February 13, 2018

Position traders will wait for one of a few things to occur before initiating new positions in the growth sector:

1) An O’Neil follow-through day (FTD), Since Tuesday was Day 3 after the low close of 2/8 in the Nasdaq and S&P, the next day in which price rises a substantial amount on volume > the prior day’s volume will be an FTD. This assumes price does not close lower than the 2/8 low close, and would signal a change in trend to up. It is always a good idea to assess the action of leading stocks. This should corroborate an FTD.

2) A higher high/higher low in the Naz or S&P. This is the definition of an uptrend. As shown in the S&P chart below, price would need to pull back to create a higher low before moving up and taking out the previous high.

3) A successful test of the 2/9 (Friday) low. Price for either the Nas or S&P would need to fall to the vicinity of the 2/9 before rebounding. This would preferably occur on lower volume than what occurred when the 2/9 was created. Individual leaders should hold up well.

For more-aggressive position traders, there is enough evidence to warrant wading back into the growth sector. This evidence takes the form of:

1) Good relative strength among growth stocks, e.g. liquid glamours Amazon.com (AMZN), Apple (AAPL), Twitter (TWTR), and Nvidia (NVDA); and speculative glamours RingCentral (RNG), Match Group (MTCH), Arista Networks (ANET), Uniqure (QURE), Argenx (ARGX), Weibo (WB), Paycom Software (PAYC), Hubspot (HUBS), Tabula Rasa Healthcare (TRHC), and Sina (SINA). Granted, this is not the whole growth sector, but is nevertheless encouraging.

2) Positive divergence between an in-house momentum model and the indices. Specifically, the low close on the indices (2/8) – a lower low – was accompanied by a higher low in momentum, i.e. a divergence. This model rarely generates a signal. But when the signals do occur with individual stocks, they are high-probability, which by my definition means at least 80% accurate. For the Nasdaq, eight of nine signals since late 2012 have been correct at confirming a low.

This time, the signal called for a long entry one tick above the high of the low day (2/9) in both Nasdaq Composite and S&P. In swing trading, an entry one tick above the high of the low day of a pullback is as good as it gets. I use this for swing trading stocks and not so much to time indices.

There is nothing magical about divergence. Any technical analysis textbook covers it. It simply capitalizes on one of the only true leading indicators in trading – price momentum. Of course there are subtle nuances that come with time and elbow grease.

Among the names, Shopify (SHOP) was noted in the last report: “…was discussed in the last report as being buyable above 123.94, its base top. This has since occurred and price is now 4% above the pivot. Still buyable.” Price is forming a handle and can be taken above the 131.16.

However, earnings are expected Thursday pre-open, so any position taken ahead of earnings should be sized appropriately so that a downside gap of, say, 30% will not substantially dent an account. A favored name.

Weibo (WB) can be taken above the 136.19 high by aggressive operators. This pattern is not a full-fledged five-week-plus base, so players who strictly only buy base breakouts may not have a chance to get this before it moves. Tuesday’s 10% move on +183% volume related to earnings shows this actor means business. Two years of big estimates lie ahead of it.

Paycom Software (PAYC) can be taken above the 93.61 high of its three-week shelf. The same comment about WB and the lack of a proper five-week base also applies to PAYC. Two full years of nice estimates ahead and earnings are out of the way.

Nvidia (NVDA) is believed to be the purest play on artificial intelligence (AI). While the stock roughly doubled last year, this year’s estimates were mired around 11% or so, below the 20%+ I prefer to see. Thus, I did not give it the attention its price action deserved. But with so many other big-estimate names really performing, it didn’t much matter.

Fortunately, the January 2019 fiscal year estimate is now 35% while the 2020 year is at 16%. This now makes my fundamental screen and it can be taken above the 249.27 high of its three-week shelf. Earnings are out of the way.

Hubspot (HUBS) shows blistering estimates of 72%/77% for ‘18/’19. Its RS line already hit new-high ground on Monday. Monday’s 6% rise on +59% volume speaks. For aggressive operators, this is takeable above the three-week shelf’s high of 102.30. Earnings are out of the way.

Tabula Rasa Healthcare (TRHC) has estimates of 133%/89% for ‘17/18. Revenue growth is very consistent in the 32%-38% range for the last three quarters. The stock is takeable above its three-week shelf high of 38.23. The risk and potential volatility are higher on this one by virtue of its $9.1MM average daily dollar volume (ADDV) and $670MM market capitalization. For very aggressive players only.

To sum, aggressive players who have experience making money with this strategy can wade back into the waters based mainly on the improving action of growth stocks. Following an 8%-12% intermediate-term correction, the emerging leaders tend to be those out of the chute and into new-high ground first. Unfortunately, not many of these are currently coming out of five-week-plus bases. This report has listed those that are attractive, regardless of pattern length.

The best stocks often play hardest to get.