December 5, 2018

Tuesday’s decline wasn’t exactly a surprise, but its severity was.

In Sunday’s video, I had mentioned that the averages might be due for a pullback along the lines of the November pullback. This was based on two things: the market moving back to the vicinity of the November high, and the percent of NYSE stocks above their 10 ma reaching 70%.

I said this would be a plus as it might allow a few of the emerging leaders to pull back, perhaps allowing for pullback entries.

The Nov. 28 O’Neil follow-through day (FTD) in the Nasdaq remains intact since it has not undercut the Nov. 20 low. Notwithstanding this, the trend in the Naz is down, what with price below the 20- and 50-day moving averages and a clear pattern of lower highs and lower lows in place.

While the trade war with China has gotten headlines, the more important piece to the backdrop is the slowing economy. The bond market had this figured out way ahead of time, as the yield curve (the spread between long rates and short rates) has been flattening for many months. It does this when the expectation is for slowing growth.

As well, beginning three weeks ago, the 10-year Treasury yield has fallen from 3.24% to 2.92%. This is the market’s way of anticipating an economic slowdown.

Otherwise, a few names profiled here recently have successfully broken out, including Codexis (CDXS) and Vanda Pharmceuticals (VNDA). It is premature, however, to say that breakouts are working. The jury will be out on this until either breakouts fail or they move up 20% and hold their gains.

When the averages show confirming action or an O’Neil FTD, a pilot buy or two may be taken. If you limit your risk on these pilot buys, you will not get hurt should the initial breakouts fail. My version of position sizing is in the public blog section of the site here. (The link to the public blog is at the bottom of every page.)

As long as you are taking junior-sized starter positions, your account will not sacrifice much by getting stopped out on one or two pilot buys. Using my example, perhaps you will lose 0.25%-0.35% per pilot buy that gets stopped out. You are not taking many pilot buys, so risk is minimal.

If the pilot buys work out, you can add to them and take on further positions. As Bill O’Neil likes to say, you are like a tree bending in the breeze. As long as you are managing risk in a mindful manner and are cognizant of who the leading actors are, and what they are doing, you will be in the proper frame of mind for the next bull move.

The following names are ones to make note of once there is some firming in the averages. The market may need some time to recover from the turbulence shown Tuesday.

Among the names, Atlassian (TEAM) is expected to put up earnings growth of 50%/24% during the June ‘19/’20 fiscal years. Sales grew 37% in the recent quarter. A 96 RS stock under solid accumulation.

Price is 13% from the top of its pivot. This is one to watch for a pullback or handle to be formed. It has some of the best relative strength since the 11/20 market low.

Euronet Worldwide (EEFT) could have been taken above its 120.12 base high. This was mentioned in the Nov. 28 report. After breaking out, price reversed, and is now 3% below the pivot. If the stock is going to live up to its leadership status, it will form a handle and try to go again. This deserves monitoring.

Canada Goose Holdings (GOOS) was mentioned in Sunday’s report (“This can be considered on a takeout of the 72.27 high of 11/14”). The comment stands. This 99 RS stock fell 1.6% Tuesday, or half of the S&P’s decline of 3.2%.

LHC Group (LHCG) was noted here in the Nov. 28 report (“While price is 4% above its pivot and could still be taken here, Wednesday’s lukewarm volume on a breakout day might augur for watching to see if a pullback closer to 100 occurs, which would reduce risk”).

Price has shown very good relative strength since the Nov. 20 low in the averages and should still be watched for some weakness which might offer a pullback opportunity.

Medpace Holdings (MEDP) was noted in Sunday’s report (“It can be taken above the 65.09 base high, though hopefully it will pull back or ease prior to a breakout attempt”). The comment stands.

The Trade Desk (TTD) was discussed in Sunday’s report (“Attractive entry does not present itself but this is one worth watching”). Price pulled back Tuesday along with most everything else. This should be watched for a handle to be formed.

Under Armour (UAA) was noted in the Sunday report (“Price is 3% from the top of its six-month base. It can be taken above the handle high of 24.58 on confirming volume”). “Confirming volume” refers to activity at least 40% more than the 50-day average of volume. Monday’s breakout came on +27% volume, i.e. 27% above average.

This is being watched for a handle or other sideways action which would provide an entrance. There is nothing to do with this currently.

In sum, the averages will need to recover from Tuesday's gaping sell-off before the conditions for successful speculation are ripe. In the meantime, readers should familiarize themselves with the setups discussed herein as well as the watch list names. Most important, each trader should feel 100% comfortable with their risk management protocol, an example of which may be found in the public blog.

Kevin Marder

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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2018. 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.