GPK: Running out of steam

Graphic Packaging Holding Co. (GPK) began its latest leg up in November and since then has gained 83%. Pretty good for a symbol that just a few short years ago was counted as a penny stock.

GPK broke above its 20-day price channel on Wednesday and confirmed the bull signal by tradng still higher today. It has, however, at mid-day declined a bit and is flirting with the upper boundary of the 20-day price channel. If it drops within the channel, then the signal will be unconfirmed and no trade will be possible.

However impressive its past performance, GPK for the near term is running out of steam. It has limited potential for a further rise, at least over the next few months. After that, I look for GPK to move on to even higher levels.

The Chart

GPK, like most stocks, hit rock bottom in 2009 and has since come rocketing back. Elliott wave analysis shows that GPK is in the middle wave of that rise, which I've labeled as wave 3 {+4}, beginning Oct. 4, 2011.

From that point the chart analysis turns difficult, because GPK shows so much upward momentum that it becomes difficult, if not impossible, to frame the turning points into the hierarchical degrees required under the Elliott rules.

Elliott called such patterns "extended waves", and they generally require counts to be revised time and time again.

Click on chart to enlarge.

GPK 3 years 2-day bars (left), 180 days 4-hour bars (right)

I've drawn a trend channel on the left-hand chart, in gray, to help mark out the turns. However, the degree labels are anyone's guess. I've made the attempt, but have no confidence in it.

This much is is clear that GPK is in the late stages of its rise and that it continues to show momentum.

The more detailed look, on the right-hand chart, shows clearly that GPK is in the final leg up of the rise from the last major turning point, on Nov. 8, 2013, when the price sank to $8.05, and in the middle portion of that final leg.

As I have counted the waves, the present wave 5 cannot move above $11.06 without violating an important Elliott wave rule: The third wave of a degree cannot be the shorter than both the 1st and 5th waves. Wave 3 is 10 cents shorter than wave 1, and if wave 5 is longer than wave 3, then wave 3 becomes the runt of the litter.

If wave 5 does in fact exceed $11.06, then my wave count is wrong and must be redone.

The upper limit of wave 5 is 4.8% above the breakout level. That's enough to make a profit, but only if wave 5 goes to the max, something that isn't guaranteed under Elliott.

There is a lot of ambiguity on this chart, because momentum makes it difficult to assess the degree. However, the rise from Nov. 8, 2013 counts quite clearly, and it shows limited upside potential for GPK over the short term.

Once wave 5 is complete, GPK will correct a portion of wave 3 {+1}, the uptrend that began last November.

There's no way to tell how deep the correction will be. Typical Fibonacci retracement levels for the correction are 38.2% ($9.92), 50% ($9.96) and 61.8% ($9.20).

After the correction is over, GPK will resume its rise, exceeding whatever high is eventually set by wave 3 {+1}.

Options are pricing in confidence that 68.2% of trades will fall between $9.31 and $11.69 over the next month, for a potential gain or loss of 11.4%, and between $9.93 and $11.07 over the next week.

I've marked the upper and lower boundaries of the one-month range on the left-hand chart. The upper boundary is above the $11.06 maximum allowed wave 5, and the lower boundary is slightly above the 50% Fibonacci retracement level.

Decision for My Account

At this point I can cut my analysis short. I need go no further. I have no intention of opening a bull position on GPK, no matter how good its financials and odds might be. The upside potential, by my analysis of the chart, simply isn't there.

The coming correction will be at a relatively low degree and should be over in a month or so. Once the rise resumes, GPK will send a fresh bull signal that will give me another chance to consider a trade.

References

My shorter-term trading rules can be read here. My longer-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 decisions for his or her own account, and take responsibility for the consequences.