at $78.  That signal will come on a close below $82.70 with supporting volume.  Until something changes, I have this stock on my list for potential short trades, not long trades.

Happy Trading.

Long Shadow Doji a Bullish Signal for SPR

Spirit AeroSystems Holdings, Inc. (NYSE: SPR) ended a 7 1/2 month horizontal consolidation on 21 September, 2016.  Since then, the stock has marched steadily northward, culminating in a 52-week high on 8 December.

SPR Daily Chart

The steep slope that marked this major move included a continuation gap on 1 November. True to form, that gap appears to have marked the mid-point of this first major impulse wave.  The five-day consolidation that followed marked an excellent entry-point for those of us that trade off gaps.  The strength of the support level at the gap itself turned out to be significant in this move.

The uptrend ending 8 December drew a complete five wave impulse.  Of note, however, is that both wave 3 and wave 5 recorded five complete sub-waves.  The confidence level in the current Elliott Wave count, therefore, is extremely high.

What captured this stock in the various scans I run nightly is the long shadow doji that pierced the lower Bollinger Bands before retreating to close near the mid-point of the bands and just above the 20-day exponential moving average.  I've found those very long shadow candles at significant levels to be very reliable, and thus include them in my scans.

Today's doji may have completed an A-B-C zig-zag correction coming off Wave 5 and the 52-week high.  Of note, the low of the shadow bounced off the 23.6% retracement of the full move as well as the lower Bollinger Band and the 30-day EMA.  Clearly it hit a lot of support.  Volume, today was higher than the last few days, however it was not in keeping with the full range of today's candle.

When you examine the volume signature following the 52-week high, those three red smoke stacks stand out like sore thumbs.  A lot of supply entered the equation at that level.  It's not surprising, really, given the 19-point run in two-months. There has been a lot of profit taking since the high.  Today's pattern, however, suggests that supply may have been exhausted.  The candle suggests a bullish move from here, and if the recently completed 5-wave impulse marks the end of the first wave of a higher order pattern, there may well be a lot more room to run.

In a strong bull market (as we're currently experiencing) it's very common for a stock to hit a 52-week high, pull back about 5%, and then make a second charge to a new high.  We've seen that 5% pullback in SPR, so a move back to the upside may well be profitable from here.  A rule of thumb target on the second move is a target above the current high that matches the size of the pullback.  If that plays out, we're looking at a move of about $3.25 beyond the 52-week high, or about a $6.50 move from here.  The major caution, of course, is that we could hit a ceiling at the prior high, thus forming a double top.  Watch for it, and exit if we don't penetrate immediately.

Spirit AeroSystems has certainly done its part in promoting the upward push.  They initiated a stock buyback program in 2014 and has thus far returned over $1 Billion to shareholders, buying back 16.6% of their outstanding shares.  The holding company also paid out its first ever dividend of $0.10, further boosting value to shareholders.  As a major supplier, the company services both Boeing and Airbus, setting itself to benefit both in the US and abroad.  From a fundamentals perspective, there's nothing preventing this stock from achieving a target consistent with two additional major impulse waves.

The only note of caution has to do with the calendar, not the chart.  We've entered the end-of-year cycle where volumes begin to diminish rapidly.  Many traders are winding down for the year and the market is closed for the Christmas observance on Monday.  (Christmas falls on Sunday this year, so in the US it's observed on Monday.)  There's also the possibility of a sell-off after the first of the year in anticipation of a more favorable tax structure in 2017 following the inauguration of the Trump administration.  Based on this, I'm not looking at any trades longer than one to three days in duration.  We'll see what the market decides to bring us after the first of the year.

As to Spirit AeroSystems, the setup I'm seeing is to the long side, and that's how I plan to trade this short-term.  Now, a close below $58 will change that view, and at that point we'd be looking at a potential short trade (assuming the market is conducive to downside trades.)  Watch the signals carefully for the remainder of the year, since the lower than normal volume can send some mixed messages and, as always, trade the market you see, not the one you want to see.

Happy Trading.

PLAY in Bull Flag After Earnings and Guidance Gap Up

Dave and Buster's Entertainment, Inc. (NASDAQ: PLAY) reported earnings on 6 December 2016 and continued a multi-year streak of better than expected EPS and revenue.  For Q3, they beat earnings by $0.11, and they beat on revenue by $11.96 million.  The restaurant and entertainment giant also increased their forward guidance for the fourth quarter, although they did caution in their earnings call that they expected their tremendous earnings growth to "normalize" in 2017.

The stock surged at the open on 7 December, gapping up by $6.50 and continuing the strong surge throughout the trading day.  Not surprisingly, volume was off the charts as demand for the stock soared.  Since then, PLAY traced a fairly tight bull flag that thus far has bottomed just above that 7 December open. 

PLAY Daily Chart

Volume throughout flag development continued to decline, and price is now gravitating towards the high of the flag trend-line.  Using just the pattern for guidance, the upward price target on a breakout is extremely attractive.  The 76.4% extension of the flagpole height would take us to $63.96 as measured from the current breakout point.

