SWKS Ready for Breakout on Daily and Weekly Charts

Earlier this week, a Presidential Advisory Panel issued the "Report to the President Ensuring Long-Term U.S. Leadership in Semiconductors."  The report focuses on the status of the US Semiconductor industry and serious threats to that industry being posed by policies emanating from China.  In the executive summary section, the report warns of fundamental weakness in the industry due to technological limitations and rapid expansion in the semiconductor market, then went on to state, "Now a concerted push by China to reshape the market in its favor, using industrial policies backed by over one hundred billion dollars in government-directed funds, threatens the competitiveness of U.S. industry and the national and global benefits it brings."

The report reaches the conclusion that, "...only by continuing to innovate at the cutting edge will the United States be able to mitigate the threat posed by Chinese industrial policy and strengthen the U.S. economy. Thus, the report recommends and elaborates on a three pillar strategy to (i) push back against innovation-inhibiting Chinese industrial policy, (ii) improve the business environment for U.S.-based semiconductor producers, and (iii) help catalyze transformative semiconductor innovation over the next decade. Delivering on this strategy will require cooperation among government, industry, and academia to be maximally effective."

It is against this backdrop of increasing pressure on the semiconductor industry as a whole and the specific threats to the US industry from China that we turn our attention to one of the major US semiconductor companies with a strong international presence, Skyworks Solutions, Inc. (NASDAQ: SWKS).  The stock is poised for a breakout (in either direction) on both the daily and the weekly charts.

SWKS Weekly Chart

For this analysis, we'll start with the weekly chart since that puts everything in perspective.  Looking at price action alone, the stock started a parabolic upward impulse that included 5 well-defined sub-waves, ending Wave-1 on the weekly the week of 1 June 2015.  From there, a Wave-2 correction retraced 61.8% of the impulse pattern, and possibly completed in July 2016.  I say "possibly" because the current pattern on the weekly chart is not conclusive with respects to the start of a Wave-3.  The next move will likely provide that insight.

Volume on the weekly has consistently declined, and combined with the price action, the likelihood continues to increase that we're looking at a coiled spring in the final stages before a major breakout.  (Remember, a breakout can be either up or down.)  The On Balance Volume line is now flat, and when we look at the RSI(9) Oscillator on the weekly chart is converging into an apex that confirms the coiled spring interpretation.  All signs on the weekly point to a breakout in the short term.

SWKS Daily Chart

There's virtually no disagreement to the coiled spring assessment coming from the daily chart.  There are converging trend lines all coming into focus within the next few days, so some type of breakout appears imminent.  Notice the consistent slope from the three upward sloping trend lines.  The dashed red upward sloping line started out as a support line with five touches in that capacity before it was broken and became a resistance line.  (It's current role as resistance is the reason I show it in red.)  Two additional lines parallel to that one form the current support channel, and we can see the strength of that channel in the short term.  

Now look at the resistance lines.  That lower resistance line actually extends out to the top of the peak in December 2015.  There are four clean touches of that line, and two additional touches that extend the full channel up by about a point.  Again, the resistance trend lines appear as strong as the support trend lines.  From a Wyckoffian perspective, this is certainly building sufficient cause to support a strong breakout.

At first glance, we see a warning sign from that strong red volume bar on 12 January.  When we examine the candle, however, we see that the volume was all demand, and that demand came into play on a bounce off the lower support line.  In fact, it rebounded above the upper support line and closed near the high of the day.  That's a major rejection of price and the strength was confirmed in yesterday's price action.

The RSI(9) Oscillator is showing major strength along the lows, and the highs are confirming price action.  There's no weakness in evidence in the RSI(9).  On Balance Volume is also following a gradual upwardly sloping trend line.  This is signalling that we have more strength to the upside than we do to the downside.

The conclusion we reach is that SWKS appears ready to break out.  While the charts are strongly suggesting an upside breakout, naturally we need to be prepared for either.  A long entry on any of the support touches starting 5 January would have been strong plays.  Unfortunately, they don't allow us to trade retroactively!  Instead, we need to seize the opportunity to play what emerges from here.

If entering long, I'd prefer to enter along one of the two support lines that are forming our channel.  If we get a pullback to that either line and then rebound, I'll take that entry.  The action on the 12th and 13th suggest we may get one more test of that support line before the breakout, if the breakout is to be to the upside.  I'll watch for that test and if it occurs on weak volume, I'll enter long.

On the flip side, I'd prefer to enter a short position on a rejection off a test of the resistance line.  Again, if we test that line on weak volume, I'll enter short there.  What we are hoping to setup is a situation where we can enter on the inner support or resistance line with a stop just beyond the outer stop or resistance line.  Either of those conditions (assuming we read the volume and price action at time of entry correctly) will setup the best reward to risk ratio we can obtain from this setup.

A less desirable entry will be on a breakout above resistance or below support.  If volume confirms, we'll take it since the two lines have converged to the point where the stop will still be relatively close, however we'll be watching closely for a better entry setup if one manifests.

Happy Trading.

Honeywell Showing Strength In Tight Bullish Channel

The second and third quarters of 2016 were not kind to Honeywell (NYSE: HON).  The stock spent much of those two quarters in a horizontal pattern before an 8-point gap wiped out nearly 50% of the entire year's gains.  That drop was very short-lived, however, and anyone that went long on the bounce off long-term support two-days later were well rewarded.  A tight bullish channel paved the way for the remainder of 2016 and into 2017, while Honeywell reclaimed all of the territory lost in early October.

HON Daily Chart

To be sure, the election of a potentially hawkish and definitely business-friendly US president helped this stock.  The selection of a "tough talk" Secretary of Defense helped as well, giving a solid boost to the prospects for Honeywell's defense contracts.  With this backdrop, CFO Tom Szlosek helped the company's cause in mid-December, promising very strong cost-cutting measures and projected a very rosy outlook for growth in segments not related to Defense. 

There's very little indication that the climb is being exhausted.  Volume continues to be consistent, and On Balance Volume shows an extremely strong upward slope that is indicative of accumulation.  The RSI(9) Oscillator on the daily is confirming the overall price action, and the Oscillator is nowhere near its extremes to the high side. 

From an Elliott Wave perspective, the stock is in a Wave-(iv) sub-wave at the moment, and there's at least one more major impulse wave to go in the short-term pattern before we reach the top of Wave-3 on the weekly and monthly charts. 

HON Weekly Chart

The strong bullish channel pattern is evident on the weekly chart as well, and that pattern has been in play since October 2011.  The highest order Elliot Waves were determined from an analysis of the monthly chart and are shown in bold black here.  Now, multiple conflicting wave counts are possible, especially as we hit mid-2016, however in any of those counts the wave evidence suggests more room to the upside.

It's important to note the bearish divergence in the RSI(9) on the weekly chart, and we're seeing a downward trend in volume as well.  On Balance Volume on the weekly continues to rise, however so for now it appears demand remains strong.  The slope of the SMA(200) is very healthy and has been consistent since mid-2012.

The trade we see on this chart is to the long side.  With a stop just below the channel support line, I'd prefer to catch a pullback to either the EMA(10) or to that trend line, however I'm willing to enter long from here if I see a sign of strength coming off the open.  While there's a bit of resistance at $120, it's extremely week and not likely to hold once the next impulse starts.  That's a wave we'll try to catch early.

