February 13, 2019

Stocks continue to show good tone. While increased volume is always welcomed in an uptrend, this one has shown gentle rolling pullbacks, a positive, three of them being of two-day durations each. These mini-reactions occur with no real distribution and muted volatility.

Breadth shines. The cumulative NYSE advance-decline line is well out in front of the S&P, a distinct plus. This tells us that the average stock outperforms the blue-chip index. It is to be expected during an interest-rate driven move, seeing as how many rate-sensitive issues comprise NYSE-listed names.

The below chart shows the yield on 10s to be in a downtrend, a plus.

Overall, beneath the surface of the averages, many leading stocks are somewhat extended above entry points. As such, we should be open to the possibility of a general market pullback. This is not a prediction, just one possible scenario. Though rarely pleasant, this would at least open up more pattern setups, which have dwindled over the past 7-10 days or so.

Five Below (FIVE) is predicted by Wall Street as having 19% earnings growth in the January ’20 fiscal year. Meanwhile, sales at the discount retailer increased 23% and 22% in the two recent quarters. A 97 RS stock.

Price can be watched should it near its 136.13 pivot point, about 4% away.

Inspire Medical Systems (INSP) was noted in the Sunday report. Price came out of its five-month consolidation on Monday, though volume was -28%. It then drifted lower and Wednesday found demand at its 9 ema, putting in a wash-and-rinse day.

The stock sets up as a pullback entry above Wednesday’s high of 57.50 with a possible stop-loss just below Wednesday’s low of 55.05. This equates to 4% risk, or 2% de facto risk if a starter position of half-normal is used. Earnings expected Feb. 26.

Irobot (IRBT) is a recent addition to the Watch List. Earnings growth is estimated at 4%/26% for ‘19/’20. Revenue grew at 29% and 18% in the two recent quarters. A 98 RS stock with a B+ acc/dist rating.

Price shot up 29% in just five sessions, apparently due to its earnings report. Due to this sharp climb up the right side of its pattern, it is preferable to see IRBT form a handle to go with its six-month cup. Worth watching.

Mimecast (MIME) is another recent addition to the Watch List. Per-share earnings are forecast to go from a penny loss to a 27-cent profit in the March fiscal year and 50 cents in the ’20 year. Sales have steadied at 30% in the two recent quarters. A 96 RS stock in a 95 RS group with an A acc/dist rating.

Tuesday, MIME jumped 14% on +649% volume to clear a seven-month consolidation. Wednesday, volume dimmed along with volatility. There is nothing to do at present but allow the stock some time to pull back, form a handle, or drift sideways. This may present a better-probability entry than taking it at current levels. Earnings expected May 13.

Novocure (NVCR) has been on the Watch List for some time but was not buyable in early January using a cheater entrance due to its being a sizable distance from its 52-week high. While a loss is expected for this year, sales grew 60% and 29% in the recent two quarters. A 99 RS stock with an A- acc/dist rating.

Price formed a handle just below the pattern high. Tuesday and Wednesday saw price moving higher again, while taking out the handle. NVCR can be taken above the four-month pattern high of 53.70. Earnings expected Feb. 28.

The Trade Desk (TTD) has just a 14% estimate for ’19 but muscular sales growth of 61%, 54%, and 50% in recent quarters. A 99 RS stock. It can be taken either above its 157.50 handle high or the 161.50 high of its four-month consolidation.

Wix.com (WIX) was discussed in Sunday’s report (“Price can be taken above the three-day handle high of 112.67”). The next day, price cleared the handle high, +0.2% on volume of -35%. However, on Tuesday price picked up a bid and rose 4.4% on +33% volume. Wednesday, the stock tacked on another 2.8% on decent volume.

WIX can be taken above the four-month pattern high of 121.45. This would either represent a starter position or an add-on position for those who entered on the handle clearing. Earnings expected Feb. 20.

In sum, judging by the extended nature of numerous speculative growth-stock glamours, it would not be a surprise to see the averages come in. This would be viewed positively, as it may allow the formation of fresh pattern setups which, at the moment, are not ubiquitous. In the meantime, we should not get ahead of ourselves. If setups present themselves, they should be taken.

The following are questions from subscribers.

Q: I had a quick question I wanted to run by you in hopes you might discuss.  When you are in a stock and they issue a secondary, how do you typically handle these?

For instance, I had a great cheater entrance in PDD and had added.  My cost basis was around $25. I've got hit with these secondaries a good bit in the past and have struggled to figure out a good reaction.This time I sold half around $28.50 and planned to hold the rest on a violation of the 20ma. I ended up selling the other half today to protect a 1R win. I'd be very interested in how you think/react to these events.

A: Thank you for the very good question. There is no ideal way to deal with these occurrences. I think you handled it perfectly. I especially like the way you are thinking re R-multiples, cheater entrances, and usage of the 20 ma, which is my most important ma. I may have done the exact same thing you did re exiting the first half at 28.50. This is b/c the 9 ma was just above that level and I will sometimes take a portion off on a break of, or close below, the 9. I hope this is helpful.

Q: I am a new member. I have traded the Australian market using Wyckoff structure for about 15 years. I've mostly swing traded or or two stocks at a time but never built a portfolio for the longer term.. I am now looking to increase my holding time and so that brought me to CANSLIM to understand investing more. I have read your educational material and am very impressed. It feels like it may be the missing piece in the jigsaw that can take my trading further.

As I'm new to growth investing with a view to finding super performers, I was wondering whether you would be so kind to help with tips on moving from a cash position? I currently have 15 buy stops in the market above structure in growth stocks, e.g. handles and minor pivots/cheaters. 

Post-earnings I risk 0.5% of account on initial entry. Pre-earnings I take entries at 0.25% of account. I am of a view to let the market pull me in on as many as it wants to and then see which ones perform and which ones don't with a view to constantly reallocating equity from those that lag to those that outperform.

All with a view to ultimately be invested in the 5 best names. From your experience would you say I am doing this correctly as I couldn't see any information in your material about this? 

For my strategies I look for the 50MA to begin to rise (above the 200MA). This often coincides with the Wyckoff LPS. I believe I have been doing things back to front in trading any names with these setups irrespective of fundamentals. 

Many thanks in advance. Obviously I take nothing as licensed advice.

A: Thank you for your question. For position trading, as opposed to swing trading, history’s biggest-winning stocks have been growth titles. O’Neil’s research in the early-‘60s confirmed this. That right there should tell you that it would pay to trade these in a position-trading account.

What has worked for me is to concentrate on ERT: earnings growth estimates, relative strength line, and technical chart pattern. Thus, with a few exceptions, these must all be present in order to consider buying a stock. Along these lines, I agree with your assessment that you may be doing things back to front. I think you are correct in letting the market come to your buy stops, with the idea of eventually whittling your positions to the best five actors.

I am unfamiliar with Wyckoff LPS. But my view has always been that trading high relative strength growth issues should be based on chart patterns – not indicators. This is because you will eventually have conflicting signals. The pattern will say one thing and the indicator will say another. Net-net: We as position traders are either pattern players or indicator players.

Please note that I am not anti-indicator at all. In fact, I find using them in swing trading to be helpful, along with PA (price action). If indicators help you, then by all means use them. However, I do not think they are appropriate for position trading of aggressive growth stocks, due to the conflict factor.

Your risk is prudent and I applaud your goal of ultimately having five names. 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 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.