The current uptrend started with a breakout from a month long consolidation that formed right on top of the 200-day simple moving average.  The breakout was convincing on higher than average volume, and even the post-breakout consolidation had an upward trend to it.  The earnings gap appears to be a continuation gap, at this point. We've no evidence (yet) to suggest that it's an exhaustion gap, which means the bottom of the pattern on 7 December should roughly approximate the mid-point of the overall move.  That would certainly be possible if the current flag pattern is wave iv of a Wave 1 impulse.

Now, normally I don't look at fundamentals when analyzing a short-term trade, however given the size of the move being signaled it does appear to be prudent to see if it's practical.  Let's take a quick look at Morningstar's Industry Comparison for PLAY.  A few key ratios jump out at us:

• P/E is 28.0 compared to 25.6 for the industry.
• PLAY is trading at 5.6 times book compared to an industry average of 13.2 times book.
• Price per sales is comparable at 2.5 versus 2.4.
• Margins are a bit low compared to the industry, showing room to grow.

The challenge with PLAY is that they are fairly unique in the industry.  Their restaurants combine dining and entertainment in a game-room style setting that targets both children and adults.  Locations in malls that offer large Cineplex style theaters have no comparable competitors and have a fairly unique operating model that has a proven track record.

A price target of $63.96 would boost the P/E to 34.6.  That level is high, certainly, but is it unrealistic?  Dunkin Brands sits at 38.2, Domino's at 72.6, and Panera Bread at 35.1, yet none of those brands offer entertainment as well as dining.  Given the rate of growth PLAY continues to experience, even if "normalized" in 2017, that multiple will likely decline, continuing to make this an attractive stock.

CEO Steve King summed up the growth potential in his Q3 earnings call: "As a reminder, we are targeting 10% or more unit growth per year including combination of large and small store formats as we mentioned likely to be 12% to 13% next year. Our 2017 target is that 11 to 12 stores with that growth rate of 12% to 13% as in years past, you see entire spectrum of stores between 25,000 and 45,000 square feet and currently we have 23 signed leases and nine of those units under construction."

 The conclusion I reach is that the price target signaled by both the continuation gap and the flag pattern is indeed a realistic and achievable target.  For now, this appears to be a long only trade with little indication that there's a play to the short side.  What we will be watching for is a close above the flag pattern, at which point we'll enter long.  A protective stop will be the bottom of the flag channel, and we'll set the price target at $63.96.  As usual, we'll begin to tighten our stops at the 50% and 61.8% extensions since either of those could cause either consolidation or correction. Watch for the break of that flag, however, since we do want confirmation of the continuation gap.

Happy Trading.

Shooting Star in Consolidation Signals Top for WDC

Following a 52-week low on 16 May 2016, Western Digital Corp (NASDAQ: WDC) retraced 61.8% of the entire 52-week high-low pattern.  The tight consolidation pattern culminated in a shooting star candle that pierced the upper Bollinger Band on 20 December.

WDC Daily Chart

The shooting star pattern at the high of an uptrend is considered very bearish.  Consider that the stock has opened with a gap up and traded to a pattern high.  At that point, however, significant supply came into play, and the bears were able to push the price back below the open to close near the low of the day.  The short term indication is for the stock to retreat from here.

The RSI(9) pattern confirms this bearish signal.  Through all of December, the RSI has printed a bearish divergence pattern, showing weakness while the stock drew new highs.  Additionally, the current two week pattern appears to be forming an island top.

The current consolidation pattern formed at the exact same level of a similar tight horizontal move from 26 October to 9 November 2015.  The duration is virtually identical to what is in progress, now.  The 2015 consolidation was the start of the march towards the 52-week low.

The volume pattern since the 7 December gap up suggests supply is dominating as price approaches a strong pivot line around 68.90.  Additionally, the SMA(10), EMA(20), and EMA(30) lines are rapidly separating into a wide fan.  Reversion to the mean suggests a reversal at least to the EMA(20) line.

Before we rush into a short position, however, there are two major considerations.  First, the overall market is exhibiting an extraordinary level of exuberance.  The strength of this upward push in the market is not conducive to trading to the short side, at the moment.  Second, WDC trades ex-dividend on 28 December, paying a dividend of $0.50.  Personally, I prefer not to hold a short position through ex-dividend since, in addition to the interest paid on the short holding, that dividend is also due to owner from whom the stock was borrowed for the short sale. 

For now, WDC will be added to our watch list.  Once the overall market enters a pull-back from the current level of exuberance - something entirely likely once to DOW touches the mythical 20,000 level - this may still be a prime candidate to ride as a short position. Of course, if the stock breaks above the high of today's shooting star, thus invalidating the bearish signal, there is a decent amount of headroom leading towards the prior 52-week high.  Let's see which direction this stock would like to take.  A break above 71.64 will be a long signal whereas a break below 66.83 will be a short signal.  As always, we'll play what the market chooses to give us.

