MDT Cup and Handle Setting Up Long

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

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

MDT Daily Chart Indicators

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

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

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

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

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

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

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

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

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

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

MDT Daily Chart

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

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

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

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

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

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

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

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

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

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

Happy Trading.

MDT Weekly Chart

MDT Monthly Chart

SYMC is a Tale of Three Charts

One of the scans I run on a daily bases searches for potential flag setups.  These minor pauses in a trending stock often offer good entry points when the trend resumes, provide, of course, the overall stock pattern is correctly interpreted.

A stock that caught my attention in today's scan was Symantec Corp (NASDAQ: SYMC), the nationally known cyber-security software developer most familiar to consumers as the maker of the Norton anti-virus suite.  The three-day consolidation underway following a healthy upward move is what tripped today's scan.

SYMC Daily Chart

There are a lot of positives on the daily chart.  The slope of the 200-day SMA shows a healthy uptrend.  A 5-wave motive is in progress, although we'll see on the weekly and monthly charts why I start the Elliott Wave count in May 2016 and not February.  On Balance Volume is rising at a slow, but steady pace.  The RSI(9) oscillator is confirming our price action, and finally, the stock recently broke out of a descending triangle pattern and has not pulled back in the month since that breakout.

There are two warning signs on the daily, chart, however.  The first is that obvious high spike in volume on 25 January.  The size of the candle that day is rather small, warning us that we may need to take a closer look at the price action since something out of the ordinary has occurred.  It's possible that this spike is indicative of climactic action signalling an end to the uptrend.

The second warning sign is the price target for our potential Wave-(v).  Using the rule of thumb that, when Wave-(iii) is longer than Wave-(i), the conservative price target for Wave-(v) is the height of Wave-(i).  Now, nothing constrains Wave-(v) in this pattern, however history shows that this rule of thumb works with enough consistency to be a valid predictor of price action.

I show the Wave-(v) price targets as a Fibonacci extension measured from the end of Wave-(iv).  We're already trading above the 61.8% extension, and that's a level I normally use as my most conservative target in any price calculation.  So based on this, the end of Wave-(v) can occur at any time.  A count on the hourly time frame, however, suggests that this slight 3-day pause is a fourth wave in an impulse that started 3 January, so if that's the case, we may yet approach the 100% extension.

I'm going to jump to the monthly chart next, since that's the chart that puts everything in focus.

SYMC Monthly Chart

That a motive wave ran from 1999 to 2005 appears obvious on the chart.  Since price following that 2005 peak has not retraced 100% of that move, we're safe (for) now in labeling that peak the top of Wave-I.  The question before us now is what to do with Wave-II.  Has it ended, or is it still in progress?  If it ended, when, and what does that tell us about Wave-III?

What I show on this chart is one of many possible wave counts.  It has problems, but then, complex corrective waves always generate massive headaches when trying to piece together their puzzle.  I've shown, in this case, the various subwaves that lead me to conclude that Wave-II ended in February 2016 and that Wave-III is in progress.  I also show my conclusion that, for the long-term trend, Wave-1 and Wave-2 of Wave-III have completed and Wave-3 of Wave-III is in progress.

Of note on the monthly chart is the breakout of the ascending channel that formed much of Wave-II.  Following that breakout - which occurred on high volume - we had a pullback and a retest of the support line.  That retest was rejected and price spiked to an all-time high this month.  That's good news for those looking for a bullish move out of SYMC and it offers confirmation that this wave count may be correct.

There are two warning signs, however.  First, volume is once again declining, and this month's candle - despite its length - has thus far experienced very light volume.  In other words, volume is not confirming price this month.  Another way of showing that is via the On Balance Volume (OBV) indicator.  Throughout the current uptrend, OBV has oscillated a bit, however the overall indicator remains flat.  We're not seeing any signs of accumulation, and we really do need that to occur in order to sustain a lengthy upward move.

The second warning comes from the RSI(9) oscillator.  When we compare the height of the RSI now to the height during the three prior price highs, we see a pattern indicative of a bearish divergence.  At best, the RSI is not confirming price action, and it may possibly be signalling weakness that will lead to a downturn.  So, while we believe for the moment that we have a valid wave count, we do need to be aware that it could be invalidated at any time.

I've left the weekly chart for last since it really needed the monthly analysis to put it into perspective.

SYMC Weekly Chart

The current 5-wave impulse is obvious on the weekly, but equally obvious is that 5-wave patterns throughout the correction were the norm.  Were it not for the monthly chart, there would be little reason to believe that this current impulse is nothing more than the next wave in the correction.

What does add some credence to the Wave-III theory is the overall volume signature.  We see some serious demand entering the picture at the move up from what we believe to be the bottom of Wave-II.  Indeed, each of the motive waves that occur throughout this upward move are accompanied by rising volume with a strong demand signature. 

The volume pattern in the tight symmetrical triangle was accompanied by an interesting volume pattern.  A lot of shares changed hands in this consolidation, and the subsequent breakout was on rising volume. 

Now, the bad news.  The RSI(9) oscillator shows a pronounced bearish divergence on the weekly chart.  This move could very well be short-lived, at least according to the RSI.  Additionally, when we look at the symmetrical triangle, we see that it is actually a pennant formed from the Wave-(iii) motive.  I've added the Fibonacci extension targets to the breakout of that pennant, and price has already closed at the 50% extension with a high nearly reaching the 61.8% mark.  That 61.8% target is a typical end-point for a pennant breakout such as this one. 

So, how are we going to trade this one?  Well, I'm going to take my cues from the daily chart.  Regardless of the Weekly or Monthly wave counts, it's obvious that we're currently in the fifth wave of a 5-wave impulse on the daily.  The current pause may be the end of that wave, it may be the mid-point of the wave, or - most likely - it's the fourth wave of a 5-wave move on the hourly chart.

Remember, the overall market is trending up with strength, so right now we're only taking long positions.  Therefore, if this stock breaks to the downside from here, we'll mark Wave-(v) complete and wait for Wave-(a) to play itself out before going long on Wave-(b).  If, on the other hand, we break to the upside, we'll open an immediate long position.  We'll set a price target of 28.41 with a stop just below the low of the entry day.  This is a two or three day trade at most, and it's a pure motive-wave play.  We will want out of the trade at any hint of weakness.  Based on the pattern on the chart, however, we believe the probability is strong for a short-term trade to the upside with a maximum 3-day trade horizon.

Happy Trading.

ATI Breakout From Ascending Triangle, Forms Bull Flag

The monthly chart of Allegheny Technologies (NYSE: ATI), the small-cap Pennsylvania based specialty materials and components producer demonstrates the the long-term pressures on the US steel industry.  The stock has yet to enjoy a true motive wave to the upside, and it's four-year climb to its all-time high turned out to be a three-wave correction that is likely Wave-A of a longer move.

ATI Monthly Wave

The long-term pattern from 2007 to the present is a descending triangle that is nearing its apex.  The good news for ATI is that there are signs on the monthly chart that the breakout will likely be to the upside.  The RSI(9) pattern is strengthening, and the last two peaks on the price chart - lower highs - compared to the RSI show a bullish divergence.

The volume pattern is showing signs of strength as well.  The amount of supply that entered the scene in the last downward move shows evidence of climactic activity, and the subsequent upward monthly candles are increasing in intensity. 

The price is now trading in the resistance zone, so we're watching this stock to see if it will break to the upside or retreat back towards support and the bottom of the triangle pattern.