Happy Trading.

Quintiles IMS Holdings Showing Weakness on Daily and Weekly Charts

A wedge pattern is not one of my preferred setups.  The breakout from such a pattern is fairly random, and the performance after the breakout is often lackluster at best.  Nonetheless, that's the pattern we're facing on the daily chart for Quintiles IMS Holdings (NYSE: Q), a mid-cap provider of bio-pharmaceutical development services as well as commercial outsourcing services in the health-care field.

Q Daily Chart

Since we know we really can't rely on the wedge pattern alone, let's review what other clues the chart has to offer.  It's hard to miss the twin towers of volume - in this case, supply - that dominate the landscape on 30 November and 1 December 2016.  While that pattern is symptomatic of climactic activity, it's not the first major indicator of weakness in the current pattern.  Look at the decline from 6 October to 1 November.  In that entire period, only four days were positive, and all four were extremely short candles compared with the rest of the save.  In total, over 11 points were traveled, forming both the top and bottom of the wedge.

When we look at the volume pattern, the amount of supply that's evident appears stronger than the amount of demand, and we can see the overall strength of the down days in general. As an added point of confirmation, the On Balance Volume (OBV) indicator (shown in orange above volume) continues to decline.  That's an indication that shares are being distributed, not accumulated, and it's an extremely bearish sign.

Curiously, we don't see a divergence on the daily RSI(9) oscillator.  Instead, it's merely echoing the price action.  In itself, it's not giving us much of a clue as to where Q intends to breakout, although the price action implies a downward break in the short-term.

Finally, notice the peaks on 5 October, 29 November, and 15 December.  With those peaks, we have at least a double top formation with the first two, and the last one arguably creates a triple top.  The pattern is not confirmed, of course, since we've yet to close below the neckline at $70.10, however it's definitely a major flashing warning light.

A double top appears on the weekly chart as well, and that formation is more ominous.  The left peak dates to late July 2015 and the right peak is in late September 2016.  The neckline on this longer term pattern is $55.01.  Note that meeting the price target of the daily chart double top would approach that weekly neckline.

Q Weekly Chart

Here's where things start to get interesting, though.  The weekly chart starts to bring an Elliott Wave pattern into context, and for the moment, at least, we appear to be in the waning stages of a Wave-2 correction.  The low of Wave-2 retraced 61.8% of Wave-1, so it was a deep correction, but in-line with all of the rules.  The next wave we'd expect on the weekly is a Wave-3 impulse that would, in this case, be an up-trend. 

That wedge we see on the daily chart extends out to an ascending triangle on the weekly chart.  That's also considered a bullish pattern.  The volume pattern is somewhat neutral on the weekly.  There's certainly some heavy supply early in the triangle, but following that one climactic week there hasn't been much follow-through in either direction.

The one major caution sign on the weekly chart is the RSI(9) oscillator.  Unlike the daily chart, there is definitely a bearish divergence on the weekly.  That's warning us of potential trouble ahead, and points to a possible downward break, at least for the short term.

Here's a case where we really need to give the stock some reins and see where it wants to lead us.  If we get a downside breakout on convincing volume, I'll play it.  The wedge is showing a potential 7 to 10 point move in either direction, and that's worth trying to capture.  A stop a few percent inside the pattern to give it room for a pullback would still be a good reward to risk ratio, and likely keep us out of a shakeout flip.

A break to the upside, however, may signal the start of Wave-3 on the weekly chart, and we definitely want to ride that one.  Again, however, we need to see convincing volume, especially given the number of failures off that resistance line thus far. 

That, in fact, is the third potential setup.  A failure off resistance will be an excellent short opportunity.  The moves down from resistance have been swift to date, and our stop would be just above the resistance line.  Again, that's a fantastic reward to risk ratio.

Let's see which of the setups will actually trigger.  With several very good plays lining up in either direction, we'll add this to our watch list.

Happy Trading.

AMAT Starting to Weaken in Extended Wave-3

2016 proved to be a strong year for semiconductor giant Applied Materials (NASDAQ: AMAT). The year started with the completion of Wave-2 on both the daily and weekly charts, and it's been a very strong extended Wave-3 right up through today's close. 

AMAT Daily Chart

This wave is a good example of an extended wave, and there's still life remaining in the stock as it nears the completion of sub-wave (v) near its 16-year split-adjusted high.  The rise has been slow and steady, rising in a relatively narrow channel at a comfortable slope throughout the 11-month pattern.

There are few warning signs on the daily chart that anything's about to change.  The RSI(9) oscillator hints at a bearish divergence, which makes sense if we're approaching the Wave-3 summit.  Volume, on the other hand, is still showing a decent amount of demand, and the stock continues to record both higher highs and higher lows.

The candlesticks themselves are undergoing a transformation, however, and that's the first possible clue that we're approaching the peak of Wave-3.  The long red candle on 1 December 2016 is the longest down day in well over a year, and that occurred on confirming volume.  We then have four consecutive down days from 28 December to 3 January, and in total those four red candles equaled the single day drop noted earlier.  Volume's tough to read in that time frame due to the slack holiday period, but the volume on 3 January as traders returned to their desks was notable.  So there's definitely some supply coming into play, here.

We've had three good days this week and volume was comparable to the candle lengths, so there's no sign yet of climactic activity.  It's worth noting, though, that we're starting to struggle to exceed the high of 22 December, and notice the candle on that day - an inverted hammer.  That's rarely a good sign at the top of an uptrend as it indicates potential price rejection.

Let's look at the weekly chart now and see if weakness is either confirmed or refuted.

AMAT Weekly Chart

Now we can see the entire three-wave pattern that's in flight. This impulse pattern dates back to November 2012, and we can see that Wave-1 lasted a full two-years.  (A check of the monthly chart - not shown here - confirms that this is, indeed, the start of the impulse pattern.)  Wave-2 was a deep correction, retracing almost to the 61.8% level, and it lasted about half as long as Wave-1. 

That's an important statistic to note since the alternation rule tells us Wave-4, whenever it occurs, must differ in either form or time (and usually both) from Wave-2.  We can therefore expect Wave-4 to be a shallow retracement - possibly to the 38.2% level - but relatively long.  That's fine with us since a long and shallow retracement will offer numerous swing-trade opportunities.

Anyway, look at the slope of Wave-3 on the weekly chart.  It's not quite as shallow as it looked on the daily, is it?  Certainly not as compared to the slope of Wave-1.  The duration is also much shorter, having already exceeded the distance traveled by Wave-1 but doing it in less than half the time.

The RSI(9) on the weekly chart confirms the bearish divergence, and it's much more pronounced than it is on the daily.  The divergence is evident when comparing the highs as well as the lows, so the evidence is mounting that our stock is weakening. 

Volume on the weekly is showing signs of fading as well. Again, we have to use caution when looking at the volume of the two weeks around the holidays, however even without those two weeks in the mix, the slope is definitely lower. 