Happy Trading.

Fed Chair Yellen Paints Overly Optimistic Picture of Job Prospects Post Graduation

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, delivered a Commencement Address at the University of Baltimore's 2016 mid-year commencement.  The first half of her address was focused entirely on the job prospects of recent graduates as they attempt to break into their chosen careers.  Commencement addresses, by their very nature, are extremely optimistic, and Ms. Yellen's was no exception.  Unfortunately, reality is much closer to Thornton Mellon's view than Janet Yellen's.  (You may remember that classic commencement address in "Back to School" in which Mellon advises the class, "It’s a jungle out there.  You gotta look out for number one.  But don’t step in number two.  And so, to all you graduates, as you go out into the world, my advice to you is … Don’t go! It’s rough out there! Stay in school!")

Ms. Yellen opened her address by telling the graduates, "I believe, for two reasons, that the job prospects and career opportunities for new graduates at this time are very good. First, after years of a slow economic recovery, you are entering the strongest job market in nearly a decade. The unemployment rate, at 4.6 percent, is near what it was before the recession."

Followers of this blog are already aware of how little respect I have for that U-3 figure of 4.6%.  Rather, the number on which I place the most significance is the Labor Force Participation Rate which is currently sitting at a dismal 62.7%.  The current rate is en par with the levels last seen in 1978 and those levels tell us nearly 95 million Americans are out of work.  It's a far cry from the rosy picture painted by that 4.6% U-3 number.  Worse yet, it's not improving.



There are numerous causes for the decline that we've experienced since the turn of the century, however recession isn't one of them. Look at the strong upward slope of that chart right through 1990.  While the labor force participation was improving dramatically, we experienced three recessions.

• 1973 to 1975.  GDP: -3.2%
• 1980.  GDP: -2.7%
• 1990 to 1991.  GDP: -1.1%

According to the Fed Chair, the layoff rate is low and job openings are up over the past couple of years.  That, however, is at odds with what we're seeing in the workforce, especially in the higher paid fields.  The "job openings" statements are especially troubling since they only consider whether or not a company is hiring. What they do not consider is where they are hiring and if those hires will be Americans or will come from the hoards of H1b visa holders that are flooding the US job market at the expense of Americans that are routinely put out of work.

Lest their be any doubt that Americans are not being hired for high paid positions, take a look at the 2016 Green Card Report listed by job title.  The 2016 H1b Visa Report tells an equally dismal story.  The bottom line is, if you're considering a career in technology, you're living in the wrong country.  The opportunities for any highly skilled software developer in the US are dwindling fast, and that is not likely to change in the time it will take for anyone currently in the school system to see any benefit.

In fact, those prospects will get decidedly worse before they get better.  The latest craze whenever business leaders talk about technology is "cloud computing."  Few of them know what it means or why they want it, but you can bet that "moving to the cloud" is in everyone's road map. Of course, the fine print on those cloud services is all too often ignored until it's too late, but it will be a decade or more before businesses learn that they've been duped and the cloud solutions have cost them far more than any perceived realized benefits.  In the meantime, that move towards Software as a Service (Saas), Infrastructure as a Service (IaaS), or any of the other "as a Service" offerings with which companies are being inundated today will continue to drain the industry of skilled technology jobs.  Well, at least in the US.  India, on the other hand, is the prime benefactor.  The number of foreign applicants coming from India outnumber their nearest competitor (China) 7 to 1.  As I said, if you want a career in technology, you're living in the wrong country.  "But we are quite certain that a college diploma or an advanced degree is a key to economic success.Those with a college degree are more likely to find a job, keep a job,have higher job satisfaction, and earn a higher salary."

She's correct in the need for a college degree, although not necessarily for the reasons she mentions or for the reasons graduates may think.  A college undergraduate degree has one purpose: assist you in procuring your first job in a career field.  Once that job is secured, the rest is up to you.  The Fed Chair correctly notes that the need for a college degree is higher than ever.  What she did not mention, however, is the reason for that, and it has little to do with the complexity of today's jobs.

Obtaining less than a 4-year college degree has become too easy and, as a result, its value has diminished.  When I entered the workforce, the level of education that was the differentiator was a 2-year Associate's Degree.  Prior to that, it was a high school diploma. Today, it's a 4-year Bachelor's Degree.  The dirty little secret is that the differentiator will always be the level of education that weeds out the vast majority of potential applicants.  The degree is not so much a job requirement as it is a method of reducing the number of resumes to a manageable level.

That, in fact, is my primary reason for opposing free college education programs.  By increasing the number of 4-year degrees on the market, all that will be accomplished is to raise the minimum requirement one level higher, to a master's degree.  The net number of people eligible for a position will not change, despite an increase in the number that have a fancy undergraduate diploma that has suddenly become worthless.  

