July 24, 2019

The averages remain in good shape as the market makes its way through earnings season. Volume continues to be summer-light.

Due to the averages being in record-high territory, most growth stocks are also extended, and thus in positions that do not lend themselves to breakout setups. Genuine five-week-plus basing patterns, then, are simply not in abundance. In one respect, this is a positive: Subscribers should be sitting in some positions that consistently move up week after week.

Below is a discussion of those breakout setups that are believed to be attractive, along with a couple of swing/pullback opportunities.

Monday evening’s video and Focus List included ProShares UltraPro QQQ (TQQQ). This is a 3x levered ETF version of the Nasdaq 100. This was a swing/pullback setup and reached a 1R profit during Wednesday’s session. Subscribers who took the TQQQ trade should consider holding the position, assuming this rally in the averages out of last week’s three-day pullback continues. Once a pullback setup reaches +1R, it is recommended that a position trader move the stop to breakeven. This allows one to be in a “free trade” sooner than with a breakout setup.

In my opinion, position traders can benefit from these swing setups by using them as entries for an intermediate-term (several weeks to several months) hold. The per-trade risk is controlled (usually 2%-4%) and the reward-to-risk ratio is skewed in our favor.

They are best used with growth stocks due to these issues’ ability to trend. These pullback setups provide us with an edge that, from what I can tell, is not being exploited by the majority of other breakout traders of growth stocks. And I expect these entries to come in handy during the next bear market. This is especially true for those trading retirement accounts that cannot sell short but can go long an inverse ETF based on the Nasdaq 100, Russell 2000, or a sector index.

While breakouts are the flagship entry for this service, pullbacks can offer the position trader substantially more entry opportunities in trending stocks. This is possible since they do not require waiting for a genuine base to form, which can take five or more weeks.

Then it is up to the trader to determine whether he or she wants to 1) flip these setups for 1R, 2) use the trim-and-trail method by flipping half for 1R, moving the stop on the second half to breakeven and then trailing it, or 3) using these setups as entries into a position trade.

Among the names, Avalara (AVLR) shows per-share earnings estimates of -0.18/0.04 for ‘19/’20. Sales grew 33% and 38% in the two recent quarters. A 99 RS stock in a 98 RS group with an A- acc/dist rating.

The stock sets up as a pullback entry above Wednesday’s high of 83.02 with a suggested stop pivot of Tuesday’s low of 80.65. This equates to 3.0% risk. Earnings expected Aug. 7 (confirmed).

Coupa Software (COUP) has been the most-recommended issue since this service began eight months ago, with six of the seven buy ideas working well. The Street eyes a jump in per-share net from 11 cents in the January ’20 fiscal year to 42 cents in the ’21 year. Sales have increased 39% and 44% in the last two quarters. A 99 RS stock in a 98 RS group.

COUP sets up as a pullback entry above Wednesday’s high of 142.52 with a suggested stop pivot of Tuesday’s low of 139.00. This equates to 2.6% risk. Earnings expected Sept. 2 (unconfirmed).

Dexcom (DXCM) shows hefty earnings growth estimates of 138%/58% for ‘19/’20. Revenue growth has been big, at 53% and 52% in the recent two quarters. A 92 RS stock in an 87 RS group with a B+ acc/dist rating.

Price forms a five-month cup-with-handle. The key day was 6/10, when price jumped 9.9% on +257% volume to clear a bottoming formation. A plus is the higher lows formed in the handle. DXCM can be taken above the 157.50 high of June 20. Earnings expected July 31 (confirmed).

RingCentral (RNG) is an enterprise software outfit with estimates of -5%/27% for ‘19/’20. Revenue has grown solidly and consistently, up 34%, 33%, 34%, and 34% over the most recent quarters. A 94 RS stock in a 98 RS group with a B acc/dist rating.

The stock forms a short cup-with-handle and can be taken above the handle high of 125.93. Earnings expected Monday, July 29 (confirmed).

Splunk (SPLK) is a database software specialist showing earnings growth estimates of 36%/30% for the January ‘20/’21 fiscal years. Sales have grown briskly at rates of 35% and 36% in the two recent quarters. A 90 RS stock in a 90 RS group with a C acc/dist rating.

SPLK forms a five-month consolidation with a 25% depth. It can be taken as a cheater entrance above the 140.66 swing high of 5/16. Earnings expected Aug. 22 (unconfirmed).

Square (SQ) is expected to record earnings growth of 62%/47% in ‘19/’20. Sales expanded 51% and 43% in the two recent quarters. An 82 RS stock in a 97 RS group with a B+ acc/dist rating.

Price forms a five-month cup-with-handle that is part of a larger, nine-month consolidation. It can be taken above the 82.66 high of the handle. Earnings expected Aug. 1 (confirmed).

In sum, the market is a victim of its success, offering very little in the way of bases with which to launch breakout moves. In the meantime, we will remain patient, with pullback setups sure to appear in the period ahead.

Q&A

There have been a couple of emails from subscribers asking about how to handle a position during earnings season. The July 17 report covered this. The following goes into more detail and provides an example.

One approach to earnings season would be to only carry a position into an earnings report in which one holds at least a 10% profit cushion. Even then, it is important that one calibrate a position size based on a worst-case scenario of what might occur post-report. I like to use a 25%-33% worst case (unlikely, but possible) which I then use to calculate my position size so that my account is not meaningfully dented.

As an example, if a position is 20% of my account, and my worst-case scenario is for a 25% drop, I calibrate my position size such that a 25% drop will reduce my account balance by no more than, say, 3%. This means I should reduce the position size from 20% of my account, which has the potential for a 5% dent to the account, to 12%, which would result in a 3% dent. I hope this clears things up.

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. Expected earnings release dates provided by EarningsWhispers.