ATI Weekly Chart

The weekly chart makes things a bit more interesting.  We can see the resistance zone that clearly and can see that we closed the week in that zone.  What didn't appear on the monthly, however, is the fact that this week's candle constituted a breakout from an ascending triangle that ran the length of 2016.  The volume pattern from this week is the highest volume recorded in at least the last five-years, and it offers strong confirmation of the legitimacy of the breakout. 

The fact that we closed in the resistance zone does raise the odds for a pullback.  If that occurs - and it occurs 57% of the time in an ascending triangle upward breakout - then we will watch for how well the triangle top - now a support line - holds.  Remember, we're not long-term traders, so we're using the weekly chart to gauge the directional trend, allowing us to enter short-term swing-trades in the direction of that trend.  So understanding the pressures imposed on the monthly and weekly charts improves our odds of entering a short-term trade in the same direction as the longer term trend.

Looking at the RSI(9) oscillator on the weekly chart, we've had consistent signals in support of the overall price movement.  This week's RSI(9) close, however, is a bit troubling.  Given the strength of the overall move, this week, a higher move in the RSI, preferably above 70, would have provided stronger confirmation of the breakout.  Instead, the RSI closed at the same level as the prior peaks that retreated from the resistance line of the triangle.  That's a sign of weakness that may be a harbinger of a pullback, at least to support.  Keep an eye on it.

ATI Daily Chart

Now let's take a look at the chart that caught our attention in the first place.  Here on the daily chart, there's no sign of that overhead resistance, which is another reason we always want to examine at least the weekly chart.  The ascending triangle, however, is obvious on the daily, and that was an extremely strong resistance line that was broken early this week.

That break, on the highest volume on the chart, also occurred on a strong breakaway gap.  It was better than expected earnings that created the gap, however the 15-month high is seen as a strong positive for the stock.  The remainder of the week created the next pattern in which we have significant interest.  We're in a tight bull flag pattern now and still showing more strength than weakness.  Thus far, there's been no attempt to retreat as low as the bottom of Tuesday's wide-range candle, and certainly no attempt to close the gap.

In the months leading up to this week's move, On Balance Volume began a steady but gradual rise, indicating that subtle accumulation was occurring over the long term.  The RSI(9) on the daily appears to be in agreement. The oscillator began to show signs of strength a month or so before the earnings announcement, again indicating increased interest in the stock.  The spike in price saw a corresponding spike in the RSI, and it continues to run strong.

We show two separate price targets on the chart.  The green target Fibonacci extension is the price target for the ascending triangle breakout, and the melon Fibonacci extension is the price target for the bull flag assuming it breaks to the upside.  The area we will set for our actual target is where the 100% triangle extension and 61.8% bull flag extension overlap.  So we're looking at a conservative target in the $25.60 range.

We will trade this stock as a traditional bull flag.  The entry will be long once the stock closes above the flag on confirming volume.  The stop will be just below the flag and the target will be $25.59. We'll wait for that close above the flag, however, since we still need to be wary of a potential pullback to support that closes the gap.  Overall, however, this appears to be a solid setup with a good probability of success.

Happy Trading.

Wave-II Correction in Flight For CONE.

After publicly trading for just over a year, CyrusOne Inc. (NASDAQ: CONE) started a steady bullish motive wave that ended in mid-June, 2016.  The last four months of Wave-I were parabolic, with the slope of the rise at times approaching the vertical.  With Wave-I complete, a corrective set of waves ensued and apparently continue.

CONE Weekly Chart

The corrective wave off the high recorded five sub-waves down to what appears to be the end of Wave-A.  If that's the case, then Wave-B is in flight right now.  The retrace from the bottom of A, however, has already recovered 61.8% of the correction, so depending on the type of corrective pattern we experience, a reversal to Wave-C can occur at any time.  We'll pay close attention to the end of Wave-B since that level will determine how deep of a correction we will probably get in Wave-C.

It's important to note the strength of the support line running the entire length of the motive wave, up to and including the bottom of Wave-A.  That support line has the potential to mark the end of Wave-C, so we'll need to be cognizant of the candle patterns as we retest that line.

So knowing that we may be ending the upswing in Wave-B, let's take a look at the daily chart.

Cone Daily Chart

On the daily, it looks like Wave-A was an extended motive wave.  What's shaping up to Wave-B on the weekly chart, however, isn't quite playing by the rules having covered 5 sub-waves thus far.  Wave-B, by definition, is a three-wave pattern.  Now, this could rectify itself by creating a 5-3-3 or 5-3-5 pattern to the top of Wave-B, so let's see how it develops.

What stood out when analyzing the chart was the bullish channel that formed for the current wave.  Both support and resistance have held firm through the entire 5 sub-wave move, and over the last two days, price has bounced off resistance and headed south into the middle of the channel.  Today, it broke through the 10-day EMA, and it's fast approaching the 200-day SMA. It's also important to note that the two consecutive down days occurred as the Dow broke the 20,000 barrier for the first time.  Yesterday's down bar was on much higher than normal volume, too, causing the OBV indicator to hook down.  The trend in the OBV is still up, but that's an indicator that lags price by a significant margin.

The RSI(9) oscillator is the one shining light on the chart.  Compared to the overall pattern, the RSI is signalling a strong bullish divergence over the long term.  Of course, that may be a harbinger of the subsequent Wave-III move that will follow this correction.

As a short-term swing trader, here's how I plan to play this stock.  As long as the overall market trend is bullish, my only interest is playing this to the long side.  So with that in mind, we'll watch its behavior at the support line of the channel.  The channel is four-points wide, so if we get a good bullish candle at support and the market is still trending up, we'll play the long.  The stop will be just below the support line to create a good reward to risk ratio, and also to get us out of the trade immediately if the bounce is a head fake.

If the breakout is to the downside, however, we'll wait for a reversal.  Now, keep in mind the wave count, since the reversal could be part of the 5-3-3 or 5-3-5 completion pattern of Wave-B. We only want to trade in the direction of the market trend, so if possible, we'll try to catch each of the upward waves into the pattern. 

Longer term, it's really Wave-III that we want to catch.  That, however, could still be off into the far distance, based on the amount of time it took for Wave-A to run.  For now, let's play the short term patterns to the upside and enjoy the current strength in the overall market for as long as it lasts.

Happy Trading.

ACAD in Ending Diagonal in Weekly Wave-II

One of the technical screens that I use to locate imminent trade candidates searches for stocks resting on a technical support or resistance line.  Arcadia Pharmaceuticals (NASDAQ: ACAD) appeared on that screen today, however it was the overall pattern that intrigued me.  The technical scan showed the stock resting on a horizontal support line but it also displayed both an ascending triangle and a descending triangle each connecting to that central support line.  It was a pattern I could not resist analyzing further.

We'll start with the weekly chart, today, since the overarching pattern offers a necessary perspective in this case.

ACAD Weekly Chart

 Arcadia emerged from penny-stock status in late November, 2012, and the initial pattern quickly resembled a traditional five-wave impulse.  Indeed, we can count a valid 5-waves that end in mid-July 2015.  The ensuing corrective pattern was both deep and chaotic, however, forcing us to take a harder look at the overall wave count.

As you can see with the sub-wave and primary wave counts we show on the chart, we believe the five-wave impulse to be a Wave-I at the higher order.  (This view is, in part, justified by a quick study of the monthly chart.)  This puts the corrective pattern in focus, and we are able to count a valid 5-wave impulse to Wave-A, a three-wave correction to Wave-B, and the in-progress five-wave impulse that will ultimately lead us to Wave-C.  Whether that continues into a compound correction or if that completes Wave-II remains to be seen, of course.