Ms. Yellen briefly touched on student debt, however she didn't go far enough nor offer any advice beyond a subtle hint that it's okay to take on that debt.  She couldn't be more wrong in that regard.  The best advice I've read recently is to not incur more total student loan debt than you can reasonably expect to earn in your first year after graduation.  What solid advice!  The fact is, education has grown absurdly expensive, and the primary reason it has grown out of proportion is the ease with which students are able to obtain loans.  The supply and demand dynamic that should result in the price of an education no longer applies, and as a result, the cost is allowed to skyrocket out of control.  With the exception of very few professions, there's no justification for it.  What's important is the degree itself, not the name of the college on that degree (again, with very few exceptions.)  All that diploma is doing is getting you into the job interview.  How you conduct yourself at that point is what determines if you get the job.  Yes, the cost of education is absurd, today, and it must be fixed.  The solutions, however, do not include transferring the cost away from the student and onto the taxpayer since that simply skews the supply and demand equation even further.

Finally, the major problems today's students will face in the workforce are coming from globalization and increased automation.  The Fed Chair stated, Like technological change, globalization has reinforced the shift away from lower-skilled jobs that require less education to higher-skilled jobs that require college and advanced degrees. 

What she neglected to mention is that the purpose of increased automation is not to simply increase the productivity of the workforce.  Rather, it's purpose is to completely eliminate the workforce. It is not just low-income unskilled jobs that are being eliminated.  It includes highly skilled high wage jobs.  Again, this is seen daily in the technology fields where automation and offshoring are the daily mantras.  Where "institutional knowledge" was once considered a key asset, it is today considered a major liability that inhibits the misconception that technology resources are interchangeable commodities that can be sourced elsewhere for a fraction of US labor costs.

So yes, I do believe Ms. Yellen painted an overly optimistic of job prospects to yesterday's graduates.  They face the worst job prospects I've seen in my lifetime, and they are likely to worsen over the coming decade.  Until "globalization" becomes a dirty word, the American worker will consistently lose to their foreign counterparts in countries without decent wage standards, environmental protections, or industry regulations.  Unfortunately, as the American worker finds it increasingly difficult to establish a career in a high paying field, that standard of living Ms. Yellen touted will begin to decline.  The point of equilibrium in this new world of "globalization" is not a point at which most Americans will want to live.  Without a bit of protectionism inserted into a world view, however, that decline is inevitable.

CSAL Approaching Apex of Ascending Triangle

When a stock touches a horizontal resistance line at least three times, while retreating to at least two consecutive higher lows, the resulting pattern forms an ascending triangle.  Conventional wisdom states that this is a very reliable pattern that breaks to the upside.  Chart pattern guru Tom Bulkowski takes a different view, however, after having studied thousands of patterns.  His brief ascending triangle treatise on The Pattern Site informs us that the pattern does tend to break to the upside 70% of the time, however it ranks 17 out of 23 for profitable upside breakout trades.  He goes into much greater detail, including trading tactics, in his highly acclaimed Encyclopedia of Chart Patterns.

My experience with the ascending triangle is that, for much of 2015 and 2016, the more profitable trades were on downside breakouts.  The pattern has become extremely well known, which means it's now a prime target for stop-hunting market specialists.  The pull-back rate cited by Tom Bulkowski was 57% on an upside break.  I believe it's even higher, now, reflecting the popularity of the pattern.  Of course, to a swing trader, that means there are potentially two or three trades coming out of a single breakout. 

Communications Sales and Leasing, Inc. (NASDAQ: CSAL) is in the final throws of an ascending triangle following a 5-wave bearish impulse and at least a three-wave corrective pattern.  (I label that with traditional A-B-C labeling, however in reality it is likely an A-B-C-D-E triangle.)  Given that we're only 8 trading days away from the apex, it's fair to say that a breakout is imminent.  We're about 75% into the triangle, and that's getting a bit long.  The average breakout is around 62% of the length of the pattern, and the signal will be broken if this continues for a few more days.

CSAL Daily Chart

While we don't try to anticipate the direction of the breakout - we can play it either way - there are some aspects of the chart that suggest it will break to the upside.

• The bottom of Wave 5 retraced 61.8% of the prior bullish impulse wave, which coincides with the 52-week high-low pattern.  That 61.8% level is a strong support level in and of itself.
• Wave 5 ended on what appears to be climactic selling.  This was a strong candle with a shadow almost three times the length of the body.  The only negative point on that long candle is that the close was below the open.  It would be a stronger signal were it a white candle, not a red candle.
• The pattern has broken out of the bearish channel that marked all of the impulse wave and much of the corrective wave.
• The SMA(10), EMA(20), and EMA(30) lines are converging and appear poised to form a bow-tie pattern in which the three lines reverse.
• The mid-point of the Bollinger Band channel is acting as support.
• The RSI(9) pattern is decidedly bullish.