Returning to the daily for our wrap-up, price right now is right in the middle of the channel that marks the entire uptrend.  This is not a position from which we would want to enter a trade to the long side since we're a pretty long distance from a viable support line.  Our reward to risk would be very poor in this situation.  Notice, though, that we are very close to a resistance line.  Given the relative weakness being demonstrated, I would be willing to enter short on a rejection of that resistance line.  There's a high probability that we'll pickup a couple of quick points on a retreat back to support, another possibility that we'll retreat all the way to the channel support, and it's also possible that we'll catch the start of Wave-4.  With a stop just above resistance, all of those possibilities become very attractive.  The key, however, is that we can't play it short unless there's a rejection of that resistance line.

The two key dates to remember for AMAT are both in February.  They report earnings after the close on 15 February, and they go ex-dividend (paying $0.10 per share) on 17 February.  We'll want to be out of any trades before those dates.  That shouldn't pose an issue, however, since Waves 4 and 5 should both run for a year or more (each) and offer numerous swing opportunities.  This stock is definitely one for the long-term watch list.

Happy Trading.

TEL Sitting On Support in Bull Channel on Daily Chart

TE Connectivity Ltd. (NYSE: TEL) spent virtually all of 2015 and 2016 in a Wave-4 complex correction on the weekly chart.  This corrective pattern developed a strong bull channel that ran from July 2016 through the present. A series of oscillations within the channel created numerous swing trade opportunities as the year progressed.  Whether or not another opportunity is presenting itself now is up for discussion.

TEL Daily Chart

As we've discussed previously, the time to enter a long position is when the stock is resting on a support line.  That's precisely where TEL sits today.  This particular support line formed as a major resistance line both in November 2015 and again in November 2016.  This increases the potential that it will carry some weight in its role as a support line now.  (Remember, once broken, a resistance line becomes a support line and vice versa.) 

If we back up one day and look at the candle that completed on 9 January, there's even stronger evidence that support may hold.  The extremely long shadow in yesterday's candle bounced off the support line directly below the current line, and it did so on very high volume.  The stock closed at the current support line, and that's essentially where it traded all day today.

So this is a solid entry and the stock's direction is up from here, right?  Well, not so fast.  What is somewhat troubling is the volume pattern on the current pullback from the stock's 52-week high.  Supply has been on the rise since we emerged from the holiday period and the true body of the daily candles have been longer to the downside than they have been to the upside.  There may be a fair amount of institutional selling underway, and if that's the case, this stock may well break to the downside.

There is still a fair amount of overlap in the pattern, so it doesn't feel like we've entered the next impulse wave - a wave that will be the fifth and final impulse on the long-term monthly chart.  The way the stock's behaving right now, it appears that this Wave-IV correction has at least one more leg to run before we can move to that impulse. 

The RSI(9) Oscillator isn't helping shed much light on the situation in this case.  Comparing the highs and the lows on the oscillator to their price counterparts on the chart, it appears the RSI on the daily chart is simply confirming the price action.  There's no hint of a divergence either way, just yet, and I would feel much more comfortable entering long if there were signs of a bullish divergence in the RSI.  There's not.

The weekly chart's a tad more interesting, however:

TEL Weekly Chart

From Wave III, the corrective pattern almost formed a nice triangle correction.  Almost, that is, were it not for a Wave-A that was too short by a long margin.  Still, the diagonal trend line along the top of the correction was decisive, with five separate touches before it was ultimately breached.  From there, two separate tests challenged the trend line, but again, it held its ground and price has moved consistently upward.

The moving averages are cooperating on the weekly, with the 200-period and 50-period all sloping upward.  The 10, 20, and 30 period averages are all in descending sequence, as befits a good uptrend. Thus far, the weekly candle bounced off the 20-period moving average, and with three days remaining before the candle closes, it shows a long shadow with a short body.  That's a bullish draw as it sits now, but of course, that can change over the next three days.

As is the case on the daily chart, the weekly RSI(9) oscillator is merely confirming price action, although it does have a definite bullish slant to the overall pattern.  The three bearish candles drawn off the 12 December peak are troubling, certainly, but not overly so.  Volume on the weekly chart has been modest, and the candle bodies are not especially long as compared to earlier waves.

So it comes down to this.  With price resting on support, is this the time to enter long?  I won't be, at least not just yet.  While the weekly is showing signs of strength, the daily is hinting that it's got a bit more pullback left in it, and I'd rather enter closer to the bottom of that pullback if possible.  The way I'm playing this is to watch how the next few candles develop.  If we break below the current support line, I'll watch for another consolidation pattern similar to the one in November when we last entered this range.  A breakout (either way) from that range would be a nice play since we'll either be going long off support or short off resistance.  Precisely the type entry we want. 

If, on the other hand, we break above the resistance line sitting right at the top of today's candle, then we'll enter long knowing that the resistance line pivoted and became a support line.  That line has some teeth as well since it has served as both support and resistance going back to November 2015.

Exercise a bit of patience on this one.  We need to give this stock a few more days to reveal which way it intends to run. 

Happy Trading.

GPN Posts Strong Earnings, Surges on Possible Breakaway Gap

Following a solid two-year 50-point impulse wave that drove Global Payments, Inc. (NYSE: GPN) to what was then its all-time high, the stock entered a lengthy period of consolidation that encompassed all of 2016.  At its deepest point, the correction retraced over 40% of the total impulse wave, however subsequent price action in the corrective wave pulled price back to the top of the impulse that ended in December, 2015.

The weekly chart shows the overall price action best, so we'll start our analysis there.

GPN Weekly Chart

What started to develop as an A-B-C flat correction quickly turned complex, and the corrective wave essentially traveled sideways for the entire year. Our first indication that something had changed came in the strong bullish candle drawn last week on higher volume.  This morning's earnings announcement told us why the stock was suddenly starting to move.

GPN posted $0.89 EPS, beating consensus estimates by $0.04, and they posted $817.2 million in revenue, beating consensus estimates by $13.65 million.  That revenue represented a 57.7% year over year gain.  Most importantly, GPN increased forward guidance, setting revenue expectations for 2017 in the $3.35-$3.45 billion range, and full-year EPS to $3.70 to $3.90.  In addition, they raised their stock buyback target to $300 million.

The news to open the week was very well received, and GPN gapped up $5.34 at the open.  The rest of the day traded strong as well, with the close finishing in the upper 50% of the daily range.  That's not bad on an earnings day when it's common for early exuberance to be pulled back as the session runs its course.

Today's gap appears to be a breakaway gap that may signal the start of Wave-3 in the overall impulse pattern.  We're looking at a weekly chart, however, and that candle is only 20% complete at this point, so let's not count the gap a done deal just yet.  Instead, let's zoom into the daily chart and see what potential plays may develop.

GPN Daily Chart

Sure enough, that gap looks impressive on the daily chart as well.  There's some indication that insiders started to move this stock as early as 3 January, and you can see that two significant resistance levels were pierced in last week's trading. 

This was an earnings day, so volume was expected to be higher than average, and indeed, it was.  Notice where the stock finally closed, however.  We're in the middle of a resistance zone that defines the all-time highs for the stock.  Long term traders - i.e., those that are willing to play in time horizons greater than a year - may be willing to enter if price tops today's candle.  After all, if this is indeed the start of Wave-3, there's a potential 50-point run or more in play. Those of us that play in shorter time-frames, however, would prefer a bit of a pullback from here before entering a long position. 

