January 9, 2019

From Sunday’s report: “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. While a 100% cash position is appropriate for most, some may wish to take a pilot buy.”

Since Sunday's report, stocks have improved technically to where the opportunistic momentum player should have one or more test buys under their belt. This was discussed in Monday's video report for premium subscribers. While the Nasdaq has not yet flashed an O’Neil follow-through day, the S&P 500 did last Friday. More important, however, has been the action of growth stocks. Volume has been less than desired, but this can sometimes happen for weeks after a low is printed. After eight weeks of low volume, I would begin to become concerned about a rally's viability.

Near-term, the market is due for a pullback. The averages are up nine of 10 sessions, and the percentage of NYSE stocks above their 10-day moving average is at a high not witnessed since at least 2010.

Let's look at the next pullback with an open mind and see how the emerging leaders - our Watch List names - behave. More important will be how they act on the rally following a pullback.

Atlassian (TEAM) was mentioned in the last two reports (“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”).  Monday, price cleared the cheater buy point on +151% volume, up 6% on the day.

The stock can be taken above the base high of 98.21, either as a fresh-month buy or an add-on buy.

Caredx (CDNA) had the most constructive base in the growth sector during October, as was pointed out then. It got caught up in the bear market, though, but appears to be coming out of it now. After a forecast per-share loss of 17 cents last year, earnings are expected to be 16 cents this year. Sales grew a bulky 74% in the recent quarter.

CDNA does not offer attractive entrance, but should be monitored as it makes its way up the right side of its base.

Chegg (CHGG) has been discussed in recent reports, including Sunday’s: “The 30.34 high of 12/12 may be used as a cheater entrance pivot.” Price surpassed the 30.34 high on Monday.

CHGG is now up nine of the last 10 days as it sits 1% away from the top of the consolidation. This, and the fact that price is up 15% over the last four sessions, would make me hesitate about taking the breakout of 32.82 as a fresh-money buy. Some of these breakouts from an extended position work, and some don’t. My preference would be to wait for a pullback or handle to form prior to entry or just after entry. This does not apply to an add-on buy.

The stock is one of the few on the Watch List with an accumulation/distribution rating of B+ or better, this one being an A-.

Dexcom (DXCM) was discussed in the Nov. 18 report (“DXCM can be taken above the 11/8 high of 152.14”). The comment stands. In the meantime, the 138.59 high of 12/4 can be used as a cheater entrance pivot.

Per-share net is expected to jump from a 12-cent loss last year to a 25-cent profit this year. Revenue growth has accelerated over the past four quarters and was last at 44%. Mutual funds are at 800, within the 400-1,100 band that is preferred to see for a medium-sized growth stock.

Mirati Therapeutics (MRTX) was added to the Watch List today. It is a biotech issue that is a development company (no earnings, no revenue). Thus, it is higher risk. A 98 RS stock with a B+ accumulation/distribution rating. The fact that this issue moved up 12-fold in less than a year during the ’17-’18 period speaks.

The stock can be watched to see if it pulls back or forms a handle after several days of gains. It does not offer attractive entrance currently.

Mongodb (MDB) has estimates of a loss in the January ‘19/’20 fiscal years. But sales have expanded at a blistering pace, up 57% in the recent quarter. A 99 RS stock.

Price has been consolidating for close to five weeks. It can be taken above the pattern high of 93.23.

NanoString Technologies (NSTG) is a higher-risk number by virtue of its lack of earnings plus its less-than-preferred liquidity (ADDV $5.2MM). However, the stock tripled in seven months in 2018. It is worth putting on the Watch List and following to see if this week’s breakout (it spent 14 weeks on the left side of its base, and just two on the right side) can offer a pullback opportunity.

(It is considered a plus when a stock spends fewer weeks on the right side of its base than its left side.)

Anything with this power and right-side base behavior has something going for it. Again, higher risk. Currently, it is 8% above the pivot point and is considered extended.

Okta (OKTA) is forecast to post losses in the January ‘19/’20 fiscal years, but shows heavy sales growth in recent quarters, including 58% in the October quarter. A 99 RS stock.

Very aggressive players could use the 69.85 high of 12/6 as a cheater entrance pivot, while others could target the 72.97 high of 10/1 or the pattern high of 75.49 as possible entrances.

Pinduoduo (PDD) was noted in Sunday’s report (“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.)

Also, “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.”

Wednesday, price cleared the 25.00 cheater pivot on +37% volume, up 6% on the day. This can be monitored for a pullback, as it does not offer attractive entrance currently.

Twilio (TWLO) was discussed in the Dec. 26 report as being “one of the better growth actors in the market, with a 45% estimate for ’19 and 68% sales growth in the recent quarter”). A 99 RS stock with a B+ accumulation/distribution rating.

The stock forms a four-week pattern. Monday saw price jump 9.5% on +58% volume. Notably, Wednesday’s range shrank from the range of prior sessions while volume dried up. This is what one wants to see as a stock sits just beneath its pattern high. This is because volatility is mean-reverting: It tends to go from one extreme to the other.

It can be taken above Tuesday’s high of 100.95.

Veracyte (VCYT) was noted in the Sunday report (“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”).

Monday and Tuesday represented a pause, if only for two days. A 99 RS stock with a B+ accumulation/distribution rating. This is a high-risk issue, as ADDV is just $7.3MM. The stock can be taken above the 15.50 high of its eight-week cup.

The intriguing thing about VCYT is that it went from 5.32 to 15.50 in about seven months. This tells us something is going on from a product standpoint.

In sum, the averages are due for a pullback. How the emerging leaders behave on this pullback, and especially how they act on the next rally, will be of paramount importance in knowing the legitimacy of this advance. Players should have established some exposure, however minimal, thus far.

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