Technicals | Jun 01 2011
LAYMANS:
Our target circa $14.00 has just been exceeded by a small margin though STO has got there a little quicker than would be deemed ideal. Had the decline been a little less severe there would have been a decent chance at seeing the next leg higher unfold. As this is clearly not the case there is every chance lower levels are going to be tagged though we are in a position to see a short bounce from this general region. In theory any strength should be quite choppy and messy in nature setting the stage for the next period of weakness. There's no doubting that a few buyers came out last Thursday resulting in a high close and a significant jump in volume. That said, one day does not make a trend and thus far there has been little follow through to the upside. If strength does return we'd be looking for a continuation up to around $15.70, perhaps a little higher before a reversal commences. A straight push beyond that target would gain our attention from a trading perspective though in reality the early April high would need to be penetrated with some impetus before moving to a bullish stance. Possible, but taking into account the potency of the sell-off over recent weeks it's not our highest expectation.
TECHNICAL:
Having hit the 61.8% retracement level we're theoretically in a position to see the next move higher though in terms of time symmetry hasn't been attained. If we are correcting the push up from the low of wave-(B) we'd be looking at a date in early August before the next probe north kicks into gear. This is where the retracement will have taken 38.2% of the time taken by the prior leg which is the minimum we'd expect. So from this point there are two alternatives. The first is that price travels back up to the zone of resistance which should precede another leg south completing a larger flat pattern. That's the more bullish scenario. The alternative is that a longer and deeper correction is in its early stages which would likely result in the lows of wave-(B) being revisited, though it's going to take many months to get there. The chances of this being the path taken increase significantly if the recent lows are breached over the next week or two. Not really what we want to see though with the move down from the high of wave-(c) looking impulsive in nature it's a distinct possibility nonetheless. Looking at the bigger picture the patterns are extremely difficult to decipher due to the myriad of overlapping wave structures that dominate. Unfortunately this is just a trait of the stock and is unlikely to change anytime soon meaning the best thing we can do here is to continue to focus on the shorter term patterns.
TRADING STRATEGY:
Although it's not the best example in the world there is some bullish divergence in position though I wouldn't be tempted to try and trade the possible bounce. Upside appears limited and the risk/reward is barely acceptable – especially if our wave count proves to be correct. For those who initiated short positions at the reversal bar early last month I'd be tightening the trailing stop aggressively to lock in some profits. If a bounce unfolds we don't want to be holding and hoping. If you're looking for short positions then wait for an a-b-c correction higher before looking for an entry following signs of weakness. As mentioned above a probe above $15.73 would likely mean a much larger flat pattern was transpiring offering further upside potential, albeit likely being brief in nature.
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