After that long a horizontal consolidation, we can anticipate at least one retest of what should turn into a support line before the next impulse gets underway in earnest.  You can see the various areas of support on the daily chart.  The green zone we show starting at the middle of today's candle is the area where we would consider an entry following a pullback.

Sure, it's entirely possible that we'll miss the entire move by waiting for the pullback.  It's more likely, however, that we'll avoid being caught in a bull trap.  Channel players would have entered short around $79.04, and based on today's action, the weaker hands will be looking to cover their positions, escaping with a small loss.  Similarly, breakout players would have entered long as price approached $80.  There are likely more buy stops in place now just above today's candle, so there's short-term pressure building to push the stock ever so slightly higher.  That's the type of pressure that market specialists prey upon, and they may very well attempt to shake out those weaker hands by pulling the stock back far enough to trigger sell stops.  That would be our cue to enter since we want to go long when the market specialists are going long, not when the retail traders are entering prematurely.

One thing we'll watch is volume on the pullback.  If this is a legitimate upward move, then volume will be relatively light on the downward swing.  The final true breakout should be on high volume.  Today's volume was high, however it was an earnings day, so even without a breakout it should be high. We'll watch for a sign that the insiders are stepping into this stock and join them at that point.  Watch for a pullback into the green zone and then a strong move up on convincing volume.  That will be our signal to enter.

Happy Trading.

MCHP At Bottom of Bull Channel But Chart Signals Caution

Another stock that appeared on our bull channel scans this weekend is Microchip Technology, Inc. (NASDAQ: MCHP).  Unlike the stock we reviewed yesterday, MCHP is sitting at support, which is where we'd like to setup a long entry.  There are some warning signs on the chart, however, that tell us this may not be the right move quite yet. 

MCHP Daily Chart

We started with the monthly chart to get the overall trend for our Elliott Wave count.  Most of it is reflected on the weekly chart that we'll display shortly, and you can see on our daily chart that the longer term Wave-5 ended on 30 November.  That coincided with a lengthy move that rode the top of the channel for about three weeks.

There are a few things that concern me on this chart from a channel trade perspective.  First, that move down from Wave-5 was a major change of character.  That's the longest bar we can find on the daily, and on the weekly the bar rivals the single-week plummet off the top of Wave-3.  Volume was definitely convincing as well.

The retest of that high was on better than average volume, however it was immediately followed by a failure on near-equal volume.  The return to the bottom of the channel was on higher than average volume (on the down days) but the bounce off the channel bottom was on about half the average volume.  That's not the type volume pattern we want to see before entering a long position.  To feel comfortable with that long entry, we need the upward volume on the bounce to be higher than average, not lower by such a large amount.

The Elliott Wave count is also troubling.  On the daily chart, since the end of Wave-5, at least two corrective subwaves have completed.  The setup is for an a-b-c flat correction, however we can't be certain Wave-c has completed.  In fact, from the top of Wave-b, we can draw four viable sub-waves, which suggests there's one more sub-wave to the downside yet to come.  That will likely complete the flat correction, and the bottom of Wave-A.c would be near the lower channel marker. 

On the higher order, this is just Wave-A of the correction, so the next move should be up from there.  Assuming the volume signature agrees, that's the point where we'd like to enter long.  The strong bearish divergence in the RSI(9) Oscillator adds to our conviction that a long entry would be premature at this time.

Nothing on the weekly chart refutes our interpretation:

MCHP Weekly Chart

Something that does jump out at us on the weekly chart is that this stock really likes to trend sideways for long periods of time between impulse waves.  Both Wave-2 and Wave-4 were diagonal corrections and each lasted for a good 18-months.  What this means is that our post Wave-5 correction may well be a complex correction that drags out through all of 2017.  That's not necessarily a bad thing if it chooses to follow the same corrective pattern as the two prior sideways moves.  Just look at the very lucrative swing trades that setup in those two diagonals.

Notice the bearish divergence in the RSI coming off sub-wave-iii. That adds greater strength to the bearish divergence we see on the daily chart.  Also notice the decreasing volume coming off the top of Wave-5 and that subsequent one-day plunge.  That the last weekly bar was down on volume approaching the average tells us there's still more weakness ahead.

This is a stock for our long-term watch list.  We'll be watching the volume signature on the daily to determine if a long entry is viable as we approach the bottom of the channel.  We'll also watch for signs that the stock is entering another lengthy consolidation period, and if so, we'll look for multiple swing trade positions as the pattern develops.  Let's not be hasty with this one.  It has excellent potential if we give it a chance to develop in its own due course.

Happy Trading.

Autodesk Trading in a Bullish Channel on Daily Chart

Channels, especially if they are channels trending in the same direction as the overall market, can be extremely lucrative for the swing trader.  An aggressive swing trader can play the stock in both directions as it bounces off the extremes of the channel.  A conservative swing trader can enter in the direction of the broader market when the stock touches the boundary most suited for that directional play. 

It's important to remember that, for channel plays, you only want to go long in an area of support and you only want to go short in an area of resistance.  Entering a channel trade outside of those extremes (either within the boundaries of the channel or on a pierce of the extremes) is tantamount to gambling, and that's not a game we like to play with our hard earned capital.

One stock that is trading in a bullish channel right now is Autodesk, Inc. (NASDAQ: ADSK). We'll look first at the daily chart since that's where the pattern first caught our attention.

ADSK Daily Chart

The channel is well defined, as you can see, with at least three touches on both the top and bottom.  The height of the channel at its innermost limits is about 8 points, so there's a very healthy spread there.  The support and resistance zones are about 2 1/2 points wide, so our reward to risk ratio is at least 2 1/2 to 1 assuming we enter at the inner limit and place a stop just outside the outer limit. 

The 200-day moving average is trending up and price is above the moving average, so we're looking at this as primarily a long play.  On this type of trade I tend to be a bit aggressive, so I'd be willing to play the short side as well, but that's really a matter of style and preference.

Now, this is a watch list stock right now, not an immediate setup.  For a long trade, we went to enter in the zone between the green diagonal support areas.  We've missed that point and we're not going to chase any stocks.  For a short entry, we want to enter in the zone between the red diagonal resistance areas. 

The daily chart does offer two warning flags.  First, there's a bearish divergence building in the RSI(9) oscillator.  This uptrend is weakening and may not have much more to offer on the upside.  This strengthens our desire to play a short if we hit that resistance zone.  Second, the last thrust to the top of the resistance zone looks suspiciously like climactic activity.  We can see that demand is weakening in the last couple of up bars.  Again, it's a strong argument for a short if we retest that resistance zone.

Let's zoom out a bit and look at this stock from a longer-term perspective.  The weekly chart was a bit chaotic and did little to offer clarity, so instead we went out to the monthly chart.  That pattern was crystal clear as you'll see here.

ADSK Monthly Chart

There are two possible Elliott Wave counts here, and I've shown the count that makes the most sense to me.  It doesn't matter which is correct, however, since in both counts Waves 3, 4, and 5 are the same.  We land in the same place, and for the purposes of understanding our daily chart, that's all we really need to know.

What has developed into our channel on the daily chart actually starts at the bottom of wave-ii on the monthly chart.  That monthly spinning top in December 2016 may have been the final gasp of Wave-v, although we won't know that until the January 2017 candle completes.  It's a warning sign, though, that we may be nearing the end of this long-term uptrend.

