January 23, 2019

Shares are in their fifth week of advance from the Christmas Eve lows. The positives include the NYSE advance-decline line running well ahead of the S&P 500, growth sector leadership, and interest-sensitive group (builders, banks, brokers, financials) outperformance.

The negatives include a barely outperforming Nasdaq Composite, a technology segment that has merely been a market performer over the past two months, and lackluster volume.

The current two-day pullback in the averages is healthy and necessary following a near-unidirectional move off the December lows. This easing provides some of the overheated growth glamours a chance to form two- and, in a few cases, three-day handles.

Most momentum players should still be in a cautious position due to the lack of glamours showing 20%-25% gains post-breakout. This is the rubber-meets-the-road test of a healthy market. Some markets take longer than others for institutions to gain the conviction it takes to send growth titles to substantial gains.

A rule of thumb is to allow an average like the S&P eight weeks or so to show convincing volume before becoming concerned. We are not there yet.

The cautious position mentioned above translates to players holding one or a few pilot, or test, buys while maintaining a measured degree of exposure on the long side. It is important to adopt an open-minded approach. This means taking action to protect precious capital should the market split open and leading growth titles break support points on volume.

As always, let’s maintain a day-to-day approach to our analysis and allow the market to tell its own story.

Atlassian (TEAM) appears to be recovering from a wild reaction to its earnings report, swinging more than 10% from top to bottom on Friday. Recall that up to that point the Australian company had one of the most constructive bases in the growth sector. The stock can be taken above the 1/9 high of 96.97. Earnings are expected Apr. 18.

Coupa Software (COUP) was noted in Sunday’s report: “Regardless of whether you entered on the cheater buy point as discussed in a prior report, Coupa Software (COUP) should be monitored for a pullback or handle before it gets to its base top of 84.53.”

Price now forms a two-day handle (by definition just a one-day handle since Tuesday’s high was the high of the recent advance) that is constructive due to the dry-up of volume. This objectively indicates profit-taking after its 20% move in four sessions is not worrisome. Since entering after a one- or two-day handle is risky, another two bars within the handle is needed prior to considering an entry.

Earnings are expected Mar. 4.

Dexcom (DXCM) has excellent fundamentals (moving to profitability this year, per the Street +44% revenue growth in the recent quarter) and is a 99 RS stock.

Price just barely penetrated the pivot of 152.14 on both the day before the MLK holiday and the day after, with sub-par volume both days, before easing below the line. There is now a two-day handle which would need to tack on two or more days to be able to be used as a pivot. Buying right here is not suggested since there is no volume in the past eight days.

Earnings are expected Feb. 21.

Domo (DOMO) was noted in the Sunday report (“While 27.10, the pattern high, would be the correct entrance pivot to use, the fast move up the right side of its base should be respected. Thus, some handle or pullback action should be awaited before initiating entry)”.

Wednesday marked the first day of handle formation. DOMO bears watching. This is a smaller issue (ADDV $12.6MM, market cap $669MM) and would be for very aggressive players only.

Etsy (ETSY) was mentioned in Sunday’s report (“While the pattern is v-shaped, it can nonetheless be taken above the pattern high of 58.30”). The comment stands. A more-aggressive player could target the Jan. 16 high of the four-day handle at 56.42. Earnings are expected Feb. 26.

Freshpet (FRPT) was noted in Sunday’s report (“It can be taken above the pattern high of 40.58”). It shows some of the better volume among watch list names as it moves up the right side of its base.

Like many other issues, it is forming a two-day handle and should be monitored for clearance above the 40.21 high of 1/18. This possible cheater entrance is not far from the pattern high of 40.58. Earnings are expected Feb. 4.

Guardant Health (GH) soared 87% in its opening day as a public entity in October. It proceeded to hit a December high that was 160% above its offering price. Combining this with giant revenue growth of 96%, 90%, and 95% in the recent quarters makes this title one to contend with.

The stock forms a cup-with-low-handle and can be entered on a takeout of the 43.48 high of 1/11. Note the dim volume beginning the day price bottomed and particularly during the handle formation, indicative of a thinning of the hot money, a plus. Earnings expected Feb. 18.

Hubspot (HUBS) was noted in Sunday’s report: “The pattern high of 162.20 can be used as an entry pivot for aggressive players, i.e. without stopping for some handle work or a pullback.” The comment stands.

Price is two days into a handle and can be watched for another couple of days of sideways action that might offer a cheater entrance above the 158.66 high of Friday. Earnings are expected Feb. 12.

Inspire Medical Systems (INSP) was noted in the Sunday report (“Before entry above the base high of 57.87, price should be allowed to pull back, form a handle, or drift sideways”). Fortunately, price is two days into a 9.7% deep handle. (When possible, a 10%-12% deep handle is preferred, if not less.) A 99 RS stock with a B+ acc/dis rating (from O’Neil).

Price is worth monitoring for the completion of its handle, which would possibly provide attractive entrance. It is to be noted that price ran up 261.7% in four months following its ’18 initial public offering. During the bear market, there was a lot of choppiness to the pattern. This can be expected after such a sizable run-up. Earnings expected Feb. 5.

Lululemon Athletica (LULU) has a number of things going for it, from the high earnings stability to the 1,158 mutual funds that own it. The January ’20 fiscal year estimate of 17% is a bit less than the 20% that is preferable to see. But this title is attractive to growth-oriented institutions due to its RS (97), very deep liquidity (ADDV of $434MM), and above-average growth prospects.

Price has shown some power coming up the right side of its base. It has paused on a volume dry-up Tuesday and Wednesday. Very aggressive operators will wait for a third day of handle formation before using the 152.18 high of 1/18 as an entrance pivot. Others will insist on two more handle days to form before considering entry.

Earnings are expected Mar. 7.

New Relic (NEWR) is predicted to show 58% earnings growth in the March ’20 fiscal year and revenue expanded 36% in the recent quarter. Price is showing nice accumulation along the right side of its six-month base.

Currently, NEWR forms a two-day handle like so many other issues. This is worth watching, as it does not offer attractive entrance. Earnings expected Feb. 6.

Pinduoduo (PDD) was noted in the Sunday report (“This can be taken above the 1/10 high of 26.70”). Wednesday price cleared the 26.70 pivot, +6% on +26% volume. While volume was on the light side compared with the 40%-50% minimum that is preferred on a breakout day, the 6% gain came on a day in which the Nasdaq was up just 0.08% on -4% volume.

Thus, relatively speaking, it wasn’t a bad performance. Price closed Wednesday three cents below the pivot. For those seeking to open a position, Wednesday’s high of 27.13 could be used as an entry pivot, in light of it being just 1.5% above the 26.70 level.

This is an explosive company by virtue of its revenue growth: $181MM, $220MM, $409MM, and $490MM over the past four quarters. From an expected loss of 44 cents a share in ’18, it is forecast to show a 3-cent-a-share profit this year. Another positive is its A- acc/dis rating. Earnings expected Feb. 19.

Tandem Diabetes Care (TNDM) has been discussed in recent videos and in the Jan. 16 report, where it was noted: “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.”

Price is now three days into a handle and can be taken by more-aggressive players above its handle high of 44.96. There has been a quieting of volume over the past eight sessions, a plus. A 99 RS stock. Earnings expected Feb. 26.

In sum, stocks generally act well, lackluster volume notwithstanding. Participants using a momentum approach should take a measured approach to long exposure until post-breakout follow-throughs show more 20%-25% gains.

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 a position in COUP, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters.