August 18, 2019

Despite last Tuesday's O'Neil follow-through day (FTD), stock averages remain below the key 20- and 50-day moving averages. This fact, plus a near-complete lack of pattern setups for the breakout trader, is all the information needed to be skeptical as to the authenticity of this two-week rally.

The folks at O'Neil have done the research on FTDs, as shown below. In the case of last week's follow-through, a major distribution day occurred one day afterward. This corresponds to a historical 95% failure rate in the FTD to confirm the recent low as the start of a new rally.

We will continue to monitor recent breakouts to see if the failure rate increases or stays the same. There are still a good number of Watch List names that hold up. Specifically, 37 are within 10% of their 52-week high. This is a good litmus test that shows the degree of leadership in any market cycle.

Some of these names are former Focus List buy ideas, including Alteryx (AYX) +67% from entry pivot, Chipotle Mexican Grill (CMG) 9%, Clarivate Analytics (CCC) 13%, Front Door (FTDR) 26%, Grocery Outlet (GO) 31%, Insulet (PODD) 28%, Novocure (NVCR) 65%, Q2 Holdings (QTWO) 21%, Shake Shack (SHAK) 39%, and Shopify (SHOP) 104% and 14%. Hopefully, some of us are still holding some of these positions.

Among the names, Adaptive Biotechnologies (ADPT) is a recent new issue with Street estimates of losses this year and next. Sales growth has been 30% and 91% in the recent two quarters. A 92 RS stock in a 76 RS group.

ADPT forms its first base, a seven-week cup with a one-day handle. Let’s monitor this to see if it can add a few more days to the handle before considering entry.

Paycom Software (PAYC) shows earnings growth estimates of 27%/24% for ‘19/’20. Revenue has grown 30% and 31% in the two recent quarters. A 97 RS stock in a 97 RS group with a D+ acc/dist rating. Since the 8/5 market low, PAYC is +9.2% vs +2.2% for the Nasdaq Composite. The RS line is leading price into new-high ground, a plus.

Price sets up in a five-week flat base with 12% depth. It can be taken above the pattern high of 246.85. This setup is for aggressive players who absolutely need to have some fresh-money exposure to the long side. Otherwise, it does not apply.

In sum, according to Bill O'Neil, there is a correlation between a market having few legitimate pattern setups and a market in a topping process. I used this info, along with a couple of other things, to move to cash on Oct. 2, as noted on Twitter Oct. 3. The decision to stay in a large cash position -- save for any positions holding up and showing a substantial gain for a subscriber -- is an easy one due to the action of the averages and the leaders. Let's be sure to maintain an open mind as we assess the price and volume behavior on a day-by-day basis.

As always, the market has the final say.

Q&A

Q: As I've mentioned before, the service is great.  I've learned a lot, made some $ and missed some debacles. You mentioned the BAC report on the recession following the 2/10 yield inversion. Tony Dwyer, Cannacord, stats point to a median recession start of 19 months (1965,73,78,80,88,90,98,2005) and a median spx rally of 21.1% following the inversion. I think I'll just watch what the institutions are doing instead of trying to predict! Thanks again.

A: Thanks for checking in. I am glad to hear your thoughts on the service. Thank you for the info from Tony Dwyer. I wasn't sure if I should post the info on the yield curve since it goes against the reliance on the averages and leaders for our cues. However, I first posted about it a few years ago when the spread was 40 bps, considered relatively flat. With the recent tweet, I thought I would put some closure on the subject. Long live the institutions!

Q: Wanted to check if there's a priority order to the watchlist/focus list. Will be great if you can share this information. If above is already present in some blog page in the website, it will be great if you can point me to it. Thanks. 

A: Thank you for your question. The Watch List is sorted according to "% off 52wk high" and the Focus List is sorted in alphabetical order.

Kevin Marder

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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.