The RSI(9) oscillator on the monthly chart is also urging caution.  While it's subtle, there is a bearish divergence along the highs.  Despite that huge Wave-5 spike as compared to Wave-3, the RSI barely peaked above the 70 line.  So the pattern is definitely displaying weakness.

Volume, on the other hand, is still extremely bullish on the monthly.  We'll have to see how this month's volume signature forms, but there's a crystal clear upward trend in demand through the last couple of quarters.

The bottom line is we'll add this one to our watchlist.  If we retest support, we'll review the RSI, volume, and candle patterns to determine if a long entry is warranted.  Remember, we'll only enter long in that support area.  Likewise, if we retest resistance, we'll review the overall signature to determine if a short is warranted.  Based on what we can see on both the daily and monthly right now, it looks like a short at that level will be a good play, but that could be a week or more into the future, so let's see what develops.

Remember, never chase a stock in a channel play.  Enter long at support and enter short at resistance, but never in between.  We always want the probabilities and the reward to risk ratio in our favor, and that only occurs within those two narrow zones.  Be patient, and let the stock come to you.  Never chase it.

Happy Trading.

Estée Lauder Forms Ending Triangle in Wave-IV

When analyzing a chart, I typically start with the unadjusted weekly chart to view the broader picture and ascertain the overall trend before zooming in to the daily and then the 30-minute chart.  In the case of The Estée Lauder Companies, Inc. (NYSE: EL) the weekly chart did not provide the clarity we needed.  It doesn't help that the company exercised a 2:1 stock split in late January, 2012.  Viewing the unadjusted chart following a split like that dramatically skews the chart pattern, so we have to go with the version that adjusts for splits and dividends.

Since it was clear that the current pattern started well before the time frame shown on the weekly chart, we instead turned our attention to the monthly.  All we're really looking for in this case is the overall trend and a good Elliott Wave count at the higher level.  The monthly did provide that perspective.

EL Monthly Chart

 Sure enough, we can see that the current trend started in March 2009, near the end of the last major financial crisis.  Three of the five Elliott impulse waves have completed with the fourth either in progress or just completed.  We'll talk more about that when discussing the daily chart.  Furthermore, each of the two completed impulse waves subdivided quite nicely into five distinct sub-waves.  With this pattern in focus, we can now turn ourselves to the daily chart to determine any potential setups.

EL Daily Chart

Notice the conflicting trend signal between the monthly and the daily charts.  On the monthly chart, the 200-period moving average is sloping upward and price is well above that line.  From the monthly perspective, the stock is clearly in an uptrend.  On the daily chart, the 200-period moving average is sloping downward and price is well below that line.  From the daily chart, the stock is clearly in a downtrend.  In fact, our short-term analysis of this stock using only the daily chart on 30 November 2016 (The Grape's Vine: Estée Lauder a Short Play Following Pullback) reached that conclusion and we presented a short trade scenario.  That play is still possible, mind you, since it still has not triggered.  The evidence now, though, driven primarily from a broader view obtained from the monthly chart, suggests the potential for an upside move as well.

The completion of Wave-III is marked on the chart, and that's obtained directly from the monthly.  An A-B-C pattern emerged from there, however the bottom of Wave-IV cannot yet be considered complete.  We have a triangle pattern coming off the end of sub-wave v in Wave-C.  From it's position, it could be a leading diagonal heading into the next Wave-A as part of a complex correction in which the second correction is a zig-zag pattern.  More likely, however, we'll find that this is actually an ending diagonal signalling the termination of sub-wave v and Wave-C.  (In that case, of course, we'd have to adjust the labeling on the chart.)

There's other evidence on the chart that Wave IV may be completing and a Wave-V impulse is set to begin.  The volume pattern is showing a lot of demand at the support line formed by the base of the triangle. Upward moves are signalling far greater strength than downward moves.  Adding to that, we see an RSI(9) oscillator that appears to be strengthening.  It appears from the daily chart that the supply that pushed this stock to its 52-week lows is near exhaustion.  Friday's close above the 50-day moving average and above the top of the triangle comprise a strong signal for a long position.

The 30-minute chart should complete the picture for us.

EL 30-Minute Chart

 Interestingly, the trend on the 30-minute is flat.  The 200-period moving average is horizontal (i.e. trendless) although price is currently above that line.  The last move on the daily chart subdivides on the 30-minute into a well-defined 5-wave impulse.  That the impulse completed just prior to the close on Friday and the final candle is a long red candle on high volume suggests there's a pull-back potential as we head into next week.  There's also a bearish divergence on the RSI(9) oscillator, warning us of impending weakness.  That further strengthens the idea that there will be a pullback in the short-term.

An A-B-C correction on the 30-minute provides a couple of very good entry points for a long position.  If you're an aggressive trader, then there's a possible long entry at the diagonal support line in dotted green.  A second entry if that line is breached is at the horizontal support level (not drawn) around $78.83.  (Remember that support and resistance levels are areas, not actual lines.  I like to provide a fuzzy .25% above and .25% below the line on a daily chart as the rough area around which the price may reverse.  On a 30-minute chart, I use .15% above and below as the measure since traders at this level will have much tighter stops.)

Conservative traders also have two possible entries.  The first is just above the high of Friday's pattern.  The second is above the high shown on the 30-minute chart dating back to 9-December.  Either way, you want both the overall market and the stock moving strongly in your direction when entering the trade.  Be sure volume confirms the move.

EL doesn't report earnings until 2 February, and we don't anticipate another dividend before the end of February.  From a major news perspective, therefore, there's nothing currently on the company's schedule that would impact the flow of the trade.  So for us on the swing side, the decision we need to make is if this is now a long setup with the break of that triangle, or if there's potentially another move to the bottom of the triangle before a breakout to either side.  We'll be playing whichever way this stock decides to break.

Happy Trading.


 

Mobileye Completes 5-wave Impulse after Trend Line Break

The Jerusalem, Israel based autonomous driving technology firm Mobileye NV (NYSE: MBLY) ended 2016 by breaking a strong resistance trend-line with a short breakaway gap.  The stock was trendless through most of its trading history, however the oscillating 20-point high to low pattern on the daily chart offers periodic opportunities for the swing trader.  With the completion of a short-term 5-wave impulse pattern following that trend-line break, one such swing opportunity may be in front of us.

MBLY Daily Chart

One of the methods for defining a trend in the stock - and a method I like since it scans very well - involves the 200-day simple moving average.  When the SMA(200) is moving up and price is above that average, then the stock is an uptrend and long positions are warranted.  When the SMA(200) is moving down and price is below that average, then the stock is in a downtrend and short positions are warranted.  When neither of those conditions are true, then the stock is not in a clear trend, as is the case with MBLY on the daily chart.

Looking at our chart, however, we can see the break of that diagonal trend-line just as the stock broke out from its bottom near year-end.  Notice the volume that coincided with that breakout.  That surge was on 29 December 2016, and was more than double average volume in a period where overall market volume is exceptionally low.  There was strong follow-through with that volume in each wave, too.

It's likely no coincidence that the company announced a deal with BMW and Intel on 4 January 2017.  The plan is for BMW to test 40 driverless cars in the US and Europe in 2017 using Mobileye's anti-collision technology. (Reuters: BMW, Intel, Mobilieye to Test 40 Driverless Cars in Second Half of 2017.)  The $9 leap in price in the week preceding that news is a good sign of institutional and specialist interest, especially given the volume we saw in the last week of the year.

