February 20, 2019

The song remains the same in the stock market.

Very little has changed over the past two weeks. The Nasdaq trudges forward, while turnover is sub-par for 12-straight sessions. This is felt in the volume on breakouts, many of which have come out on average volume.

Premium subscribers will notice that the number of names on our Watch List has remained penned in the 60-66 range of late. Dozens of names cleared bases and are now treading water amid a slight cooling of the speculative sentiment. This is all a function of the market's success.

As a result, our report contains fewer issues of interest than usual. This is expected to shift back to normal upon a pullback in the averages.

Codexis (CDXS) is a biotech with a loss expected for this year. Sales increased 31% and 70% in the two recent quarters. A 98 RS stock with an A- acc/dist rating.

The chart shows impressive accumulation along the right side of its 10-week cup-with-handle base, in particular two major accumulation days. The stock can be taken above the handle high of 22.49. Earnings expected Feb. 26.

(With regard to the earnings report, you can either wait until after the report has been released, or, should price cross the pivot before then, put on a measured position that is calibrated such that a large downside reaction to the report – say, 33% - will not substantially dent your account.)

Five Below (FIVE) is a discount retailer showing an estimate of 19% in the January ’20 fiscal year. Revenue has been 22%-23% in the last two quarters. A 97 RS stock with a C- acc/dist rating. The big question mark here is the lack of accumulation in the base.

For this reason, the stock can be taken above its current five-day handle, but only with confirming volume. Otherwise, this is not a go. Earnings expected Mar. 20.

Irhythm Technologies (IRTC) was mentioned in Sunday’s report (“It is now two days into a handle formation and can be monitored for some more backing and filling prior to considering an entrance. Worth watching”).

The stock is now four days into a handle and can be taken above the 96.69 handle high. Earnings expected May 14.

Irobot (IRBT) was covered in the Feb. 13 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”).

Since then, IRBT has continued its move higher. It is up 37% in less than two weeks, with just a one-day pullback en route. It crossed the pivot line on just +23% volume on Monday. It should be monitored for a pullback or other sideways movement prior to entrance. Earnings expected May 8.

Mimecast (MIME) was noted in the Feb. 13 report (“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”).

The stock forms a handle with a 9.0% depth just above the top of its prior consolidation. I have recently spoken about how 10%-12% handles, or less, are preferred. However, this handle is not part of a base – it lies on top of the base. I would prefer to see how MIME acts before suggesting that a handle breakout makes sense. Earnings expected May 13.

Stoneco Ltd (STNE) is a Brazilian financial payments processor for merchants. Earnings growth was 557% last year and is forecast to be 153% this year. Sales rose 82% and 75% in the two recent quarters.

The company came public during the bear market, dropping by one-third before bottoming Christmas Eve. Since then, the stock is up 50%, thanks in part to three major accumulation days in a row. Wednesday, price rose 7% on +131% volume.

STNE does not yet offer attractive entrance, but is worth watching. Earnings expected Mar. 4.

In sum, a market that is a victim of its own success tiptoes higher. Pattern setups among the growth-stock glamours have dwindled to a chosen few. This should change in due course. Until then, out of necessity, players will need to be selective with fresh-money buys.

Subscriber questions

Q: Really enjoying the service. I am trying to reconcile 3-5 positions as optimal with a 60+ stock watch list. I got into several positions 5-6 weeks ago, are those going to be reviewed for add ons? All are still on the watch list and are up 15-20%. Or sell and focus on the newer ideas?

A: Thank you for the email. Glad to hear the service is a good fit for you.

I don't see a reason to sell as long as your stocks continue to act well. Now there are some people who prefer to take part of a winning position off once it increases by some percent, e.g. 20%. This is a personal preference thing. I have always stayed with an issue as long as it is acting well. This was the way Bill O’Neil taught it early on and was the way everyone traded it back then. If your stocks are true leaders in this market, it is fine to let them exhale every now and then. If one or more of these breaks down, then you would seek to sell and redeploy the capital in another market leader.

To be clear, an add-on position can be put on 2% above your starter entry, assuming your starter entry is within 2%-3% of the pivot. This is Bill's technique discussed in his book. Thus, there is no need to wait until it moves up and then pulls back later on to offer what I call a swing trader entry. I have issued more than one idea on some names. If one took the first as a starter position, then the second could be used as an add-on position. Or for those who missed the first entry, they can use the second idea as a starter position.

The Watch List is large because I would rather be safe than sorry. In other words, I don't want to miss anything that happens to come out and be a big winner. I did not focus on swing trader entries (pullbacks) b/c there were so many breakouts. Now, the breakouts have left the barn, so to speak, so pullback entries as either starter positions or add-on positions make more sense. You will know how i view any possible pullback setups for the names you own by whether they are covered in the Focus List.

Q: Hi Kevin, The “drill down on ZEN” portion of your video was very helpful and serves to distinguish your service from others. Sharing your experience on some of the subtleties of trading for 5 or 10 min once a week would be great. One thing I struggle with is how to choose which stocks to take and how to avoid FOMO. I end up holding a lot of small positions. Any advice in this regard would be helpful.

A: It sounds like you are trying to kiss all the babies! This explains why the Watch List is 60+ names currently, and not half that – I don’t want to miss anything which could become a leader.

Outside of the earnings estimate and revenue data, the two things I analyze to determine which names might have the best potential are 1) the relative strength line slope/RS rank, and 2) accumulation in both the base and then on the breakout and the follow-through.

This is a supply & demand game. Healthy demand manifests itself as healthy accumulation. These are the titles that institutions, for some reason, want. That reason is usually big earning growth expectations.

During 2017, quite a few leaders came out of bases on average volume. If this is what the market wants, then it is acceptable to buy them. In 2006-2007, the market wanted cyclical groups like the shippers and fertilizers. This caught most growth-stock aficionados by surprise. What the market wants, we should want.

A helpful exercise is to go back and look at the charts of leading stocks. Note the accumulation in the base and the volume on the breakout. I hope this is helpful. I will also endeavor to add in “Zen-type” analysis if and when it presents itself.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

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.