BEAV: Uptrend or sucker trap?

B/E Aerospace Inc. (BEAV) peaked at $88.43 last November, had corrected down to $74.48 by Feb. 4, and had recovered back to $87.36 in Friday's trading, a higher high that confirmed the bull signal triggered by Thursday's break above the 20-day price channel at $86.49.

As I make a trading decision, the question is the nature of the recovery from early February. If it is the first leg of a renewed uptrend, then BEAV has sufficient upside momentum to support a bull play. If it is nothing but a recovery within an ongoing correction to the downside, then it is a sucker trap, waiting to snare the unwary.

The Chart

Elliott wave analysis shows that the Nov. 26, 2013 peak of $88.43 marked the end of wave 3 {+2}'s epic rise that began from $36.51 on Aug. 6, 2012.

That third wave is the middle uptrend within wave 2 {+3}, which began on Oct. 4, 2011 at $28.83, coinciding with a major low for the markets as a whole.

BEAV remains within wave 3 {+4}, which began Nov. 21, 2008 from $5.37, the end of the Great Recession bust. And the whole uptrend is part of wave 1 {+5}, which began on March 12, 2003 from $1.23.

Click on chart to enlarge.

BEAV 6 years 3-day bars (left), 120 days 1-hour bars (right)

By my count, BEAV remains within the wave 4 {+2} correction. It has completed wave A {+1} to the downside, the first leg of the three-wave correction, and is now nearing the end of wave B {+1} to the upside, a recovery within the correction.

I base that conclusion on the wave count within A {+1}, which divides into a clear five-wave pattern. The problem is the count within wave B {+1}. Under the Elliott rules, B waves divide into three waves internally. This wave, which is poorly differentiated in its components, appears to be closer to the five-wave pattern.

An alternative view would see wave A {+1} as still underway, which would make the rise from Feb. 4 into a 2nd wave. If that is the case, then the problem remains, since 2nd waves are also subdivided into threes.

Whether the present leg up is a B wave or a 2nd wave, it cannot under Elliott go higher than $88.43, which is 1.2% above the high set in early trading on March 7. That's certainly not enough upside potential to support a bull play.

The magnitude of the B-wave rise, almost to the start of the prior A wave, suggests that wave 4 {+2} will be a flat -- a sideways correction -- that will have the $75 area as a floor and the $87 or $88 area as a ceiling. Corrections often alternate int heir patterns, and wave 2 {+2} was a downtrending zig-zag. That would further support the likelihood of a flat correction.

A move above $88.43 would invalidate my count and would instead mean that wave 5 {+2} of 3 {+3} of  3 {+4} of 1 {+5}, all the upside, are underway, giving much upside potential to support a bull play.

At this point I know enough to make a decision and can end the analysis.

Decision for My Account

I see  BEAV as most likely heading for a reversal very soon and so won't be opening a bull position. A break above $88.43 would cause me to revisit that decision.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.