Let's zoom into this chart now to see what type of entry may be available.  I prefer the 30-minute chart for entries, as opposed to the hourly chart, since the 30-minute doesn't cross daily boundaries and better aligns with the hectic first and last half hours of the trading day.

MBLY 30-Minute Chart

Well, that 5-wave impulse certainly comes into focus on this 30-minute chart.  Notice that the 200-period moving average at this level is swinging into an up-trend status.  Also notice the volume patterns throughout the move.  Compared to the rest of the chart, volume was exceptional in the entire upswing.  It's started to taper off as we've consolidated into a horizontal pattern following the completion of Wave-5, however that's a good sign as well.

What we are attempting to ascertain is whether or not that 5-wave impulse was merely the first wave of a much larger higher order impulse.  The volume pattern and the consolidation we're seeing now suggests that it is.  The problem is, we don't yet know which way this next move will break.  The pattern can be interpreted as a descending triangle (which has a probable downside break) or a pennant coming off that 5-wave impulse (which has a probable upside break.)  We can make a case for either one.

A bit of caution is needed.  That lengthy consolidation on the 30-minute is only 2 bars on the daily, and after the move this stock made, that's not enough of a correction to signal the next move with any conviction.  I'd expect to see a bit more of a pullback on the daily, which means we may get a downside break of that triangle on the 30-minute.  Because of the daily pattern, I won't take a short position on that first break.  Rather, I'd only take it on a retest and subsequent failure of the base of that triangle.  We need confirmation that it's a true resistance line before entering.

That's not true on an upside break, however.  Because of the strong move this stock made in the first place, and because of the high demand showing in the volume signature, we will take a long position on an upside break.  Notice that the daily is showing a strong support line at the bottom of today's candle, so a protective stop below the low of the January 4 candle would be a safe play.  This is a momentum play, so a break below that candle would signal a level of weakness that would invalidated the trade, and we'd want out immediately.

Watch the 30-minute chart but be wary of a possible bear trap.  On the upside, a conservative target is the resistance level at $46.98.  On the downside, a conservative target is the support level of $34.06.  Let's see how this one plays.

Happy Trading.

PFG Has One-Wave Remaining After Healthy 27 Point Run

For much of 2016, Principal Financial Group (NYSE: PFG) enjoyed a healthy, steady uptrend, gaining 27 points coming off a low of $33.09 in the beginning of February.  The uptrend was briefly interrupted by a Wave-2 correction that retraced 50% of the first wave.  Since then, it's been an impressive upward march to an 8-year high.

PFG Daily Chart

There are multiple possible wave counts on the daily chart, however, which means some caution is in order.  One possible wave count is in bold black, and that's the count that first caught my attention.  In that count, Wave 3 completed and Wave 4 is in progress.  This means there is one more wave to go to the upside before we head into a corrective pattern.

The more I scrutinized the chart, however, the more I realized there was an alternate count that may be in play. That alternate count is shown in red, and in that count wave-5 completed on 8 December and we're now into a correction.  There's some evidence to support this count when you consider the bearish pattern that formed in the RSI(9) Oscillator.  A bearish divergence on both the highs and the lows first appeared in early November, and nothing has changed since then to change the situation. 

Volume also hints at waning interest.  The pattern was declining on up days prior to the holidays, and since then the three bars thus far this week are warning of lessening demand.  So we cannot eliminate the potential for an impending correction.

Let's take a look at the weekly chart to see if it will clarify the picture for us.

PFG Weekly Chart

There is certainly less in doubt on this chart.  Granted, Wave II was an odd complex correction, however there can be little doubt that it was a corrective wave.  So on the weekly chart, Wave III started on 2 February, just as our current 5-wave impulse started on the daily chart.  So far, so good.

Waves 1 and 2 on the weekly are crystal clear as well.  In fact, Wave-1 traces a strong 5-sub-wave impulse, and that helps clarify the labeling of Wave-1 on our daily chart.  Wave-2 is also crystal clear.  The wave on the daily that has a bit of confusion is the next one, but there's no confusion at all on the weekly chart.  Wave 3 follows a straight line pattern and ends the week of 5 December.  Based on this, we can conclude that the count in bold black on the daily chart is the correct count.  There's no disagreement on the weekly with that interpretation.

Also, we can see that, on the weekly, Wave 2 is a relatively short and deep correction.  The alternation rule tells us that Wave 4 will be a shallow and potentially long correction.  That would explain the weakness we're seeing on both the weekly and daily RSI(9) oscillators.  A lengthy Wave-4, even if it's a flat correction with a tight range, will eventually push the oscillator close to its lower boundaries. 

On the daily chart, it appears that Wave-4 has already traced a very shallow flat a-b-c correction. We now need to see if the wave develops into a complex correction.  Note that today's candle rests right on top of two separate diagonal support lines, each drawn from different originating points. Those lines diverge starting tomorrow, but it's probable that one of those two lines will hold.  We need to wait and see which one it may be, however.

Given the current pattern, we're not anticipating a short trade from here.  Rather, we're watching for signs that Wave-4 is completing and we intend to ride Wave-5 to its ultimate top.  There are a potential twelve points (or more, since we've no constraints to the upside) in the move. PFG raised dividends three times in 2016 and is currently paying a 2.94% yield, so we're perfectly fine if that move takes us through the next ex-dividend period.  That's not likely, however, since we don't expect it much before the first week of March. 

We'll add this stock to our watch list and attempt to catch the beginning of Wave-5.  Be aware of a potential pullback in the market after the Dow Industrial Average finally trades above the 20,000 level, and also watch for a post inauguration pullback.  Both have the potential to stop us out of any long positions, so be aware of it and manage your risk accordingly.

Happy Trading.

Retail Numbers May Spur Next Impulse Wave for Amazon

With the rapid growth of third-party sellers, Amazon.com (NASDAQ: AMZN) is rapidly becoming the one-stop shopping center for online retail sales.  Since the January 2012 start of the recently concluded 5-wave Impulse, Amazon's stock price went from a "mere" $167 up to a stratospheric $847 at its all-time peak.  A brief pullback has the stock now trading in the $755 range, however reports coming out of the retail sector leave us wondering if the pull-back will be short-lived and a new impulse wave is set to begin.

AMZN Weekly Chart

The weekly chart adequately sums up the tale of the tape.  The five impulse waves are easily drawn, and it's clear that no Elliott Wave rules were violated in the year bullish pattern.  The daily chart zooms into the current situation rather nicely.

AMZN Daily Chart

A 38.2% retrace of Wave 5 may have completed Wave A in the corrective move, but from there the picture grows a bit fuzzy.  As corrections go, especially for a stock trading near the limits of the upper atmosphere, this one is especially shallow.  While we can draw an A-B-C corrective pattern and then trace a flat correction from there, it simply doesn't fit the type correction one would expect.  Nonetheless, it's the correction we have before us. 

The question now is whether AMZN will continue to correct - i.e. move sideways - or if the end of this wave will result in a new impulse wave.  If the latter, will that wave be a bullish or bearish trend?  For guidance, we'll reference two news items that came out today. 

