Stocks, buoyed by the expectation that the current economic slowdown will be just that, a slowdown and not a recession, continue to plow ahead.
While it remains a risk-on mindset, some of the speculative sentiment that surged in January has since faded. This can be seen in the lagging small- and mid-cap sectors over the past seven weeks. At the same time, large-cap growth continues to outperform as it has since November. As well, the yield on 10-year Treasurys jumped on Friday to its highest level in over three weeks, a sign that recession fears have subsided.
Not coincidentally, the financials, a reliable long-term leading indicator, have outperformed for three weeks and appear to be out of harm's way.
There remains a dearth of leading growth stocks with pattern setups. The number of both actionable setups and high-volume breakouts is slim. While growth-stock performance has suffered somewhat at the margin, the number of new opportunities cannot be expected to pick up materially until Nasdaq volume picks up from its moribund levels. This level of low volatility leading to a pullback in the averages cannot be ruled out.
In the meantime, it is logical to expect that breakouts in growth titles may occur amid mediocre volume, not the confirming volume we would prefer to see.
Coupa Software (COUP) was discussed in Wednesday’s report (“COUP can be taken above the 100.00 high of its consolidation pattern on confirming volume. Earnings expected June 10 post-close”). The comment stands.
Five Below (FIVE) is a discount retailer with earnings estimates of 19%/24% for the January ‘20/’21 fiscal years. A 94 RS stock with a B acc/dist rating. Sales increased 22% and 19% in the two recent quarters.
FIVE was listed in the Wednesday evening Focus List as buyable above its 133.65 cheater entrance pivot. Thursday, price cleared this on +116% volume. FIVE was then listed in the Thursday evening Focus List as buyable above Thursday’s high of 133.99. It cleared this level on Friday.
FIVE can now be taken above the alternate entry of 136.13, its pattern high. Earnings expected June 26.
Irobot (IRBT) shows Street earnings estimates of 4%/25% for ‘19/’20. Sales rose 29% and 18% in the two recent quarters. A 97 RS stock with a B- acc/dist rating.
IRBT forms a five-week base with a 14% depth, which is reasonable for this length of pattern. The stock can be taken above the 132.88 pattern high. Earnings expected Apr. 23 post-close.
(If you hold a position going into an earnings report, be sure to calibrate your position size so that your account is not substantially dented in the event of a large earnings-related selloff.)
Mimecast (MIME) was noted in Wednesday’s report (“The stock can be taken above the 51.66 high of its pattern”). A plus was the ability to put in two major acccumulation days last week. Earnings expected May 13 post-close.
Paylocity Holding (PCTY) was discussed in the Mar. 31 report, the April 3 report, the April 7 report, and Wednesday’s report (“It can be taken above the handle high of 92.50”). The comment stands. Earnings expected May 8 post-close.
Sea Limited (SE) shows losses anticipated for ‘19/’20. However, revenue growth has accelerated over the past three quarters, from 65% to 81% to 118% to 127%. Too, sequential revenue growth soared 38% in the most recent quarter. A 99 RS stock with an A acc/dist rating.
Technically, the stock forms a five-week flat base with a 13% depth. (Flat bases preferably have a depth of 15% or less.) The big positive is the 35% earnings-related jump of late February which came amid +1,016% volume. It can be taken above the 25.14 pattern high. Earnings expected May 28 post-close.
Svmk (SVMK) was analyzed in the April 7 report (“Very aggressive players could take this above the handle high of 18.48, assuming confirming volume”). An 87 RS stock in a 99 RS group, enterprise software, with an A acc/dist rating. Given that there is now a 10-day handle to go with its six-month cup, this setup is suitable not just for “very aggressive” players but also for “aggressive” traders.
Earnings expected May 15 post-close.
Workday (WDAY) was discussed in the April 7 report (“The stock can be taken above the pattern high of 200.00”). This is a six-week, flat base with depth of 12%. Volume dried up nicely during most of the three weeks in the middle of the pattern. Both price and volume shriveled on Thursday and Friday. The April 7 comment stands. Earnings expected May 30 post-close.
In sum, this remains a buyable market, though one in which its low volatility cannot be expected to last forever. Speculators should temper their expectations of what is possible until either Nasdaq volume picks up or weakness in the averages creates more pattern setups.
The following two questions arrived in a single email from a subscriber:
Q: Do you find that breakouts in smaller stocks (ADDV $34mil) like EHTH tend to be more prone to short seller attacks than something like a larger XLNX ($457mil ADDV)?
A: I have never considered short seller attacks. It is unclear if there is a way to measure short selling besides the monthly data released to the public. Even if there was, I will say that the chart tells the whole story of supply and demand. There is nothing else that needs to be added.
Q: Do you draw Cup and Handle patterns on the S&P 500 or does the CnH only apply to stocks?
A: Chart patterns work best with individual issues. But they can be used with any liquid tradable including indices.
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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2019. All rights reserved.
The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters. Expected earnings release dates provided by EarningsWhispers.