Note the triangle pattern that forms support and resistance.  That will come into play further as we study the daily chart.  From the weekly, however, we can see that we're just starting Wave-v of Wave-C, and if this will be a true zig-zag correction, this will be a long and deep pattern leading down to roughly where I have C shown on this chart.  As far as the weekly chart is concerned, our only move is to the short side.

ACAD Daily Chart

The area of focus on the daily chart is that final upward move we saw in the weekly.  That last move is what triggered the technical screen, after all, since we can see that it broke through resistance, retested it as support a couple of times, and now rests directly on that line.  Were it not for the overall Elliott Wave count, this would appear to me to be an excellent long trade opportunity.  From an Elliott Wave perspective, however, danger signs abound.

The A-B-C correction dominates the daily chart, and if Wave-C is a 5-wave impulse, as it appears to be on the weekly chart, then it is clearly not yet over.  That signals more distance to the downside before any true uptrend can occur.

What didn't appear on my technical screen, however, is the current wave pattern in the upturn.  We appear to be in an ending diagonal pattern in wave-iv.  Now, we entered this pattern from the top, and typically, the ending diagonal exits in the direction from which we entered.  That would imply an upward move, and we do anticipate that to Wave-v of this sub-wave impulse. But this is wave-4 of the overall move, and wave-5 will be to the downside.  That's the warning I show with that down arrow in black.  Wave-5 must complete Wave-C, and Wave-5 is a continuation of the downward impulse of that correction.

Despite the strong candle drawn today, we don't believe the Wave-iv (which will be Wave-E of the diagonal) downward move is complete.  We're still too far from the support line that forms the lower part of the diagonal.  We'll watch the next moves, of course, since no pattern is perfect, and we need to trade what is, not what the books say it should be. 

Before we look to place a trade, however, we need to see evidence that Wave-C is complete.  This is one case where we'll take our cues from the weekly chart.  The signal is cleaner there, and we should have a better indication when the next impulse - a Wave-III on the weekly chart - begins.

Given the overall strength of the market - the Dow crossed the 20,000 barrier today, after all - we are not interested in taking a short position.  Until Wave-C ends, we'll keep this chart in reserve for the inevitable pull-back of the overall market.  When the market does correct, this may be a prime candidate for a short position.  For now, however, we'll take a pass on entering a trade here.

Happy Trading.

Ending Triangle Breakout in AME May Signal Start of Wave V

After a two-year long corrective wave, the aerospace industry's electromagnetic device supplier Ametek, Inc. (NYSE: AME) broke out of an ending triangle pattern on both the daily and the weekly charts.  The pattern took over twelve months to develop, offering the potential for a lengthy run following the breakout.

AME Weekly Chart

The long term trend in AME continues to be bullish, and the triangle on the weekly may have completed Wave-IV of the long-term trend. We still need more evidence to reach that conclusion - evidence we may have on the daily chart - however the initial breakout in early December followed by the pullback to the triangle near the end of the month and the subsequent January bounce off both that triangle and the 10-period EMA all bode well for a resumption of the uptrend.

Wave-III on the weekly was a two-year pattern that was more than double the price movement of Wave-I.  This eliminates any physical restrictions on the height of Wave-5 should it truly be in progress.  We'll know for sure if price closes - and remains - above the resistance line formed by Wave-II and several subsequent tests of that peak.

The breakout started with a bang, driving the second highest weekly volume on the chart.  It's easy to see that virtually all of the volume to date implies strong demand, and that bodes very well for the subsequent impulse wave.  Volume has, indeed, declined since the twin spikes, however that decline merely brings us back to the 200 period volume moving average.  Overall, it's a bullish signal.

AME Daily Chart

The entire triangle pattern is glaringly obvious on the daily chart.  The volume spike off support at the end of Wave-C as well as the volume spikes on the retest are both good indicators that this is a legitimate breakout and we may well be into Wave-V.  Since November, the price action drew a bullish channel at a modest slope.  Price is riding the support line at the moment, and it has been doing so since the beginning of the year.

Now, it's obvious that we missed the prime entry point which came on the retest of the triangle (which is now positioned as a support line.)  That doesn't, however, mean that another trade setup is not about to appear.  Notice that we've traced five full sub-waves since the November low.  Well, we've almost traced them.  Wave-v is still in flight, and while its minimum target has been met, there's nothing preventing it from running further before a corrective wave kicks in.

Based on the length of Wave-III, we expect Wave-V to run at least 21-points, and given the length of Wave-III, it can certainly run further than that. Based on this, there are two entry points for which we will patiently wait.

1. Wave-v thus far continues to include candles that touch the lower support line.  That's the first possible entry.  If we get a one-candle pullback to support, we'll enter long on a bullish reversal candle.  The stop will be just below the lower support line, and we'll ride the remainder of Wave-v.  
2. The preferred entry at this point, however, will follow a short sub-wave a-b-c correction. Wave-v - once it completes - will likely signal the end of Wave-1.  Once that happens, we'll wait for Wave-2 to run its course and then attempt to catch the start of Wave-3.  That wave should be at least a 10-point run, so our patience will prove quite rewarding if we catch it in time.

Be aware that AME reports earnings before the open on 7 February.  Earnings have not gone well of late with eight consecutive revenue misses.  In fact, six of the either have merely met expectations on earnings, with the other two beating earnings by only a penny.  Clearly, another quarter of dismal earnings could negate the entire chart pattern and send the stock into free-fall.  On the other hand, good earning surprise (especially if revenue beats expectations) could be the stimulus needed to send this stock to the Wave-V price target.  We won't hold a position through the earnings date, of course, however we do need to be prepared to jump on board if a move immediately triggers.

Be patient, wait for the right entry point, and be wary of the earnings date.  If we play this one right, however, it could prove quite lucrative.

Happy Trading.

Slight Pause in Markets But No Real Sign of Trouble

After the sharp upward spike in the US markets following the November election, the nearly month-long horizontal movement we've experienced recently has naturally generated a bit of hand-wringing.  Several pundits on the financial shows this morning, in fact, were questioning whether the so-called "Trump Rally" is now over.  Against that backdrop, let's set both politics and emotions aside and simply examine what the daily, weekly, and monthly charts are telling us.

Dow Industrials Daily Chart

Let's briefly glance at the daily chart since this is where the impression of a pause appears to originate.  When studying the overall market, however, the daily chart is not the focus, nor should it be.  Charles Dow, in creating the original stock Indices, intended to smooth the wild daily fluctuations - what he considered noise - in order to study the actual market trends.  Liquidity was much lower in the late 19th century than it is today, of course, but on the macro level that daily fluctuation still constitutes little more than noise as we'll see in a moment.

What we can see on the daily, however, is that the Dow 30 experienced two bursts - one in February to April and one in November to early December - that accounted for all of 4500 plus points that were gained in 2016.  Three months out of twelve accounted for all of the gains.  Another way of putting that is that the market trended for 25% of the time.  That's in-line with historical expectations.

So let's toss the daily chart aside and take a look at the overall broader trend in the market by looking at the monthly chart.

Dow Industrials Monthly Chart

Here's where the behavior for the last 30-years comes into focus.  The current long-term bull market started in the late 1980s.  We experienced two major recessions in that period, starting with the post-9/11 correction followed quickly by the Great Recession of 2008.  Look a bit closer at the 9/11 recession, though.  That downturn did not start with a terrorist attack in New York City; it started in January 2000 with the end of the first impulse wave in this bull market.  Wave-I ran for nearly 13-years and it went parabolic starting in 1995. 

The corrective wave that started in January 2000 turned out to be an A-B-C running flat correction that encompassed both the 2001 and the 2008 recessions.  Wave-II ended in March 2009, and retraced just over 50% of Wave-I.  It was a long (9-years) and deep (50%) correction, which tells us that Wave-IV (whenever it starts) should be a short and shallow correction.

Wave-III started in March 2009 and it is an extended wave.  Sub-wave 1 was, in itself, sub-divided into five sub-waves and that ended with the first of the corrections in May 2015.  (Remember the hand-ringing around that one?  How many pundits prematurely proclaimed the death of the bull in 2015?)  That A-B-C flat correction ended sub-wave 2 in February 2016.  We now find ourselves in Wave 3 of III.  This sub-wave appears to be subdividing as well, and is now in Wave-iii of that subdivision.  Notice that, on the monthly chart, the current so-called pause barely registers as a blip on the chart with price resting along a bull channel resistance line that started nearly 8-years ago.

From here, let's zoom in a bit to the weekly chart. 

Dow Industrials Weekly Chart

This adds even more perspective to the recent market action.  Everything on this weekly chart is part of the current Wave-III. It's one, long impulse wave that - according to the Elliott Wave count - has only just begun.

Sub-Wave 1 ended in May 2015 and at the weekly level we can see that the tremendous growth experienced in 2016 was really a double-flat corrective pattern.  The weekly shows us that corrective Wave 2 only ended in October 2016.  The next sub-wave (Wave-i) ended in early December, and this pause is merely Wave-ii of the 5-sub-wave impulse that will lead to the end of Wave-3 of Wave-III.

Notice the strong bull channel that runs through the entire chart.  There's no evidence that the channel is weakening, and there is some evidence that a support line may be forming near the top of that channel.  We'll keep an eye on that as Wave-iii develops since Wave-III has the potential to be accelerate into a parabolic pattern similar to Wave-I.

So, is the so-called "Trump Rally" over?  Well, if we look at the monthly and weekly charts, we can see that the "Trump Rally" was a myth from the outset.  The market's behavior has thus far followed the overall pattern in a consistent fashion since this 5-wave impulse kicked off in 1987.  The Elliott Wave patterns continue to be consistent and in-line with the broader theory. 

As short-term traders, we're very much interested in the trends that manifest on the weekly chart.  So we're aware that we're currently in a short-term Wave-ii corrective pattern, but it's setting up to be a short and shallow wave.  The overall trend is still up, and that's what we are trading until signs emerge that a deep corrective wave will intervene.  At present, there are no signs of such a wave on either the weekly or monthly charts.

Happy Trading.

APA Nearing Channel Support in Daily Wave (iv) of 3

The long term trend for Apache Corporation (NYSE: APA) continues to be corrective.  The stock climbed to a Wave-I high that completed in May, 2008, but the financial crisis and Great Recession plunged the stock into a correction from which it has yet to recover.  Over the past 8-years, it drew an A-B-C zig-zag correction that completed in January, 2016.  There is insufficient data, however, to determine if the current long-term pattern is the start of Wave-III or if Wave-II will develop into a double or triple complex correction.  For now, the safe assumption is that the correction continues.

On the weekly chart, the volume signature changed dramatically at the end of 2015, and showed strong evidence that climactic selling may have signaled the end of the long term correction, or at least ended the bearish leg of the correction.

APA Weekly Chart

The two areas highlighted on the chart show the price pattern around the extremely high volume patterns.  From a Wyckoffian perspective, this may have signaled the start of an accumulation phase.  What is interesting is the volume decline we've experienced since the last spike in September, 2016.  Notice how volume on the downward weeks is extremely light as compared o the rest of the pattern.  That suggests that supply is diminishing rapidly.  The Elliott Wave count on the weekly, however, suggests that a sideways or possible retrace pattern may follow.

Price is resting on support in the short-term uptrend, and it's possible that the wave count may need adjusting if the stock bounces off support to the upside.  We'll have to watch that over the next couple of seeks.  For now, however, that channel is the dominant pattern and it's the one we bring with us into the daily chart analysis.

APA Daily Chart

The daily chart is dominated by the bullish channel, although at this level we come up with a slighly different wave count.  At this level, it appears that price is in Wave (iv) of Wave-3 with more room to the upside before Wave-3 completes.  Based on this, the only trades we're considering at the moment are to the long side.

There's evidence building, however, that the uptrend is weakening quickly.  When we look at the slope of the resistance lines, we see a gradual but noticeable flattening of the slope.  While the stock is still drawing higher highs and higher lows, the height of the highs is weakening fast.  Then when we look at the RSI(9) oscillator, we see a bearish divergence off both the highs and the lows.  In total, we can conclude that the overall short-term uptrend is nearing an end.

Because of the Elliott Wave count, and because of the strength of the support range that we're rapidly approaching, we can't justify a short position at this time.  So the way we plan to play this is to watch for a bullish reversal pattern within the green area indicated on the chart.  We'll go long on such a signal if - and only if - the volume associated with the reversal is higher than average.  We need to see commitment to the next upward wave in order to enter.

On a long position, our protective stop will be just below the lower support line.  Our target will be just below the lowest resistance line, accounting for the declining slope of those lines as a whole.  Even with the declining slope, the trade will have a 4:1 reward to risk profile, so as long as the overall market cooperates, this will be a trade worth entering.  It's important, however, to ensure that volume confirms the reversal.  As we near the top of the channel, we can then watch for signs of weakening that will justify a short entry.  For now, however, our only setup is long.

Happy Trading.

Aflac in Coiled Spring At End of Wave 2

The daily chart for Aflac, Inc. (NYSE: AFL) is a treasure trove of chart patterns, each converging to signal that a major move may be imminent.  Do you trade double bottoms?  We've got you covered.  How about channels?  Yes, we have that, too.  Want a descending triangle?  That's on the chart.  How about an ascending triangle?  That shows up on the weekly chart. Do you trade Elliott Wave patterns?  How does the end of a wave-2 move on the daily coupled with a wave 3 of 3 move on the weekly and monthly sound? 

Let's start with the broad view and take a look at the monthly chart. 

AFL Monthly Chart

The long-term impulse wave for Aflac started in 1991.  The Wave-1 rise was steady and included a 2:1 stock split in early 2001, just before the 9/11 market adjustment.  Wave-1 ended at the onset of the 2008 financial crisis.  Along with banks, the insurance industry was crushed in that major economic downturn, and AFL retraced nearly 80% of Wave-1 before it ended.  Wave 2 was a running correction and Wave-3 appears to be in flight.  This sub-divided wave is now showing signs that it's in Wave (iii) of Wave iii of Wave-3.  That's about as lucrative a Wave-3 entry that you can find.  With the monthly pullback to the 10-period EMA, there's nothing negative at all appearing in the long-term trend.

AFL Weekly Chart

The Wave (iii) of iii of 3 configuration is well defined on the weekly chart.  Adding to the strength of that signal is the diagonal support line extending from the low of August 2015.  That support line has several touches, including three in the last six weeks. 

Notice that the weekly chart formed an ascending triangle pattern with price currently resting on the hypotenuse (support) of that triangle.  This line is also just above a horizontal support line that pivoted from resistance off the Wave-i peak in October 2013.  That support line was tested at least four times and price bounced off it on each occasion.  From an intermediate (weekly) to long-term (monthly) perspective, the signals are looking strong for a bullish impulse.

AFL Daily Chart

This brings us to the heart of the matter on the daily chart.  We'll start with the double bottom that formed on 1 November 2016 and 2 December 2016.  The price target for that pattern is $77.79 (61.8% of the height of the pattern added to the neckline.)  Price is trading sideways above the bottom of the pattern, but it has not closed below the pattern so it is still a valid double bottom. Note, however, that it has yet to close above the neckline, so by definition, the pattern has not yet been confirmed. 