First, let's start with the competition.  Two large retail stores - Kohl's (NYSE: KSS) and Macy's (NYSE: M) - both reduced their overall 2016 guidance today.  Both cited a 2.1% slip in same-store sales, and as one might expect, shares of both are being hammered in after-hours trading. (The Street: Wall Street Punishes Macy's and Kohl's for Brutal Holiday Season.) To make matters worse, Macy's will close 63 stores by the spring of 2017.  It's part of a larger move previously announced, however it will cost the company $575 million in 2017 sales.

Well, based on this news, the Retail Sales numbers released on 15 January should prove interesting.  Given the extremely poor results being projected from these two retail giants, I'd be very hesitant to open a long position in that sector until both the retail numbers are out and any company in that sector in which I intend to go long reports their 2016 results.  The risk just skyrocketed.

So what does all this have to do with Amazon.com?  Well, it appears those buyers that didn't pass through the doors of Kohl's or Macy's may have let their keyboards do the shopping online.  (Reuters: Amazon Doubles Deliveries in 2016 for Third Party Sellers.) According to the report, Amazon did 50% more business for these fulfillment partners during the holiday season, and they doubled their business for the entire year.  Equally impressive, they saw 70% growth in the number of sellers using the fulfillment service for which Amazon takes a cut on every item shipped. 

The growth and profitability of this portion of the business is tremendous.  According to CEO Jeff Bezos, close to 50% of all items purchased on Amazon.com come from third party vendors.  The growth potential in this space is significant, especially with the rapid adoption of online shopping.  Year over Year, the company sold 5 million more items on Cyber-Monday alone, as compared to last year.  With the delivery troubles experienced a year ago apparently behind them, a solid earnings report after the close on 26 January may well launch another bullish five-wave impulse in a stock already in near-earth orbit.

Even if AMZN is out of the price range for many of us, we still need to pay close attention to this space.  Customers gained by AMZN are customers directly pulled from the brick and mortar retailers.  That will have a negative impact on those retailers, certainly, but also potentially on the REITs that specialize in that space.  On the flip side, it will be a boost to UPS, at least until Amazon finishes building out its own delivery fleets, an effort already underway.

Pay close attention to the retail sales numbers on 15 January, and factor those overall numbers into what the individual retailers are reporting.  As always, follow the money and we'll find some very interesting trades in the making over the short term.

Happy Trading.

ADP Employment Report Will Set Stage for Friday's Job's Report

The Automatic Data Processing / Moody's Analytics Employment Report will be released at 08:15 EST tomorrow, 4 January 2017.  Following today's exceptional ISM Manufacturing report, tomorrow's ADP report coupled with Friday's Employment Situation report take on added significance.  The ISM report raised the probability of an early interest rate hike, thus increasing the significance of the monthly jobs data.

There are two mandates under which the Federal Open Markets Committee (FOMC) must operate.  First, they must strive to maintain a rate of inflation at the 2% level, and second, they must maintain the U-3 unemployment percentage below 5%.  The primary lever used by the FOMC to influence inflation and unemployment is the target range for the Fed Funds interest rate, currently set to a range of 0.50% to 0.75%.

One of the principle drivers of inflation is wage growth.  Since inflation currently sits at 1.7% and sloping upward, FOMC will scrutinize the rate of wage growth that is reported in the two employment reports issues this week.  Wages are directly impacted by the employment situation (they are, after all, a classic supply and demand function,) which is another reason the Jobs Report is so closely monitored. 

The key statistic being watched in tomorrow's release is ADP's employment estimate for December, 2016.  The consensus estimate is for 172,000 jobs being added in December, down from the 216,000 added in November, and well off the 306,000 added a year ago.

ADP Employment Change through November 2016

This is another situation where good news (i.e. a stronger than consensus release) may be bad news (i.e. the market declines on the news.)  A strong number would signal that Friday's Employment Situation report will come in stronger than expected.  That puts added upward pressure on wages, and as a result, it increases the potential rate of inflation. 

US Inflation Rate through November 2016

We'll have to wait until Wednesday, January 18 for the December 2016 inflation rate to be announced.  As we can see from the chart through November, however, inflation is definitely on the upswing, and given the current rate of growth, we'll be knocking on that 2.0% rate by the end of the first quarter of 2017.

It normally takes about six months for a change in monetary policy to be reflected in the key economic indicators.  When FOMC raised rates in December, they did so anticipating the rate of inflation and unemployment in the June 2017 time-frame.  The challenge before the committee now is to anticipate what impact that rate increase is having, if any, and then determine when the next increase is best served such that economic growth is maintained, but is not allowed to accelerate out of control.  It's a bit of a balancing act, since moving to much too soon will force the economy into a contraction, and that's not at all the objective.

Pay attention to tomorrow's number, but realize that the more meaningful report is issued Friday.  We're using tomorrow's number as the gauge to determine how close the current consensus estimates for Friday will be to the actual release. What matters to us as traders is how the market may adjust to these numbers in the short term.  Multiple strong releases will pull the next interest rate hike closer to the March or May FOMC meetings, and that will require market adjustment.  That adjustment, of course, creates prime trading opportunities since we'll want to catch those short-term moves.

Happy Trading.

ISM Report Shows Accellerating Growth

The US economy experienced its 91st consecutive month of growth according to the Institute for Supply Management (ISM.)  The Manufacturing Index surged to 54.74 as compared to the consensus expectations of 53.8.  The report also indicated that 11 of the 18 manufacturing industries are experiencing growth.  Listed in order, they are:

1. Petroleum and Coal Products
2. Primary Metals
3. Miscellaneous Manufacturing
4. Food, Beverage, and Tobacco Products
5. Apparel, Leather, and Allied Products
6. Paper Products
7. Machinery
8. Electrical Equipment
9. Appliances and Components
10. Computer and Electronic Products
11. Fabricated Metal Products 

The 6 manufacturing industries that reported a decline are:

1. Plastics and Rubber Products
2. Furniture and Related Products
3. Printing and Related Support Activities
4. Textile Mills
5. Nonmetalic Mineral Products
6. Transportation Equipment

The following chart published by the Institute for Supply Management details the status of each area covered by their monthly survey.

December 2016 ISM Report on Business

What is specifically notable is the rate of change listed for prices as well as the rate of change listed for the overall economy.  The ISM's observation that both are growing at a faster will increase the pressure on FOMC to raise interest rates earlier in 2017 than previously anticipated.  Indeed, the Fed Funds Futures are now factoring in the following probabilities that interest rates will be above the current .50% to .75% range:

• 15 March 2017 = 29.5%
• 03 May 2017 = 39.8%
• 14 June 2017 = 74.5%

Given the exceptionally strong report issued today, Thursday's Jobless Claims and Friday's Employment Situation reports will be closely monitored by FOMC.  Traders will need to monitor this as well, since the probability of interest rate hikes will be factored into equity and bond prices well in advance of each Fed meeting.

Also, as we head into the first earnings season of the new year, be aware of those industries that are reporting expansion versus contraction.  This level of growth (or decline) will manifest in both the earnings releases and the forward guidance for impacted companies.  Watch for potential price reactions as the market digests today's in anticipation of those earnings releases. 

Happy Trading.

