January 2, 2019

The Nasdaq is five days into a rally phase and can be watched for volume-backed confirmation, either an O’Neil follow-through day or otherwise.

The recent three-day sequence of high-volume down days could be viewed as a climactic blow-off of sorts, notwithstanding the third day being a quarterly expiration session. If so, the current rally could be expected to continue.

The wedging, or declining, volume of the second, third, and fourth days of this rally should not be viewed as a lack of demand. Rather, it reflects a vacuum of sellers following the previous swift descent, and is normal.

The backdrop has been decidedly more supportive of stocks in recent weeks. The yield on 10s has plummeted over the past seven weeks from 3.24% to 2.66%. This may be viewed as a negative, as it reflects the reduced inflationary expectations consistent with a slowing economy. However, more important, it was accompanied by a steepening of the yield curve which helps the all-important banking system’s profitability.

As well, the market’s view of the Fed now incorporates just one rate hike this year – down from three previously – and the beginning of a rate-cutting campaign in ’20.

As was the case in our last couple of reports, this is not an environment for long-side speculation. The names that follow should not be purchased if they cross suggested entry points. Rather, they are included to provide some vehicles to consider if the averages firm up and show better tone. This could happen at any time.

An exception would be for an aggressive player to use as a pilot buy with a reduced position size.

The most encouraging thing about most of the Watch List names is that they hold up well as they continue to repair the technical damage done to their patterns.

Atlassian (TEAM) was discussed in Sunday’s report (“TEAM may have the most attractive base on the Watch List. The 89.82 high, just 2% away, serves as a cheater entrance pivot. For less-aggressive players, the base high of 98.21 is 11% away”).

Monday, the stock slightly cleared the top of its well-formed, cup-with-low-handle base, up 1.6% on +30% volume. Wednesday, price gapped down at the open, but recovered to post a trivial gain. Those using a 6% stop-loss or less would have been stopped out if they had sold right at the open.

(It is suggested that a gap down open that violates a stop be given at least one or two five-minute bars to see if demand kicks in after the open. If price continues to fall during the opening 10 minutes, then an exit can be warranted. In TEAM’s case, there was a recovery that began in the opening 1-2 minutes and took one out of harm’s way.)

TEAM offers another cheater entrance above Monday’s high of 90.88 for aggressive operators who seek to test the waters with a reduced-size pilot, or test, buy.

Crocs (CROX) is a turnaround story, with earnings growth estimated at 163%/152% for ‘18/’19. With revenue increasing in the single-digits in recent quarters, the expected earnings growth appears to be a function of cost-cutting, not unit sales growth. Thus it is not a pure growth stock.

However, this is a 99 RS stock with its RS line well ahead of price in new-high territory, a plus. CROX broke out of a three-week flag pattern in early December in tandem with the averages’ rally then, but reversed the next day in tune with the general market. This came on the heels of a November breakout which saw it jump 28% on +564% volume.

Wednesday, CROX was one of the best performers in the market, +6% on +49% volume. It is four weeks into building a base and, assuming the averages firm up, can be taken above the 29.88 high of Dec. 4.

Paypal Holdings (PYPL) is the only liquid glamour on the Watch List. It likely holds up well because of its steady-eddy earnings stream (just 4% standard deviation of the past several years of earnings) which appeals to institutions leery of a ’19 economic slowdown. The Street eyes earnings growth of 26% for last year and 20% this year. Sales rose 14% in the recent quarter.

This is a 90 RS rank stock whose RS line moved into new-high ground over two weeks ago, quite notable. While PYPL’s three-month consolidation is no doubt choppy and needs some work to allow it to settle down, it is worth watching. A cheater entrance is not appropriate until its basing pattern smooths out. Until then, the pattern high of 93.70 is a suitable entrance pivot.

Ra Pharmaceuticals (RARX) was mentioned in the Dec. 30 report (“The stock happens to have one of the most attractive technical patterns in the market, a nine-week consolidation. The entrance pivot would be the pattern high of 19.80”), as well as the Dec. 12 report  and Dec. 19 report.

Wednesday, the stock broke out of its three-month basing pattern, +20% on +90% volume. Price is now 13% past its entry pivot and should not be chased.

While RingCentral (RNG) is expected to show earnings growth in ’19 equal to its ’18 growth, this remains a growth stock with extremely steady sales growth of 33%-34% in each of the last four quarters. Meanwhile, 512 mutual funds own it. A 95 RS stock with a B accumulation/distribution rating.

Technically, RNG appears to be forming a head-and-shoulders bottom pattern. Its RS line is close to new-high ground, yet price is 17% off its high, a plus. A cheater entrance is available above the 88.66 high of 12/12.

Workday (WDAY) shows earnings growth estimates of 23%/27% in the January ‘19/’20 fiscal years. Revenue grew 34% in the recent quarter. More than 1,000 mutual funds own the shares, placing it in the 400-1,100 sweet spot that has correlated with numerous successful growth companies. A 97 RS stock.

WDAY broke out of a 12-week consolidation on Nov. 30 in line with the eight-day November advance in the averages. On the breakout day, volume was +334% and price surged 13%. The fact that price was able to do this so strongly when most other growth stocks were much farther away from their old high, made this a name to watch.

Ten days later, price reversed and returned to its base – another failed breakout. After finding support at its 50-day line, the stock is 7% from the top of its four-week, v-shaped pattern. The pattern depth is 18%, which is reasonable considering the size of its prior advance.

V-shaped patterns are not constructive and WDAY is not technically attractive in terms of offering an entrance. Yet this is well worth watching, as the RS line hit new-high ground last Friday, well ahead of price. This has the potential to become a leader, it just needs time to round out its pattern.

In sum, stocks remain in a bear market. Long positions should only be taken by aggressive players on a pilot-buy basis using reduced position size. Short ideas will be relayed to premium subscribers via the private, members-only blog. Otherwise, a 100% cash position is appropriate for most.

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.