The volume pattern at the second bottom - which is an eve bottom - strongly suggests climactic selling.  One relationship we always compare is the range of the price bar compared to the size of the volume bar.  We can see significant supply pushing the price to that second volume, but then we have an extremely narrow range bar on extremely high volume.  Supply is being exhausted.  Then we have a hammer pattern on 9 December with the second highest volume bar of the year.  That was a sign that major demand entered the scene as priced reached the bottom support line. 

What stands out in the short term is the rising volume we're starting to experience while price continues to trade horizontally.  A narrow channel formed starting with a long wick on 14 December, and this pattern now appears to be a coiled spring ready to explode in either direction.  The green support area forms a descending triangle when paired with the diagonal resistance line shown in purple, so price truly could break in either direction.  The Elliott Wave counts show a higher probability that the break will be to the upside, but it's always important to remember that this only shows us probabilities, not certainties. 

We intend to play this current setup to the long side.  What we are looking for is a strong bullish candle that closes above the horizontal channel resistance line on confirming volume.  Our stop will be just below the lower green support line.  A break of that line not only invalidates our entry, but it also invalidates the Elliott Wave count on the weekly and monthly charts.  So if we break that barrier, we definitely need to exit and reassess the pattern.

Because this is a Wave (iii) of iii of 3, we're not going to set a fixed price target.  Rather, we'll want to ride this one as long as we can, gradually moving our protective stops up as each of the sub-waves form.  We'll only want to be stopped out of this one when Wave-4 finally forms.  The Elliott Wave targets, both for the primary wave and the sub-waves, show a minimum target of $87.70 which will be a nice 17-point move from our current position.  Compared to the 3.50 point risk we're assuming with our protective stop, that's a solid 4.85:1 reward to risk ratio.  We'll take that trade.

Happy Trading.

Channels and Triangles Typify GT on Daily and Weekly

When a corrective pattern in a single stock nears the end of its second decade, one may be forced to conclude that it's no longer a correction but rather the "new normal" for that issue's behavior.  Such is the case with the well-known US tire manufacturer Goodyear Tire and Rubber Company (NASDAQ: GT).  When you step back far enough to view the stock on a monthly chart (not shown in this article,) we see a distinctive long-term double top pattern formed at the all-time highs between May 1993 and March 1998.  The neckline was breached in December 1999, and the target met in February 2003.  Since then, the stock has wandered aimlessly, mostly sideways, only occasionally showing signs that it may attempt to initiate a new impulse wave.  Such attempts are short-lived and price action quickly returns to the lower levels reached in the correction. 

For long-term position traders, there's not much to hold any attention.  Even the 1.3% dividend yield will quickly lose any remaining luster as the Fed continues to raise interest rates.  As a buy-and-hold investment, there are certainly more lucrative income stocks, and the long term investor would be better off with the US Treasury's 10-year bond which is paying nearly double what GT is offering and holds none of the risk associated with the equity giant.

Turning our attention to the weekly chart, however, we start to see some decent potential for the short to intermediate term trader.

GT Weekly Chart

What stands out on the weekly is that two-year long horizontal channel that formed with enough touches of both support and resistance to make it a very strong multi-directional setup.  Given the other signals on the chart, however, this is one we'd prefer to play to the long side.  Since we want to enter long on support, there are multiple trend lines to which we will look for a strong reversal signal.  We're sitting on one of those support lines right now, so a reversal here would be a permissible long entry. 

Notice the orange channel that has appeared in the short term.  That orange support line is a better entry point if price retraces and reverses at that level.  Better still are any of the green lines since they have much greater strength are would offer much better protective stops.  The best entry, if we retrace far enough is that horizontal green line that marks the bottom of the channel.  So if you're a longer term trader with a horizon in the two to three month range, this is your chart and there are numerous possible entry levels depending on your risk tolerance.

I prefer to trade on the daily chart, however, and prefer a horizon that is much shorter, measured in days, not weeks, so let's see what the daily is telling us.

GT Daily Chart

The technical screen that called attention to this chart identifies ascending triangles, and I show that triangle with the bold red resistance and bold green support lines.  Both extremes mark excellent entries for a play in the opposite direction, and on a breach (i.e. a close above resistance or below support on high volume) they make excellent entry points for breakout plays.  As long as volume confirms the move, I wouldn't hesitate to take either, although the protective stop needs to account for the likelihood of a pullback and retest of the line.

Of interest at the moment is the short-term Elliott Wave count.  That the long-term pattern is corrective is largely irrelevant at the moment.  We can see that a 5-wave impulse pattern started at the diagonal support line of the triangle, and it culminated at the horizontal resistance line that marks the top of the triangle.  After bouncing off resistance, an A-B-C zig-zag correction ensued, and may have completed.

Notice the diagonal support line marked in purple.  That line has served as a pivot since May 2016 and has numerous valid touches, including two in the current Wave-c pattern.  A bullish reversal on volume at this point will be a good entry with a price target near the horizontal red resistance line.

The potential for Wave-c to continue further, however, is equally significant.  There is an orange channel drawn, and the support line in that channel originates at the October high.  It's a moderately strong support line, and it intersects the green support line of the triangle on 30 January.  We would not be surprised if that's where the price trends since that's only six trading days distant.  That point would be our ideal entry point for a long position if it manifests.

With no divergence showing on the RSI(9) and On Balance Volume still drifting gradually lower, we see that continued decline into stronger support as a highly probable move. GT reports earnings before the open on 7 February, but it trades ex-dividend on 30 January.  Since we have no short setups appearing on the chart prior to then, I'm not concerned about the dividend.  Just remember that the opening price will be adjusted down by $0.10 on that date.  You don't want to be artificially stopped or entered because of the dividend adjustment.

The way we'll play this is relatively simple.  From where the stock currently sits, we only see a long setup for now.  We'll enter long on a strong bullish reversal with confirming volume.  We'll set our price target at the red horizontal resistance line.  Our protective stop will be just below the lower dotted green support line. We'll look to raise that stop to just below the purple line as soon as we see a move that confirms the upward direction.  Be aware of the orange channel line, but don't stress over it.  A strong impulse wave may pause at that line, but it's not likely to reverse there.  Whether or not we take a short position at resistance or on a breach of support will depend on what the overall price and volume patterns look like at that time.  For now, we'll just concentrate on the next move, and we currently see that as a long position.

Happy Trading.

High Volume Gap Up Followed by Pullback in DXCM

Back to back good news events last week propelled DexCom, Inc. (NASDAQ: DXCM) to an opening gap up $11.75 a week ago today.  The first bit of good news came on Tuesday, 10 January 2017 when DexCom upped their forward guidance for 2016's full-year report.  Their forecast increased revenue by 42% to $570 million, and they reported that as many as 90,000 new patients are using their Continuous Glucose Monitoring System.

For 2017, they provided guidance of $710 to $740 million in revenue with a gross margin of 67% to 70%.  They expect to add another 70,000 patients worldwide.  That news alone was well received, and the stock surged over $5 on higher than average volume.

The major news, however, came on Friday, 13 January.  CMS (Centers for Medicare and Medicaid Services) approved a reimbursement program for the Continuous Glucose Monitoring System, classifying it as "Durable Medical Equipment. (DME)"  DexCom is the sole provider of a this type of device with a DME classification.  This action by CMS came a year earlier than analysts predicted, resulting in a major market surprise that rocketed the stock northwards.