ISM Index Release Will Provide First Glimpse into Earnings Season

The major economic data releases are relatively light in the first week of the new year.  Of the major releases that we follow, only six of them are on tap this week:

• Tuesday 10:00 - ISM Manufacturing Index
• Wednesday 14:00 - FOMC Minutes
• Thursday 08:30 - Jobless Claims
• Thursday 11:00 - EIA Petroleum Status Report
• Friday 08:30 - Employment Situation (AKA the "Jobs Report")
• Friday 08:30 - International Trade

Heading into the next round of earnings releases, starting on Monday, 9 January when Alcoa (NYSE: AA) reports before the open, we'll pay special attention to Tuesday's ISM Manufacturing Index.  This key release offers insight into whether manufacturing (and the economy as a whole) is growing or declining. To interpret the index, keep in mind these key levels:

Readings above 50 indicate that manufacturing and the overall economy are expanding.  It also indicates that the GDP (Gross Domestic Product) is also growing at a steady pace.

Readings below 50 but above 42.5 indicate that manufacturing is declining, however the GDP is continuing to grow, albeit slowly.

Readings below 42.5 indicate that both manufacturing and the GDP are in decline.  (Remember that the definition of a recession is two consecutive quarters of negative GDP growth.)

The ISM data being released tomorrow is for the month of December, 2016.  Consensus estimates for tomorrow's release is a reading of 53.8.  That follows a prior release of 53.2, so the consensus is for modest growth in both manufacturing and the economy as a whole.

ISM Manufacturing Index Histogram

The index is well off it's Third-Quarter 2014 highs, however since bottoming in January 2016 manufacturing and the GDP have demonstrated modest growth.  This trend is expected to continue in tomorrow's release.

The implications of a surprise away from the consensus estimates may well be in play through the entire earnings season this quarter.  Since it shows the health of manufacturing, a weaker than expected report will imply that earnings in general, especially for the industrial and transportation related industries may similarly disappoint.  Equities in general could retreat following a weak announcement.  On the flip side, the bond market will rally on the indication that the economy is weaker than perceived, and bond yields will retreat.

If, on the other hand, the index reports higher than consensus estimates, we may see some mixed results. The market is currently anticipating a June 2017 interest rate increase. March only shows a 20% chance of an increase, and May only shows a 29% chance. June, on the other hand, is at 47% - nearly 50:50, and the dates beyond June start to reflect the interest rate that will follow the next move.

If the Manufacturing Index is higher than the consensus estimate, this may incent the FOMC to increase interest rates in either the March or May meeting, and in anticipation of that, we may see equities retreat despite the positive economic data.  That will be especially true for companies with a high reliance on debt in their operating model, and will also be true for lower-yielding dividend stocks since the higher interest rates go, the more attractive bonds become for that level of income.  Bonds, on the other hand, will decline and their yields will increase.

Of course, the size of an Index surprise to the upside will determine whether equities advance or retreat.  Coming in at or just a point above consensus will not be taken as bad news for equities.  Several points above, however, the the support that provides to the more hawkish FOMC members will almost certainly be factored into market pricing.

When the Index is released at 10:00 AM EST (15:00 GMT) tomorrow, consider what it signals for corporate earnings, most of which are already in the books and awaiting release, and what it signals for potential shifts in the FOMC monetary policy posture.  This is one of the indicators that may generate tradeable setups, so pay close attention to what it portends.

Happy Trading.

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

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

DNKN Daily Chart

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

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

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

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

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

DNKN Weekly Chart

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

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

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

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

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

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

Happy Trading.

Bull Flag Develops in PGR Off All-Time High

I'd like to wish everyone a very Happy, Healthy, and Prosperous 2017.

A very strong third-quarter earnings release on 13 October 2016 pushed Progressive Corporation (NYSE: PGR) to its all-time (split-adjusted) high, narrowly surpassing the prior high set in March 2016.  Not surprisingly, the stock experience a slight pullback coming off that all-time high.  In a strong bull market such as we've experienced recently, a pullback off a major high is often an excellent entry point since the stock will typically retest those highs and often push well above them.  This strategy with major lows also works well for short entries in strong bear markets.

The daily chart, in the case of Progressive, offers strong evidence that there's more to come on the high side.

PGR Daily Chart

The overall daily chart shows a long-term complex correction, and as such, I chose not to label anything other than the current move.  Starting from the low on 4 November 2016, however, the stock drew three complete impulse waves that ended at the all-time high.  Since then, the very shallow pullback is filling in the Wave-iv picture very nicely.

Wave-iii, like Wave-i before it, was near vertical.  The Wave-iv pullback formed a classic bull flag, and the break of that flag will be our signal that Wave-v is in progress.  That, in fact, is the trade we plan to take with this stock, but more on that in a bit.

Before we briefly discuss the weekly chart, I'd like to draw your attention to the three diagonal support lines that all converge at a horizontal support line around $35.50 in the late January time-frame.  Two of those lines are extension of prior resistance levels, each with a minimum of three resistance touches.  The third line is formed from support coming out of Wave-ii.  Combined, these are all significant levels of support that may factor into a trade setup later this month. 

Finally, the RSI(9) oscillator is in a strong bullish wedge pattern.  There's currently no indication of weakness in the RSI, at least not on the daily chart.  The current pullback has found some support on the EMA(10) line, adding to the strength we anticipate in the next move.

Now let's take a quick look at the weekly chart.

PGR Weekly Chart

Going all the way back to September, 2012, Progressive's march was steadily northward.  A strong bull channel formed very early in that trend, and it has yet to be broken to the downside.  It's an extremely strong bull trend for this stick, however, we are starting to see signs of weakening.

You can easily see the twin peaks formed in March 2016 and December 2016.  For longer term traders, those peaks form a double top, and suggest the next long-term move for PGR could be down.  Now, that time horizon is far greater than I trade, but the potential for future weakness shouldn't be ignored.

The RSI(9) oscillator on the weekly chart also signals weakness.  There's a bearish divergence in the RSI coming off those two peaks, and there's a general downward slope to the channel formed in the oscillator.  Now, these types of RSI signals are often well in advance of the actual price action they portend, so this doesn't influence the short-term trade we're planning.  It does, however, give us a pretty good clue as to what types of trades may setup longer term, once the current daily five-wave impulse completes.

So, what trade are we contemplating?  Well, the signal will come on the daily chart, as usual.  We're looking at a long position trade on a break (with confirming volume) above the bull flag.  Our initial protective stop will be $0.10 below the low of the pattern.  Currently, that would make it $35.23, however that could certainly change before entry.  There are three potential price targets that we are watching, and all of them are based on the height of the flagpole.  When entering flag trades, we use the 61.8%, 76.4%, and 100% values as the targets ranging from conservative to aggressive, respectively.  That puts our targets at $37.17, $37.54, and $38.13. 

Looking at the number of support lines converging, we expect to be able to reduce our risk almost immediately, and hope to quickly move our stop above the entry in order to eliminate our risk.  As always, we'll trail our stops up until we are stopped out of the position.  The conservative target will be used for position sizing and initial risk analysis.  As we close in on each of those targets, however, we'll move our stops tighter, and tighter.  Remember, we want to stay in the trade as long as the stock is running in the right direction, so we don't set hard exit limits.  Rather, we let the market stop us out when the direction shifts.

Happy Trading.