December 11, 2019

Stocks reacted well to the Fed's announcement on interest rates Wednesday.

The number of pattern setups peaked 10-14 days ago, and has declined since then. For example, our Watch List went from 65-70 names to 54 currently. This is not necessarily a negative. It is to be expected as the original group of leaders is not replaced by much in the way of new merchandise.

A mild negative is the distribution that has begun to seep into certain Watch List and Focus List buy issues. A general rule of thumb is to ignore one or two distribution days in a leader. Seeing three would hoist a yellow caution flag, though not a reason to sell on its own.

Among the names, Amarin (AMRN) is a biotech expecting its first profit in ’20. Sales growth has accelerated from 44% to 67% to 91% to 103% in the most recent quarters. A 93 RS stock with a 99 RS group and a B- acc/dis rating.

After a 781% surge in just six weeks during September and October of ’18, price has been consolidating. It can be taken using the 23.91 high of July 5.

On or before Dec. 28, the FDA is scheduled to make a decision on AMRN’s drug for high-triglyceride patients. This is part of the stock’s risk, as is takeover speculation. Earnings expected Feb. 4 (unconfirmed).

Coupa Software (COUP) is expected to show earnings growth estimates of 100%/31% for the January ‘20/’21 fiscal years. Sales have expanded 54% and 51% in the last two quarters. A 96 RS stock with a D acc/dis rating.

The stock can be taken above the 159.97 high of its eight-week consolidation pattern. Earnings expected Mar. 2 (unconfirmed).

New Oriental Education (EDU) is a Chinese provider of language training and courses to prepare students for exams. Earnings growth is expected to be 36%/32% for the May ‘20/’21 fiscal years. Sales rose 20% and 25% in the two recent quarters. A 96 RS stock with a B+ acc/dis rating.

The stock forms a five-week, base-on-base pattern with a tight, 6.9% depth. It can be taken above the 124.78 pattern high. Earnings expected Jan. 21 (unconfirmed).

Shopify (SHOP) is a unique growth stock due to its unusual combination of very large size (market cap: $50B) and rapid earnings growth. There are only so many stocks in the market with this combination. Institutions with a growth mandate only wish there were more names like SHOP they could place money with.

Earnings are expected to go from an estimated 50% decline this year to a 384% increase in ’20. Sales increased 48% and 45% in the last two quarters. A 97 RS stock with a B- acc/dis rating.

Price forms a three-month cup. Last week, the stock put in two powerful major accumulation days. Since then it has formed a five-day handle with constructive price/volume correlation.

As noted in Sunday’s report, “It is always possible that the stock takes off from here, but the preference here is to allow price to put in one or more days in forming the handle prior to setting a pivot price.”

On Monday, price attempted to clear a two-day handle but was turned back, likely due to general market weakness that day. To be fair to those who took it that day, SHOP could just as easily have gone higher if the averages had not weakened during the session.

SHOP has now created a five-day handle. It can be taken above Monday’s high of 381.11. Earnings expected Jan. 28 (unconfirmed).

Veracyte (VCYT) is a medical research company which is expected to record losses this year and next. Revenue rose 32% in each of the last two quarters. A 95 RS stock with a B- acc/dis rating.

Price forms a four-month consolidation with 36% depth. It can be taken above the pattern high of 31.18. Earnings expected Jan. 21 (unconfirmed).

Yandex (YNDX) is a provider of Internet search/content services to Russia, Turkey, and a couple of other countries. Most on Wall Street look for 25%/46% earnings growth for the ‘19/’20 period. Revenue grew 39% and 40% in the last two quarters. An 86 RS stock with a B acc/dis rating.

Price forms a four-month consolidation with seven-day handle and can be taken above the 42.25 high of its handle. While the pattern appears unorthodox, note the Nov. 18 gap-up 12% gain on +338% volume. Also note the lack of worrisome profit-taking in the wake of that outsized gain, especially the three trading days prior to today. Each had volume 75%-77% of average volume. Earnings expected Jan. 24 (unconfirmed).

In sum, the market acts well, though the number of breakout opportunities has diminished. This should not have a bearing on our market operations, but is worth noting. In addition, some distribution in the better actors is noted, but is generally orderly and not broad enough to damage the growth sector.

Q&A

Q: My question is because I was stopped out at breakeven after +8% of profit in two positions last week (ACAD and PCTY), and after that, both positions rebounded immediately to a higher level. (I can´t follow the markets all day, so I put in limit and stop orders.)

Do you have any general advice regarding this topic? For example, don´t use stop orders at breakeven, and close the position once the closing price is below breakeven? Or maybe wait until the profit is a little bigger?

A: I am afraid I do not have an easy solution for your situation. The 8% level at which to move a stop to breakeven was a suggested level. After all these years, I did this by feel and not by a hard-and-fast rule. But I thought it would be a good idea to provide subscribers with a general rule of thumb they could start with and then adjust for their own unique makeup. After I received your email, I spoke with a friend who runs part of Bill O'Neil's money, and he does not have a hard-and-fast rule either. He said if he had to use one, he would use 7%-10% in profit as a place to move the stop to breakeven. This is similar to the 8% I have suggested.

This is where you should experiment with a different level or technique to see which might work best for you. I would not look at your two trades and make any conclusions because this is a tiny sample size. Over time and a larger series of trades, you will find what is a reasonable spot for moving up the s/l to breakeven. I hope this is helpful.

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 a position in SHOP, 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.