DXCM Daily Chart

The upward push started a couple of days prior to the upgraded forward guidance, and on a lower level scale, the move culminated at the high on the gap day in a 5-impulse wave move.  It's interesting (and significant) to note that the gap opened on a diagonal support line extended downward from the 52-week high and subsequent test of that high.  This implies that this support line may have some teeth if price decides to test it over the next couple of trading days. 

The gap up created an island reversal pattern that counters the gap down on 2 November.  Unfortunately, if you're hoping to trade the island pattern, it's too late.  The price target for the island reversal was met - and exceeded - on the day of the gap itself.  From a chart pattern perspective, it's not one that we'd consider using, in any case.  Of all the breakout patterns, the island reversal is the worst performing and has the lowest success rate.  It's not a reliable signal and we don't base any trading decisions on its manifestation.

What we're watching for on the daily chart now is whether the uptrend will resume, indicating that Wave-v was also the top of Wave-1.  If so, there's a potential very lucrative Wave-3 in the offing, and that's one we'd love to catch at its inception.  Normally, we'd use the low of the gap day as the support line, but in this case, since we have a very well defined diagonal support that already touched the gap candle, we'll use that as the demarcation line for this pattern. 

Thus far, the four-day pullback retraced just over 23.6% of the full impulse.  Notice the intersection of the support line with the 38.2% retracement line.  It's entirely possible that the stock will retrace to that level before reversing.

RSI(9) is encouraging, showing a bullish divergence pattern.  There's strength entering the picture, offering a subtle hint that a full impulse may actually be in flight.  Offering support for bullish view is the overall volume signature.  The behavior starting 2 November 2016 suggests climactic selling, and we can see how price retested and subsequently retreated off that 2 November low.  This occurred in the holiday period, so we do need to be careful not to draw conclusions from the volume picture at the retest.

What we do find telling is the volume coming off last Friday's gap.  A lot of shares changed hands the following day as well, although the stock pretty much hovered in place.  The three down days after that were on continuously declining volume, suggesting a bit of profit taking following the gap, but there are no indications that there's widespread supply entering the scene.  We'll be watching for a bullish reversal on confirming volume to indicate that the uptrend has resumed.

DXCM Weekly Chart

The weekly chart shows a lengthy corrective pattern that ran for over 15-months.  The pattern is a classic A-B-C flat correction, and Wave-c completed the week of 3 January.  It's still to early to tell if that was also the end of Wave-4, hover the length of the pattern would suggest that the corrective wave has, indeed, run its course.  Time will tell. 

The strong moves last week are evident in the largest candle on the chart, coupled with the highest volume on the chart.  That may be the start of Wave-5, however we do have to wait for confirmation before making that claim.  Wave-5 has the potential to run at $43 points, based on typical impulse wave patterns, and that would bring us close to the all-time high.  Notice that such a move would setup a double-top pattern, so be aware of a potential significant play to the downside if we stall at that level.

There's a bit of weakness along the lows on the RSI(9) weekly oscillator, although the highs confirm the price action that we've seen throughout the correction. Overall, the trend lines are forming a triangle pattern, and we entered that triangle from the bottom, so there's additional weakness concerns manifesting on the weekly chart.

The way we will play this stock depends on its next move.  If we get a bullish reversal on the daily with confirming volume, then we'll take a long position and attempt to ride would could be a daily Wave-3.  Wave-1 ran over 30 points, so Wave-3 has a decent profit potential. 

If, on the other hand, we break below the diagonal support line on confirming volume, then we'll take a short position.  Our target, in that case, will be a retest of the lows that marked the bottoms of Wave-iii and Wave-v.  Patience is the buzzword with this stock.  Let it show us the direction it wants to take and we'll play that move accordingly.

Happy Trading.

XLY SPDR Nearing End of Weekly Corrective Pattern

The Consumer Discretionary sector thrives when the overall US economy shows marked strength.  With wage growth on the rise, consumer confidence on the rise, unemployment on the decline, a strong US dollar reducing the cost of imported goods, and the GDP showing increasing strength, it's hard to argue that the overall economy is anything but robust.  All of this bodes very well for the Consumer Discretionary Select Sector SPDR Fund (NYSE: XLY). 

XLY Weekly Chart

As we can see on the weekly chart, XLY began a healthy recovery in October 2011.  With only minor sub-wave paused in 2012 and 2014, the sector SPDR rose steadily until Wave-1 peaked in August 2015.  What followed was 18-months of corrective action starting with an A-B-C flat that ended in February 2016.  Now, the question before us is if the corrective pattern is an X-Y-Z triple, or if we have just completed the second set of a double correction.

It's the latter that I show on the weekly chart, marking Wave-2 complete at the end of October, 2016.  That's by no means certain, however, as we'll see when we review the daily chart.  So as far as the weekly is concerned, we have either completed Wave-2 and are now starting what should be a towering Wave-3 (remember, Wave-1 ran for 48 points,) or we are into the third and final A-B-C corrective pattern in a larger X-Y-Z pattern.

On the weekly, neither the On Balance Volume, which remains flat, nor the RSI(9) offer strong clues as to our next direction.  We're trading in a well defined bullish channel, which implies offers strong support for a shallow last corrective wave if that occurs, and we're currently trading above a relatively strong support line, so at least on the weekly there's evidence that the next impulse may be in flight.  Let's look at the Daily Chart, however, for more details.

XLY Daily Chart

We'll look first at the trend lines.  The pattern starting with Wave-X shows an upward sloping (albeit at a shallow slope) bull channel with three touches at resistance and two touches at support.  Since the second Wave-C completed (which may possibly be Wave-Y) price has hovered above the mid-point of that channel.  In fact, a three-touch trend-line with a steep slope formed from the second Wave-C and may offer some support for a subsequent pull-back.  Anyway, from a trend line perspective, our direction is up.

Looking next at horizontal support and resistance, there's a strong support line at $82.  This line served as strong resistance across much of the chart before it was breached in late November, 2016.  The line was tested twice and it held both times.  That's another bullish sign.

On Balance Volume on the daily chart is rising, indicating that some accumulation is underway.  That's another good indicator, especially when we look at the volume pattern itself and see the relative strength of demand (black bars) compared to supply (red bars.)  Volume suggests that there's more demand at current levels, and that should push price higher.

There are two warning signs, however.  First, the highs of 13 December 2016 and 17 January 2017 form a double top.  The neckline only represents a 4% drop, however, so it's not a significant concern - the standard measure for a double top is a 10% drop to the neckline - but we do need to watch for a potential drop down as low as $78 for a short-term A-B-C Zig-Zag correction.  That would be consistent with an X-Y-Z correction, and if that does occur it will be an excellent entry point to ride the crest of the ensuing Wave-3.

Second, the RSI(9) oscillator on the daily chart is showing a bearish divergence on both the highs and the lows.  That signals subsequent weakness and a potential decline on the daily.  This would be consistent with the possible move south off the double top, and it would also be consistent with the final leg of an X-Y-Z correction.

How we'll play this depends on what the stock chooses to show.  Wave-3 has a potential run of 48 points or more, so there's no need to be hasty on the entry.  To enter long, we'll wait for a strong bullish move on confirming volume.  We'd prefer to see price break above the double top highs on convincing volume.  That would indicate that Wave-3 has, indeed, begun and we can enter with relative safety.

On the other hand, we're definitely not averse to playing that double top if we see strength to the downside.  Some caution is justified around the steep support line in purple, and again at the horizontal support line just below it.  Be ready for a swift exit at those levels if the move fades, however if we do drop to the downside off that double-top pattern, there's greater likelihood that the move will be swift and powerful, ignoring at least the diagonal support line.  It's not strong enough to halt a decisive move.  So if we do break to the downside, we'll be ready to play that short, and then to enter long immediately on a strong bullish reversal pattern. 