CSAL reported earnings on 14 November 2016 which, not surprisingly, coincides with the long range candle.  Earnings themselves were positive, beating by $0.03 EPS and also beating revenue by $1.62 million.  What appears to have spooked investors was an announcement as part of their earnings release that they acquired Network Management Holdings for $65 million.  NMS has 313 wireless communications towers in Mexico, 55 in Nicaragua, and 105 in Columbia.  Additionally, they hold another 114 build-to-suit tower sites that are currently under development.  The suite is expected to produce $7.9 million in additional annual revenue and $4.4 million in annual tower cash flow.  Overall, it appears to be a positive addition to their portfolio.

Given that we do not yet know when CSAL will break out of the ascending triangle pattern, we must be aware that the stock will trade ex-dividend on 28 December.  The dividend is $0.60 per share, with a pay date of 13 January 2017. 

We need to keep a close eye on the development of this pattern.  When it breaks, it's likely to move quickly.  Be aware that an upward breakout may hit resistance at the 200-day moving average.  That may be the prime location for a pull-back, in fact, sitting about 10% above the top of the triangle.  To the downside, there may be support at either the 23.6% retracement line or the lower Bollinger Band.  Either of those could be a logical point for a pull-back.  Knowing the potential for a pullback in either direction, of course, gives us probably entry points for a second play should that opportunity arise.  Be alert for the initial break as well as any subsequent entries on a pullback.

Happy Trading.

IP Has Room to Upside Once A-B-C Zig-Zag Wave Completes

International Paper (NYSE: IP) continues to show strength, trading in a bullish channel since its bottom on 25 January 2016.  Much of the activity throughout the year, however, contained a significant amount of overlap despite the overall upward trend.  That overlap, by definition, marks a corrective pattern, not an impulse pattern.  Thus, the true impulse wave did not appear to start until a November 4 rebound off strong support.

IP Daily Chart

The orange line near the center of the chart shows both that significant area of support as well as the overlap the occurred in early November that implies the true impulse wave had yet to begin.  While it's possible for the eye to imagine an impulse starting at the low in January, too many Elliott Wave rules would have to be ignored for that move to be considered a valid wave count.  Rather, the current indication is that the corrective waves ended on 4 November 2016.

It's also possible to consider a count that starts on 28 June, however we'd have to ignore the overlap on 3 November.  It would also imply a Wave 2 that, in time, was not proportional to Wave 1, at least on a daily chart, and that violation is troubling.  So based on that, we're looking (at least for now) at an Elliott Wave impulse pattern that started on 4 November.

Thus far, that impulse has drawn three complete waves culminating in the 52-week high on 12 December.  For the past week, the stock appears to be drawing an a-b-c zig-zag correction that would mark Wave iv.  If that plays out, the bottom of Wave c (which is currently developing) would be an excellent entry point for a long position.

Wave iii is longer than Wave i, so the standard rule of thumb in measuring Wave v is to use the height of Wave i as the target.  That gives us a potential upside move of 5 points as measured from the bottom of Wave iv (which includes the bottom of Wave c.)

There are some areas that look promising for that bottom and subsequent entry point.  The 10-period SMA is diverging significantly from the 20-period EMA.  Reversion to the mean tells us that we will close that gap.  Notice, too, that there are two upward trendlines offering support.  The uppermost of those support lines intersects the 23.6% retracement line of the full impulse.  That in itself is an extremely attractive target for entry, although it's a bit deep for Wave c.  The more likely location will be the 20-period EMA.  As price declines a bit for Wave c development, that line will begin to flatten, will likely converge with price about mid-way between the 23.6% retracement and the horizontal support line that developed in this short-term corrective pattern.

Ignoring the high volume spike resulting from Friday's quadruple witching, we can see that volume and price bars have been consistent throughout this impulse wave with demand having a bit of an edge over supply.  Candle ranges have narrowed as Wave iv developed.  That's normal in this type of a consolidation, but it's also a caution.  We will likely see a rapid price bar expansion when Wave c completes and it may be very easy to miss the move that triggers the start of Wave v. 

We need to remember, though, that fifth waves are often truncated.  So while the price target is about a five-point move, it's not uncommon for a fifth wave to fall well short of that target.  As a result, we discourage any attempt to chase a fifth wave move.  If we're not filled at the level that we set, then we'll skip the trade entirely.  Reward to risk on a fifth wave tend to be tight under normal circumstances, so there's no point in reducing it further by accepting a less than desirable entry point.

For now, we're adding IP to our watch list.  We'll attempt to catch the end of wave-c and ride it to the long side through wave v.  Since that will mark the end of Wave 1 (by our count, at least) we'll see what opportunities arise in Wave 2.  The wave we truly want to catch, however, is the subsequent Wave 3.  That, however, is a trade for sometime in 2017, not today.

Happy Trading.

BAH Signals Long After 38.2% Wave 2 Retrace

Booz Allen Hamilton Holding Co. (NYSE: BAH) started a strong breakout from a very lengthy consolidation pattern in early November, 2016.  Five sub-waves completed on 29 November marking the completion of Elliott Wave 1 and were immediately followed by an a-b-c zigzag consolidation that appears to mark Wave 2.  That's where the stock sits as of this writing.

