Did We See A Successful Test and a Look at Care Fusion (CFN)

 Click Here For Wyckoff Wave Chart 07-05-2013

In an abbreviated trading week, the stock market, as measured by the Wyckoff Wave, may have put in a last point of support.

Wednesday was an abbreviated trading day and the Wyckoff Wave traded slightly lower. The significance was reduced price spread and relatively reduced volume. This suggested a lack of supply.

On Friday, the Wyckoff Wave rallied on increased price spread and relatively reduced volume. If Wednesday had been a full trading day, it’s volume probably would’ve exceeded Friday’s. This again suggests a lack of supply.

The Wyckoff Wave saw support slightly above the Creek area drawn from point B and Friday’s rally moved it back into its intermediate up trend channel.

In addition, the Wyckoff tools are somewhat bullish. The Optimism – Pessimism Index is in a short term positive divergence with the Wyckoff Wave.  The Technometer will open on Monday in a slightly oversold condition. The Force Index is beginning to rally and while it is still producing negative numbers, the index appears to be moving in a more positive direction.

Finally, the long-term trend of the market is solidly up.

If the Wyckoff Wave moves above point R on the daily chart, the short-term trend will be changed to up with the supply line drawn from point Q through Wednesday’s low.  A parallel support line can be drawn through point R.

This week I received an interesting e-mail from a longtime Wyckoff student who has been following Care Fusion (CFN) While Care Fusion has had a nice move to the upside, he also mentioned that it had exhibited many Wyckoff principles.

While Ted was absolutely correct, it is also an interesting stock that gives us some excellent examples that while Wyckoff strategies and techniques can lead us to nice profits in the stock market, they are not automatic mechanical tools and each Wyckoff indicator needs to be analyzed and verified by its own action.

CFN began its accumulation phase in August 2011, with a selling climax at point A. There was an automatic rally to point B and a secondary test to point C. CFN then continued to move sideways in a trading range defined by a support line drawn from point D and a resistance line drawn from point B.

In January, 2012 CFN sprung the trading range at point F. Either argument could be made as to whether the spring was a #2 spring or a #3 spring. As the low was on decreased price spread and volume, I would probably opt for a #3 spring.  A long position could be taken on the spring at around $22.75.

CFN then rallied to the top of the trading range. Two trading days before point G it reached the resistance as it tried to leave the trading range to the upside. The stock then rallied through the trading range to point G, but the rally was on reduced price spread and volume. CFN needed to go and go now or it would be in jeopardy of returning to the trading range. That didn’t happen and CFN reacted back into the trading range at point H.

The Wyckoff trader who had taken a long position realized, the day after the high at point G the trade was in jeopardy. This was confirmed a couple of days later when the stock again tried to leave the trading range to the upside. While price spread was sustained, volume was reduced. At exactly the time when demand needed to come into the stock and drive it into new high ground, CFN floundered. This was a message that despite the nice spring, the trade needed to be closed.

On the rally from point H, CFN, for the third time was not only unable to penetrate the resistance, but broke the short term up trend channel. This was the last signal to close the trade and maintain a small profit.

The stock didn’t react and attempt to spring the trading range again, but simply moved sideways. While there was a one-day rally to point K, the stock stayed within the trading range. This sideways movement lasted until August, 2012. Notice how the volume dried up and the stock move in a fairly narrow range.

The reaction to point N successfully tested the previous low at point L. Apparently enough supply had dried up and CFN made another attempt to rally out of the trading range and rallied to point O.

While this may have been an interesting development to anyone following CFN, there was no justification to take a new position in the stock. One needed to wait for a Wyckoff signal, which in this case would be a last point of support.

Suddenly there was a change in character. CFN reacted on reduced price spread and volume back to a last point of support (LPS) at point P. There was now another opportunity to take a long position.

A new short-term uptrend channel can now be drawn with a support line N – P and parallel supply line through point O. It looks as though CFN is finally ready to make that long anticipated move to the upside.

Unfortunately the bulls were disappointed again. After rallying to point Q, and making little progress towards the supply line of the new short-term up trend channel, CFN reacted. It weakened the short term up trend channel and broke it on the brief rally to point R. Once again, this was a danger signal that suggested positions could be closed.

The stock then reacted back to point S, but held above the trading range resistance line. The reaction was on reduced price spread and volume and could be interpreted as another back up to the Creek (resistance line) for a more important last point of support.

Again positions could be taken in the $26.50 area. In addition, a more important intermediate term up trend channel can be drawn with support line N – S and supply line point Q.

The patient Wyckoff trader was about to see a nice return on investment. LPS rally to a high of $38.47 or a 47% gain. It is also in an overbought position relative to its intermediate-term uptrend channel.

Notice the rally from point U to V. We saw wide price spread and very high volume. This is an example of “whooping it up” as the stock makes one final move before experiencing its buying climax. This was probably a good time to close positions and taken profits.

CFN is an interesting stock, not only that it presents some interesting Wyckoff principles, but it communicates an important message. Just because we see one Wyckoff principal, we should never assume that events will unfold in a perfect manner. We need to be patient with our investments, move our stop orders to protect profits and always consider a negative scenario, even when the trading is going well.