August 11, 2019

The market remains beholden by the various announcements/tweets related to progress in the U.S.-China trade talks, or the lack thereof. These news items hit the wires intraday and tend to set the tone for that trading session.

This is the definition of a news-driven market.

More than usual, this is a market that must be analyzed on a day-by-day basis. This means operating without any preconceived biases or opinions. The major averages are all just below their 50-day lines. A takeout of Friday’s Nasdaq low, then, would be a clear negative.

The market has lost a certain amount of its growth-stock leadership. This represents the “thinning of the herd.” In particular, the dominance of the top 20 O'Neil industry groups by computer-software segments is no longer. Just two are in the top 20 currently vs. the four or five a while back. This area had been the driving force behind growth-stock outperformance for some time.

There are a number of v-shaped patterns in the Watch List, including Avalara (AVLR), Clarivate Analytics (CCC), Crowdstrike Holding (CRWD), Ehealth (EHTH), PROS Holdings (PRO), Phreesia (PHR), The Trade Desk (TTD), Universal Display (OLED). These are considered to be lower-probability plays and are best avoided.

Among leading stocks, the key thing to watch is the recent breakouts in names like Avalara (AVLR), Carvana (CVNA), Five9 (FIVN), Guardant Health (GH), Hubspot (HUBS), Mercadolibre (MELI), NeoGenomics (NEO), and PROS Holdings (PRO). Failures in a majority of these would be telling from a speculative sentiment standpoint.

Currently, there are no actionable pattern setups, either breakout or pullback. The following come closest and are worth watching, but not actionable.

Among the names, Carvana (CVNA) is expected to show losses for ‘19/’20, while registering triple-digit revenue growth in the last two quarters. A 97 RS stock in a 98 RS group with a B- acc/dist rating.

Friday, CVNA cleared the top of a three-month base with a 27% depth, up 7.8% on +144% volume. This occurred a day after an earnings-fueled 25% surge on +424% volume. This comes to a 35% gain in only two days from the bottom of its base.

A stock that is overheated like this by soaring straight up off the low of a base does not offer an attractive reward/risk ratio, especially in a higher-risk market like this one. This one is worth watching to see if a pullback/handle can form which might offer an advantageous entry.

Hubspot (HUBS) shows expected earnings growth of 57%/28% for ‘19/’20. Recent revenue growth has been rock-solid at 35%, 35%, 33%, and 33% in the last four quarters. A 92 RS stock in a 74 RS group with a C acc/dist rating.

Similar to CVNA above, HUBS vaulted 19% in just two days following its earnings release to clear the high of its 11-week, 17% deep consolidation. As with CVNA, the stock was met with selling shortly after its pivot was taken out. It will be monitored for a pullback or handle in order to reduce the risk of its overheated nature.

In sum, the averages show major distribution as they sit below their 50-day lines. Individual stock leadership, both quantity and quality, has deteriorated. The decision to abstain from fresh-money buys in this environment should be respected until concrete evidence proves otherwise.

Q&A

Q: Dear Kevin, first of all I would like to tell you that I am a super happy member of your service, you are really providing great education & wisdom, especially when it comes to your judgement of the overall market health. I am writing to you as I hope that you can give me your perspective and thoughts on the topic of initial stop loss placement (ISL) for breakout trades.

So far I used to place my ISL based on the chart at the low of the last consolidation area before the breakout which on average was between 6% and 10% below my buy point. As I cannot watch the markets all day (due to a full time job) I often buy when the stocks are between 1-5% above the optimal buy point as I also want to monitor the volume and not only put in starter buy orders. I am currently reviewing all my trades from 2018 and 2019 in order to better understand based on the stocks I traded (growth & momentum stocks) where best to place the initial stop loss.

As you for sure know, it is a fine line in the sand between giving the stock enough room also for a small pullback below the breakout level and not letting losses get too big. Quite often I did not wait until the stock reached my ISL-level but sold half or all of the position with a smaller loss (my average is about 5,6%) only to see the stock skyrocket afterwards. My last example was NVCR which I bought on the 13th of June and sold it completely the next day when it reversed and closed several percentage points below the breakout level. So I missed a great run afterward (and this happened to me several times the last 1.5 years).

So what I am doing now is to write down for each individual trade I took the lowest intraday and closing price level within the first 10 days after the purchase and on which day after the purchase this lowest level occurred. Furthermore I take notes of the highest closing price after 10 and 20 days of the purchase to understand how the stock performed overall sometime after the purchase.

By analyzing this data I hope to find some kind of sweet spot on how to best place my ISL (e.g. sell first 50% of position 3,5% below opt. buy point, sell last 50% of position 7% below opt. buy point). I know that there is not this one sweet spot but at least I would like to get the odds in my favour. Would be great to get your thoughts on this, especially also if – from your experience – it makes sense to apply some kind of 50/50 approach like in my example (3,5% / 7%).

By the way I read the corresponding section in your pdf Momentum course but I was not clear if you always let yourself stop out at the 5-7% level (3 – 3,5% in higher risk environment) with your full position or if you reduce your position size beforehand. Thanks a lot.

A: Thank you for your question. My situation is different from yours because I have always had the luxury of watching the market throughout the day.

Obviously, when one is incorrect, one wants to lose as little as possible. The earliest one might know that one is incorrect is when price clears a pivot and then returns to that pivot and undercuts it. Regardless of research showing that about one-half of all breakouts return to their pivot, this is indication #1 that something might be amiss.

There is something important about a pivot point. Livermore said it is the line of least resistance, the level at which price is most likely to continue higher.

Therefore, at the earliest sign something might be amiss, I sometimes, but not always, take off half the position at -1%. The remaining half is taken off at -5%. In situations when I do not take half off at -1%, the entire position is exited at -5%. Important: In order to use this technique, one must be ready and nimble to re-enter should price reverse and turn back higher.

The only way you will know for sure what works best for your unique makeup as a trader is to do what you are doing: Study past trades to see what works best according to your comfort level.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

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.