January 16, 2019

Stocks have given a good account of themselves at the surface, with the Nasdaq Composite pulling back for all of two sessions, and on drying volume, before moving out anew.

But subsurface, there are a number of leaders that broke out but did not follow through. This is a time in which it is important to insist that volume confirm a breakout. This means at the time of the breakout, volume should be on its way to finishing the day at 40%-50% above the 50-day average of volume, at minimum.

Here is a technique to consider using in order to estimate how much volume a breakout will produce by day's end. If a stock breaks out at about 12:15 p.m. ET, I consider that halfway through the session, and I would simply double the volume at that point to determine an extrapolated end-of-day figure. I would use 11:10 a.m. ET as the one-third point in a session. Any breakout occurring around then would have its volume multiplied by three for an EOD estimate. I have used 10:30 a.m. ET as a one-fourth interval.

These are used on a best-efforts basis, and are sometimes not accurate. But they are the best technique I have used. Wednesday, I noted Nasdaq volume at about the halfway mark. It finished the day with volume about 5% more than the extrapolated figure I came up with intraday.

Because of a lack of conviction in breakout situations, which is further exemplified by Nasdaq volume coming in for seven-straight days below average, I have limited myself to a few pilot buys. Currently, I am 30% long, holding two long positions.

Atlassian (TEAM) has been covered a number of times in prior reports. Its chart pattern was, and still may be, about the best in the growth sector.

Price forms a cup-with-handle and may be taken above the handle high of 96.97. The fly in the ointment is the earnings report, which is expected Thursday after the close. Most players will prefer to wait until after the report before entering a position if the handle is broken.

Attunity (ATTU) is a riskier, less-liquid member of the computer software – database group, currently ranked 95 according to relative strength. The stock holds a 99 RS rank with a B acc/dis rating (the O’Neil accumulation/distribution rating). Earnings are expected to grow 26% this year and sales increased 35% in the recent quarter. ADDV is just $7.3MM and market cap $499MM.

Price has bounded up the right side of its base, with Tuesday and Wednesday showing material price gains of 7.4% and 6.8% backed by heavy volume of +138% and +114%. With such a sharp move, it is preferable to wait for some backing and filling to occur before buying the base breakout above 23.85. Moreover, the earnings report is expected 1/31. Very aggressive players will take the breakout without any waiting for consolidation.

(There will always be a few issues that move sharply up the right side of a base and then break out and show good follow-through even without any handle or sideways drift prior to breakout. Over time, one develops a feel for how one wants to play these situations. In a market like this one in which most breakouts have yet to truly prove themselves from a follow-through standpoint, and in which Nasdaq volume has been below average for seven-straight days, some caution is warranted in these situations.)

Bilibili (BILI) is perhaps the best performer among Chinese stocks. A loss is expected this year and sales grew 43% in the recent quarter. A 96 RS stock with a B acc/dis rating.

Price forms a low level cup-with-handle base, and could be taken above the 16.74 pattern high. Earnings are expected Feb. 19.

Cronos (CRON) was discussed in Sunday’s report (“It is preferred that price put in some sideways or pullback behavior prior to entry”). Since then, price briefly broke out above the 13.95 high of its five-week pattern before reversing, and now has a two-day handle. This handle has a 9.9% depth, basically within the 10%-12% depth range, or less, that is constructive for a handle.

Preferably, price puts in two more days below the Wednesday high of 14.15 before entry is considered above this high. Earnings are expected Feb. 12 pre-open.

Dexcom (DXCM) shows a loss of 12 cents a share expected for ’18 and a move to profitability with a 25-cent profit this year. Revenue grew 44% in the recent quarter. A 99 RS stock with a B acc/dis rating. Earnings are expected Feb. 21 post-close. Mutual funds numbered 813 in the recent quarter.

The pattern high of 152.14 can be used for a pivot entrance.

Freshpet (FRPT) is forecast to make a move from a loss of 10 cents a share in ’18 to a 24-cent profit this year. Sales expanded 27% in the recent quarter. A 98 RS stock with a C+ acc/dist rating.

Price cleared a cheater pivot at 37.22 Wednesday on +40% volume, however it went out at 37.38. I would be leery of entering a position right here based on the lack of follow-through. Earnings are expected Feb. 4, according to www.earningswhispers.com (EW).

(This is an example of how the great MarketSmith charting software differs from EW sometimes. MarketSmith shows Mar. 5 as the date for FRPT. We’ll see which is correct. Again, I prefer EW and have not seen them make a mistake yet.)

Okta (OKTA) has been discussed in prior reports. This is a steady-eddy producer at a prodigious pace given its revenue growth rates of 59%, 60%, 57%, and 58% in the recent four quarters.

OKTA does not offer attractive entrance, but should be monitored for a pullback/handle/sideways drift that would produce a lower-risk opportunity.

Ringcentral (RNG) was noted in Sunday’s report (“A couple of more backing-and-filling days and it would complete a cup-with-handle pattern. I would wait for this to occur before getting aggressive with an entry”).

The stock now has a five-day handle and can be taken above the 89.50 handle high but only on confirming volume. Note that price twice attempted to come out (12/12 and 1/9), but did not succeed. This is not unusual. Some speculators will not buy a stock on its second or third attempt, while others will. This is where confirming volume can be used as a prerequisite for entry. If the volume is not there, one can pass on the trade.

Given the previous failed entry attempts, one can always wait until the standard base breakout pivot of 98.15 enters the picture.

Servicenow (NOW) can be taken on a takeout of the cheater entrance pivot at 194.04. Rest assured, a lot of players are eyeing this level. Again, confirming volume should be relied upon in order to increase the probability of good follow-through. Good earnings estimate of 32% for ’19.

Tandem Diabetes Care (TNDM) was noted in Sunday’s report (“Like many other growth titles on our Watch List, it is just starting to tread water after a swift move up (38% in five days). Thus, we should allow it to form more of a ledge in here before thinking about entrance”).

Price formed a three-day handle before breaking out Wednesday on -19% volume. This is another example of a high relative strength name (RS 99) that shows tepid action at a key point on its chart. Let’s watch and wait on this one. If worst comes to worst, there may be a better entry up to and possibly including the 52.55 base high.

In sum, stocks have left something to be desired when it comes to post-breakout follow-through. As a result, players should insist on confirming volume when taking a breakout. The Nasdaq is extended and it should not be a surprise if it comes in for a reaction. There is no hurry in getting invested as numerous names are still working on their bases.

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.