BAH Daily Chart

Following the completion of Wave 1, an extremely high volume gap down formed what appears to be a wave "a" corrective wave, coinciding with news that Booz Allen Hamilton acquired Aquilent (also known as eGov Holdings) for $250 million.  eGov is the digital and cloud architect for the federal government's .gov solutions.  The transaction is expected to close on 31 December 2016.  The addition is expected to add between $30 and $35 million to Booz Allen Hamilton's revenue in 2017, and is expected to increase the company's operating margin in 2018.

Following that announcement, the full a-b-c zig-zag patterns appeared to complete, culminating with a spinning top candle on 15 December.  It should be noted, however, that the c-wave was not a full 5-wave impulse in this time frame, so it's possible that the c-wave has yet to complete.  The rest of the signature implies it has, however we can't say that for certain.

With the exception of the 15 December low, the stock found support on the 20-day EMA.  The low itself bounced off the 30-day EMA as well as the 38.2% retracement line of Wave 1, and the 23.6% retracement line of the full 52-week high-low pattern.  Two additional areas of support at that same level are a horizontal support line that coincides with the previous wave iv, and a diagonal support line that goes back to the 1 April 2016 high. 

We should examine that diagonal support line a bit deeper.  As you can see on the chart, there is a distinct diagonal support line that has at least four touches of the trend and extends from 11 February 2016 through to the start of the latest impulse on 1 November.  That's the base support line we're using that forms the slope of the other two diagonal lines drawn on the chart. 

The line that forms Wave iv resistance and Wave c support is parallel to that base line and is drawn from the first major high following the 52-week low.  Until it touches Wave iv, it meets nothing but dead air, so it's not viewed as an overly significant line, at least until it's combined with all other signals on the chart.

Now look at the uppermost diagonal line.  That, too, is parallel to the base support line, and it has three major touches of the trend in October, November, and December 2015.  Notice that it has formed the resistance line for the b-wave in our current pattern.

Looking next at the Bollinger Bands, we see that the low of what appears to be Wave 2 reversed very close to the lower band.  Of equal note is the volume on that reversal, which barely surpassed the 200-day volume moving average. The spinning top suggests indecision, but the volume pattern tells us that there's really not much supply at this level.  Volume certainly doesn't confirm the range of that candle. 

If, in fact, this is the end of Wave 2, then the next move for this stock should be up.  There are three moves that are possible from here.  One, of course, is that the c-wave is still in progress and we could decline further.  That's the least likely scenario, however, given that the zig-zag pattern has followed a textbook retracement thus far.  The other two moves are both up.  One would see a continuation of the consolidation pattern with an "x" wave.  That would likely take us back to either the top of "b" or the top of "1".  The second is the start of wave 3.  That wave, once it confirms, should draw at least 8 3/4 points, and will likely have five subwaves.  Each of those subwaves will produce valid entry zones.

For now, we're looking to play an upward move using the top of the spinning top from 15 December as the entry and the bottom of that spinning top as the protective stop.  We'll trail our stop if the long setup triggers since we don't yet know if it's an "x" or "3" wave.  Either way, however, the odds favor a long position from here.

Happy Trading.

ALSN in Wave 2 Setting Up Long Trade For Wave 3

Allison Transmission Holding (NYSE: ALSN) drew a well-defined five-wave minor impulse pattern to form what appears to be a complete Wave 1.  That wave culminated with a very bearish candle on 8 December 2016, although volume did not confirm a longer-term reversal signal. 

ALSN Daily Chart

In addition to the Elliott Wave pattern that continues to develop, a very narrow bullish channel (in dashed green) is providing a bit of support as Wave 2 plays out.  The diagonal resistance line is a much stronger signal, however, so I'm not putting too much stock in that support line.  There is, however, a weak horizontal support line at the 23.6% retracement level of the full wave that may carry more weight.  That's also at the 50% retracement level of the wave v impulse adding further credence to support at that level.

The overall second wave pattern is sitting at the mid-point of the Bollinger Band channel and is just below the 10-day simple moving average.  Given the overall strength of the stock since 21 October, that line has a much higher probability of holding than it does of being violated.

There is a significant amount of strength showing in the RSI(9) pattern.  The upward bull channel it signals confirms the overall move of the stock price.  The drop below the oscillator's  21-day moving average coincided with the completion of Wave 1 (and had we been watching this stock, that would've been a great four-day trade setup) however the oscillator has already curved north and is converging on it's moving average once again.

While the current setup implies a Wave 3 should soon follow, and that Wave 3 should be at least a 7 1/4 point move, it must be noted that the weekly chart is showing a very long-term double top that setup on 29 December 2014.  Since the stock only went public in March 2012, I'm not overly concerned about the strength of that extremely long-term pattern, since it's likely the passage of time (for our trading horizon, at least) has likely negated it.  Still, it does signal some reason for caution.