Being a sector fund, XLY does not report quarterly earnings, and the next ex-dividend date is not expected before March.  There are economic reports that impact the sector, however, so do be cautious around next Thursday's Jobless Claims and New Home Sales reports.  The major movers for this sector, however, will come on Friday, 27 January with the GDP report, the Durable Goods Orders, and the Consumer Sentiments report.  Monday, 30 January will also be impactful with the release of the Personal Income and Outlays report.  Be cautious with an open position heading into each of those announcements.

Happy Trading.

GILD in Horizontal Channel and Longer Term Descending Triangle

A 50% retracement correction on the weekly chart of Gilead Sciences, Inc (NASDAQ: GILD) has settled into a horizontal channel and a longer term descending triangle pattern on the daily chart. Now, the biotech industry is one in which I always elevate my risk assessment since it can be so volatile on a moment's notice.  The industry as a whole is heavily dependent upon the success of individual products in its R&D pipeline and a single disappointment (or success) can dramatically move the stock without warning.  When a pattern such as we see in GILD emerges, however, it's extremely difficult to resist taking the bait since the potential reward far outweighs the increased risk of an opposing news release.

GILD Daily Chart

Here we clearly see the steady decline that dominates the last year.  Notice, however, that the pattern settled into a horizontal channel in mid-October 2016, and it's that pattern that we're hoping to play in the short term.  There have been four consistent touches of the support line in that channel, the latest in the set coming both yesterday and today.  With the stock sitting on a major support line, it behooves us to analyze a potential long setup.

There have been three bounces off that support line since November, 2016.  In all three cases, the move up was swift and covered the six-point channel range in anywhere from two to four days.  Swift, indeed.  On the flip-side, the subsequent move back to the support line has taken from 9 to 19 days, although that period is shortening as the pattern progresses.

In addition to the channel setup, a descending triangle pattern is also in effect.  The resistance line goes back as far as July, 2016 and has registered five separate touches.  The volume signature's a bit troubling, however, since it showed signs of diminished demand over the last couple of days. 

RSI(9) is no help, in this case.  The pattern has pretty much mimicked the price action since the channel began in earnest.  On Balance Volume is still dropping like a stone, so there's some feeling that there's no accumulation occurring at the moment.

The weekly chart is more bearish than the daily, when viewed from a longer term perspective.

GILD Weekly Chart

A full 5-wave impulse completed on the weekly chart in June 2015.  The stock ran out of steam in an extremely short Wave-3, however, and that resulted in a shorter still Wave-5.  Since mid-2015, the stock has traded in a complex consolidation wave that thus far has retraced 50% of the full prior impulse.  That's a fairly solid correction, however the current Elliott Wave count suggests there could be more room to the downside before the correction ends.  It's possible to count out a complete double corrective pattern here which implies that the next impulse wave is ready to begin, however I'm not confident enough in that count to show it here. 

What does show on the weekly, however, is a strengthening RSI(9).  At least on the lows, we're seeing a bullish divergence, indicating a potential shift to an upward bias may be on the horizon.  On Balance Volume on the weekly would appear to agree since it continued strong while the price retraced 50% of the prior impulse.  That's another bullish divergence that indicates longer term strength.

There are two ways we intend to play this stock, based on how the stock wants to move from here.  We'll play a long setup if that triggers, by placing a buy stop order above today's high.  The protective stop in that case will just below the lower support line.  The price target in this pattern will be the horizontal resistance line formed by the last upward move.

At the same time, we'll setup a sell stop order just below the lower channel support line.  The protective stop in that case will be just above yesterday's high.  The target will be six-points below the support line - i.e. the height of the channel.  That six-point channel stepping stone has been a consistent pattern throughout the down-trend for the past 18-months.

When we place this type of an order setup, we do so with a "one cancels other" type order.  As a result, if the long position triggers, the short entry order will be canceled, and vice versa.  From the current chart position, we could have either a channel play based on a bounce off support (the long entry) or a breakout play based on a violation of support (the short entry.)  This is a good means of allowing the stock to move as it will, and just going along for the ride.

Happy Trading.

Complex Correction and Weekly Double Top In PPG

While a short-term bullish channel has emerged on the daily chart for PPG Industries, Inc. (NYSE: PPG), the weekly chart offers strong clues that the next move may be to the downside.  To better understand the configuration of the daily chart, we'll first start with the weekly.

PPG Weekly Chart

From an Elliott Wave perspective, a strong Wave-1 impulse ran from September 2011 through May 2015.  The end of that wave, in fact, was a 2:1 split that apparently took the wind out of investor's sails and triggered a wave of profit taking that resulted in a 38.2% retracement (so far) of the first wave. 

A Double Top pattern is in effect, although given the "W" shape, some may trade this more as a Double Bottom.  Personally, I use the subsequent action off the top of the "W" to determine if this is a top or bottom pattern, and in this case, the move is solidly to the downside.  Thus, I treat it as a Double Top.

Notice the rising neckline in this case.  That neckline - since it's rising - offers an aggressive entry on the weekly for intermediate term traders looking to play this pattern.  Price closed below that neckline, retraced back to it only to see the neckline hold as resistance, and is now poised to run lower.  That's a pretty decent entry point for a trade that may take several months to play out.  (That's longer than our horizon, but it's a region that many traders do play, so it's worth mentioning.)

There's currently a weak support line that the pattern is following.  Since the next Elliott Wave - a Wave-b - is expected to be to the upside, it's possible that this support line will hold for a time.  It's Wave-c that will likely take us to the price target of the double top, assuming that pattern follows its natural course.

The RSI is simply confirming the overall price action, volume is declining (indicating a breakout in either direction may be setting up) and On Balance Volume is flat, indicating an equilibrium.  So, for now, the weekly is telling us that we are still in a Wave-2 correction, we have a potential Double Top pattern in flight, and the next corrective wave we anticipate is a Wave-b to the short-term upside.  With that in mind, we'll look at the daily chart.

PPG Daily Chart

The dominant short-term feature - and in this case, by short-term we are referring to the trend that started in October 2016 - is a bullish channel that is 23.6% off the pattern low.  Since the pattern high to low on this time frame is Wave-a on the weekly chart, that retracement is noteworthy.  The Wave-b pattern is expected to be to the upside, and there's a very attractive target for that wave around the 61.8% level.  The resistance line for this bullish channel is rapidly approaching that level as well.

Today's candle is an extremely bullish one in this time frame.  It's a hammer that bounced off the lower support line on high volume.  That's a major sign of price rejection and an indication - at least in the short term - that there are a significant number of buyers entering the market along that support level.  It helps that today's low was at the convergence of three separate support lines.  The first is the bull channel that runs from October, the second is the horizontal support line that crosses three separate patterns, and the third is a downward sloping support line that extends back to May 2016 and served as support on multiple occasions since then.  Since each of those lines would generate interest and their associated stop and limit orders, it's no wonder today's volume was higher than usual.

The RSI(9) offers little help on the daily.  It's confirming price action, but that's about it.  There are no signs of a divergence that may help us understand where price is heading.  On Balance Volume is oscillating without clear direction, as well.  It's well off its lows, however it may be hooking back down again, showing signs of distribution.

So how are we playing this stock?  Well, in the short term, we're looking to ride that potential Wave-b, and today's hammer off support on high volume offers a signal we're willing to take.  We'll place a buy stop just above today's high, and we'll place a protective stop just below the channel.  Our price target will be the lower purple resistance line that marks the inner boundary of the resistance channel.

