January 6, 2018

The S&P 500 and Russell 2000 scored O’Neil follow-through days (FTD) Friday.

While this brightens the picture somewhat, it is not an all-clear buy signal as some might think. This is because the market is still in a repair mode with nearly all growth-stock patterns requiring more work.

It is to be noted that an FTD will coincide with some breakouts, a few breakouts, or no breakouts. So, while an FTD is a plus, it should be placed in its proper context. At present, while our Watch List has expanded to 40 names, very few are actionable without at least a bit more work.

The real litmus test for a market, any market, is whether breakouts are following through for 20%-25% gains. The only real breakout we have seen has been Watch List title RA Pharmaceutical (RARX). So far, this remains 10% above its pivot.

A couple of interesting things should be noted. First, the computer software groups are standing apart from the pack as the emerging leaders within the growth sector. You will notice that 19 of our 40 Watch List names happen to be computer software.

The following chart of the software segment shows how the 12/24 low just slightly undercut the 11/20 low vs. the most recent lower low recorded by the averages on Christmas Eve. This often occurs in the latter phase of a bear market as the more in-demand merchandise – the cream – rises to the top. That it is a growth area that is showing this behavior is a plus for the momentum player. It could easily be energy or defensive sectors.

We are not quite at the point where a pilot, or test, buy feels appropriate. Close, but not quite there. This could change in a day or two, depending on the emerging leaders on our watch list more so than the averages. In the meantime, some of the following issues contain suggested cheater entrance pivots for those inclined to test the waters with a pilot buy or two.

Atlassian (TEAM) may have the most constructive base in the growth sector. Earnings are expected to grow 50%/24% in the June ‘19/’20 fiscal years and revenue expanded 37% in the recent quarter. A 97 RS stock.

In the last report, it was noted that “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.” The comment stands.

Attunity (ATTU) is forecast to show 26% earnings growth this year. Sales increased 35% in the recent quarter. A 99 RS stock in a 96 RS group, computer software – database.

The chart pattern has quite a bit more work to do in order to offer an attractive entrance. Worth watching.

Chegg (CHGG) is anticipated to record 26% earnings growth in ’19 while posting 19% sales growth in the recent quarter. The RS line is at a new high despite price being 9% off its high, a plus. A 97 RS stock.

The 30.34 high of 12/12 may be used as a cheater entrance pivot.

Crocs (CROX) was discussed in Wednesday’s report (“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”). The comment stands.

Per Wall Street analysts, Pinduoduo (PDD) should turn a 4-cent-a-share profit this year following a 40-cent loss last year. The Chinese mobile e-commerce platform went public in July at 19 and hit a high of 30 before falling amid the bear market.

This is an extremely fast growing company. For example, revenue went from $181MM to $220MM to $409MM to $490MM in recent quarters. A sequential growth rate of 20% in the recent quarter is powerful.

This has a good deal of work ahead of it, but is worth watching in the interim due to its potential for explosiveness as displayed in its September surge of 50% in just three days. An aggressive entrance in the cheater style would be above the 25.00 high of 12/3.

Planet Fitness (PLNT) was discussed in the Dec. 23 report (“It is being left on the watch list for now due to its impressive relative strength line, showing a 7.5% gain since early November vs. a 13.6% loss for the Nasdaq”). PLNT was one of only two names on the Watch List that showed +50% volume in Friday’s session.

A 97 RS stock that has regularly seen its RS line hit new-high ground ahead of price. While earnings are expected to rise by “only” 18% this year, sales rose a plump 40% in the recent quarter.

Price is 3% from its pivot of 58.50, where it would be buyable.

Veracyte (VCYT) is a new add to the Watch List. This is a more-speculative issue, with losses slated for last year and this year, its price being just 14.24, and ADDV of just $6.9MM. Sales increased 34% in the recent quarter. A 99 RS stock.

The stock forms an eight-week cup which it is hoped will produce some sideways movement up around its 15.50 pivot, about 8% away. Recall that a pattern is higher risk when it rushes up the right side of its base without pausing for even a couple of days around the pivot area.

If I was to take a position on the breakout, my stop-loss would be tighter than normal if price did not have a handle or a pullback to remove some of the excess speculation.

Zendesk (ZEN) is a tried-and-true growth stock, with the ’19 earnings growth estimate at 88% and the recent quarter’s sales at 38%.

The 12/12 high of 62.72 represents a cheater entrance pivot.

In sum, stocks remain in a bear market. While a 100% cash position is appropriate for most, some may wish to take a pilot buy or two. While I personally am aggressive in taking positions in a developing bull, if that's what this is, there is not enough meat on the bones in terms of great chart patterns to entice my participation on the long side. This could change in as little as a day or two depending on the action of the leading growth stocks.

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.