The key for us is how this current wave 2 will play out.  This could develop into an a-b-c corrective wave, or wave 2 may be completing as it stands.  Either way, however, the most probable direction from this point (with our trade horizon) is up, and that's how we will play it.  We'll set a long entry range between 34.41 and 34.46.  Our initial protective stop will be 33.44 (just below the pattern low.)  Since this could be the start of Wave 3, we'll follow our stops up on a daily basis, hoping to catch the uptrend until we are stopped out of the position on strong weakness.

Entering at this point is somewhat aggressive, however given all of the convergence at this support level, we feel the aggression is justified.  A more conservative play would wait for a close with confirming volume above 35.06, however for a solid swing trade we feel that would be giving up too much potential ground in the short term.  Which strategy you choose to employ depends, of course, on your own risk tolerance and your own personality as a trader.

Happy Trading.

HFC Showing Strength After Wave "a" Completes

After six months of trading horizontally near the bottom of its historical range, HollyFrontier Corp (NYSE: HFC) drew a two-month long 5-wave impulse that peaked on 8 December.  This opens the door for several potential trade opportunities that we'd like to examine in a bit more detail.

HFC Daily Chart

Bear in mind that HollyFrontier is primarily a refining company.  As a result, their margins are inversely proportional to crude oil prices.  As crude prices rise, their margins decline, adding pressure to their bottom line.  Similarly, if prices rise to the point that they begin to impact demand for the refined product (e.g. gasoline) that will add negative pressure to their revenue stream.  As we head into 2017, there are two counterweights in the crude-oil tug-of-war.  On the one hand, we have an OPEC deal to cut production, thus adding upward pressure on crude oil prices.  Opposing that is a rising US dollar coupled with future interest rate hikes on the horizon further increasing the value of the currency.  That places downward pressure on crude oil prices since oil trades in US dollars worldwide.  Thus tug-of-war will impact all refiners, including HFC, as the new year progresses.

Turning now to the chart, we can see that HFC started an impulse wave with a very long bullish candle on 9 November.  This, sudden enthusiasm may, in part, be attributed to an optimistic view of environmental deregulation under the incoming administration that will positively impact industries such as oil exploration and production.  Regardless of the cause, however, the impulse started on 9 November.

Since then, the stock has traced a full five-wave pattern, and appears to either be in the midst of - or having just completed - wave "a" of a three-wave corrective pattern.  Thus far, that wave has retraced 38.2% of wave "v", which is a normal retracement level for an a-b-c flat correction.  Equally significant is the fact that wave "v" completed at the 38.2% retracement level of the much larger high-to-low 52-week pattern.

There are two strong support/resistance lines on the chart that are drawn in thick dashed blue lines.  The thinner dashed blue line is another resistance line, however it's not as strong as the others.

Of particular interest are the three dashed green lines.  The current five-wave impulse created a well defined bull channel that, for the moment, at least, appears to be holding.  There is also a line that appears to be significant that is drawn from the two peaks in March and April.  Notice how that formed a brief level of resistance on 5 and 6 December, and it's now forming a bit of support for the completion of Wave "a".

The RSI(9) pattern is also supportive of the short-term bullish channel.  While the RSI has dropped below its 21-day EMA - a bearish signal - it's still not showing any signs of divergence from the price chart, although the current low in the RSI is a bit lower than I'd like to see for true confirmation of the bullish trend.

So what can we expect from here?  Well, it appears that we've either completed or are about to complete an "a" wave.  The most probably move from here is a "b" wave that will retrace at least 61.8% of the "a" wave, and could extend to as much as 138.2% of that "a" wave.  That is potentially a wave we can trade, although we do need to keep our stops extremely close.  Because it tends to fall short of the height of wave "a" the reward on a "b" wave trade is relatively low.

The "c" wave that follows is a very popular wave to trade for Elliotticians.  A typical "c" wave will approximate the length of wave "a" as measured from the top of wave "b".  This makes the profit target predictable, and the stop loss is already pretty tight since violating the top of "b" invalidates the trade and we want out immediately.

Once that "c" wave completes, we will have another potential opportunity, provided it's followed by an impulse wave.  (Note that the impulse wave can be either up or down.  Either way, we can trade it.)  What I would hesitate to trade is if the "c" wave is followed by another corrective wave pattern.  That can be extremely choppy and unpredictable, so if that develops, I'll just add the stock to my watch list and wait for the impulse that will inevitably follow it.

Whether or not the subsequent impulse is up or down will very likely depend on HFC's ability to achieve their fourth-quarter objectives of 440,000 to 450,000 barrels per day, as well as their ability to achieve longer term objectives of doubling their refining capacity to one million barrels per day.  They've outline a number of initiatives that will drive that growth, and the impulse that just completed was reflective of that optimism.  If they're able to demonstrate progress, and if their current operations continue to run trouble-free, then the impulse that just completed may well become a larger Wave 1 in a broader 5-wave impulse.  If that occurs, we'll have many more short term opportunities to trade.

For now, let's add HFC to the watch-list, and lets attempt to capitalize on the developing "b" and "c" waves.  By the time they complete, we should have a much clearer view as to whether an impulse will follow and which direction that impulse will flow.

Happy Trading.

DHI Signals Short Term Bull Channel Trade

DR Horton, Inc. (NYSE: DHI) approached the lower (20,2) Bollinger Band on very high volume, bouncing off to produce a long-tailed spinning top in today's trading.  The significance of the high volume is somewhat diminished by today's quadruple witching, however the remainder of the chart shows promise for a short-term long play.  Let's first take a look at the daily chart. 

DHI Daily Chart

The price action on 9 November penetrated both the lower Bollinger Band and the 61.8% Fibonacci retracement from the 52-week high to low pattern.  Of significance, however, was the immediate bounce back to the 50% level where a very strong pivot line has already been established.  Since then, we've found support at that 61.8% line on two additional tests. 

Both the highs and the lows in this six-week pattern have created a well-defined bull channel, albeit with a modest slope.  Today's price action marked the third test of that support line, but we'll take a much closer look at that test shortly.

From the daily chart perspective, we're now looking at a potential short term channel play.  The RSI is confirming the short-term bullish signal, so there are no worries there.  The higher highs and higher lows are also encouraging, as is the volume in today's action.  Remember, though, that the volume was influenced by quadruple witching, so we do need to downplay it just a bit.

To get a better feel for today's action, and to analyze a potential entry and protective stop range, we'll turn our attention to the 30-minute chart.  (I prefer 30-minute charts to the 60-minute chart since the open and close volatility fits neatly into one candle on each end and isn't potentially hidden by doubling that cycle.  Also, the trading day is 6.5 hours long, so there's an inconsistent overlap of alternating days using the 60-minute.  I find the analysis works better on the 30.

DHI 30-Minute Chart

Well, the very first thing that pops out as us is the long tail.  That certainly caught our attention on the daily chart, but here we see that it occurred right in the first 1/2 hour of trading.  That has all the hallmarks of some stop gunning.  It's the type pattern you'll see if the specialists are taking out sell stops in preparation for a move upward.  For the rest of the day, the stock traded in a narrow range that created a bull pennant with the long tail acting as the pole.  Volume at the end of the day was high on a very short candle, but given today's options expiration, that's not a surprise.

Notice that, just like the daily chart, the 30-minute chart is also hovering right at the 61.8% retracement level from the 52-period high-low pattern.  There is also a very strong horizontal pivot line (in dotted bold blue) that is now acting as support.

The 30-minute chart is providing a potential entry zone as well as a good protective stop level.  For the entry, remember that we don't enter a position before 10:01 EST.  You can see on this chart how volatile that first 1/2 hour is, and it's the territory primarily of the market specialists, day traders, and scalpers.  I prefer to let the market settle down a bit and enter after we can see the true direction it's taking.  So 10:01 is the earliest I'll enter a position.

The range we'll set for entry, based on this 30-minute chart is from 0.10 above the upper pennant line to 0.10 above the height of the full flagpole.  Above that and the reward to risk ratio is too low, and below it invalidates the signal.

There are three potential stop loss levels depending on how aggressive you are as a trader.  The first obvious level is just below the pennant.  That level is a bit too aggressive for me, however, and I believe it's an area likely to be taken out if there's still some stop-gunning on the horizon. 

The second level is what I've highlighted in red.  That area forms support from the two-day pattern, and that nice rounded bottom heading into Thursdays close appears to be a solid bottom.  In fact, that's likely what prompted the specialists to go stop hunting at the open, today.  Now, that level is still somewhat aggressive, however as long as we avoid the first 30 minutes of trading, we may well avoid another stop-hunt at that level.  So personally, I'll set a stop just below that red line.

The final level, of course, is below the low of that long shadow.  That's the most conservative level in this short-term pattern, and for me it's too conservative.  The distance we'll have to travel to get a decent reward to risk ratio is more than I can comfortably plan.

For our exit strategy, we return again to the daily chart.  Remember, we take our signal from the daily, select our entry and stop from the 30-minute, and then exit based on the daily.  As we can see on the chart, there's a very strong resistance line (in light blue) that coincides with the upper Bollinger Band.  It is also intersected by our bull channel in three trading days.  That's where we'll set our price target. 

This is a pure channel play, so we must be prepared to exit at any sign of weakness.  We also need to be aware of that intermediate pivot line that sits dangerously close to the center of the Bollinger Bands.  There's a risk of pausing or retreating at that level, and we must remain nimble enough to recognize it and exit immediately.  This is a two or three day play, not a long-term play, so we can't afford to sit around and wait for a consolidation to work itself out.  Exit immediately on any weakness.

Happy Trading.