Now, the wave we ultimately want to catch is that Wave-c that could complete the Double Top pattern.  As we approach our price target for Wave-b, we'll start watching for signs of a reversal and attempt to enter short as Wave-c gets underway.  The overall Elliott Wave pattern on the weekly will give us clues as to the distance that wave could travel, and since Wave-c is typically a 5-wave impulse in itself, there should be multiple swing trades on which we may capitalize, even if we miss the first downward thrust.

Happy Trading.

FIS in Wave 5 on Monthly But Still Has Significant Headroom

A horizontal consolidation pattern characterized the stock performance of Fidelity National Information Services, Inc. (NYSE: FIS) for the entire fourth quarter of 2016.  The pattern is showing signs of an impending breakout, however.  To understand the overall trend and determine where FIS could head, we'll start with a look at the monthly chart. 

FIS Monthly Chart

On the macro level, the current uptrend started with a strong monthly reversal candle in November 2008 at the peak of the Financial Crisis.  After a lackadaisical first wave that barely exceeded the pre-crisis high, Wave-3 took off and, depending on your interpretation of the wave count, ended in either last 2015 or mid-2016.  The date of it's ending doesn't much matter for our trading horizon, however what's important here is that the overall long-term trend is up, and there is still a full Wave-V to go - a Wave-V that is virtually unrestricted due to the length of Wave-III.  The channel boundaries in the up-trend suggest the current consolidation could run a bit longer, but there are no downward pressures of significance on the chart other than a bearish divergence in the RSI(9) oscillator that is typical of the top of one of the impulse waves.

FIS Weekly Chart

The weekly chart improves the picture and starts to approach our trading horizon.  Here we can see the development of the last major impulse wave on the monthly chart, and on the weekly it's clarified into a 5 sub-wave pattern.  This pattern is more relevant to us since the potential for the final impulse wave to end in the short-term greatly increases. That doesn't mean that wave-5 can't extend into a second impulse, however we don't yet have evidence that it will happen.

Again notice the consistent bull channel that runs the entire length of this impulse wave.  Right now, we're trading near the center of that channel, although we are resting on a shorter term horizontal resistance line that's held for the last six-months.  A breakout from that resistance line will be an excellent indication that Wave-v is in progress, and would be a very good long entry point if confirmed on the daily chart.

FIS Daily Chart

So now we know that the long-term trend is up (based on the monthly chart), and the intermediate term trend is up but potentially running out of steam (based on the weekly chart.)  Let's now look at the daily chart since it's on this time frame that we look for our setups.

This horizontal consolidation that's been running since July 2016 forms a narrowing wedge pattern, but the channel itself is ill-suited for swing trade setups.  Price has not oscillated between the extremes with any consistency.  The much shorter term channel - in magenta - does show more promise since there were three touches to both support and resistance since late November 2016.  Last Thursday's candle was a retest of support, and that was rejected on high volume.  Even though the candle is red, that hammer was a very bullish indicator.

This, in fact, is the setup we are looking to take.  Friday's candle offered confirmation of the price rejection, at least in the short-term.  Going long just above the high of Friday's candle with a stop below the rising support line offers a good setup.  The rising resistance line offers a good exit opportunity, although we may also want to allow at least half of the position to continue to run since Wave-v should initiate soon.  It would be nice to catch that wave if we see the setup in time.

Be aware that FIS reports earnings before the open on 7 February. They are expected to trade ex-dividend in late March, so that should not have any bearing on our trade horizon.  Do be aware of the earnings date, though, if we attempt to ride the crest of Wave-v.

Happy Trading.

CXO in Bull Channel But Weakness Abounds

With oil rebounding off the major lows that characterized 2015, the exploration and drilling industry began to recover in early 2016 and enjoyed a slow but steady uptrend  for much of the year.  One such exploration company that continues to trade in a bullish channel is Concho Resources, Inc. (NYSE: CXO).  Concho's area of focus is the Permian Basin in West Texas and Southeast New Mexico, a region that should benefit from any relaxation of environmental controls that currently add pressures to the bottom line and inhibit growth in the industry as a whole.

Overall, the industry experienced a rapid price appreciation in the first half of last year, however, that positive rate of change diminished as oil prices stabilized later in the year.  The result, especially in the case of Concho Resources, is an oscillating price pattern in a bullish channel at a gradual but healthy slope.

CXO Daily Chart

There are warning signs, however, that the channel's strength may be waning.  For all of 2017, price was riding the support line of the channel.  The various bullish candles in the last couple of weeks are starting to look more and more like testing patterns leading into a distribution phase and subsequent downtrend.

On Balance Volume turned down off the highs and continues to slope down.  This is another indication that demand has waned and supply is starting to enter the equation.  Finally, the RSI(9) Oscillator transitioned from a bullish divergence (shown in black trend lines) to a bearish divergence (shown in red trend lines.)  The daily picture cautions that the uptrend may be weakening to the point of breaking to the downside.  If so, expect those two green support lines in the channel to quickly transition into resistance lines.

The weekly chart does nothing to change our view that the trend is on the cusp of change.

CXO Weekly Chart

As we might expect based on the overall pressures in the energy sector, CXO spent the last several years in a long-term correction.  The monthly chart suggests the correction may have ended in January, 2016, but we don't yet have sufficient evidence to reach that conclusion.

Starting with that late January 2016 low, a 5-wave impulse pattern ran its natural course, ending in early December, 2016.  Notice that Wave 5 was an extended wave that included two deep corrections.  The pattern now is in Wave-A of the corrective pattern coming off that 5-wave impulse.  Now, if this is a new impulse on the monthly chart, then that Wave-5 top is also Wave-I on the higher order, however we cannot yet state that as fact.

Just like the daily chart, the weekly uptrend formed a bullish channel that continues to hold price along the support line.  Weakness in the recent pattern coupled with the completion of Wave-A strongly cautions us that the channel could be broken to the downside.

Long-term traders will notice the double top pattern that set up with the Wave-5 completion.  Now, this pattern has yet to confirm since that requires a break of the neckline.  I draw that neckline as being horizontal from the first low, however be aware that there are other possible interpretations that would lower that neckline by at least 5-points.

The next warning sign comes from the RSI(9) oscillator.  A bearish divergence started to manifest with the completion of Wave-3.i.  Since then, the RSI showed continued weakness while the price action experienced a series of higher highs and higher lows.  This weakness would be consistent with the corrective wave pattern we anticipate following the Wave-5 top.

Finally, OBV is flattening and may actually be starting to hook down.  The bearishness of this volume indicator is more prominent on the daily chart, but even here on the weekly we're seeing evidence that distribution may be entering the scene.

This brings us to our view on how we may be playing this setup.  Given all the weakness, I'm hard-pressed to consider a long position, despite the positioning of price on the support line in a bullish channel.  That would change, of course, if we see a strong bullish candle with confirming volume, however that's not the move we expect from this position.  Rather, we're watching for a break of the support line to the downside on confirming volume.  If we get that break, we'll look to enter short on a retest and rejection of that former support line as it transitions into resistance.

We will also be watching for the development of the A-B-C corrective wave.  Wave-A looks to be in progress, so the retrace for Wave-B should give us a clue as to the type corrective pattern this will be and will tell us how to play Wave-C.  It's that Wave-C move that we'd really like to catch if we can read the entry in time.  Watch for that signal since an entry in the area around $145 could move close to 20-points on the downside if the pattern follows a traditional zig-zag correction.

Happy Trading.