Stocks continue their march higher, pausing for one day last week before moving out anew into record turf. The catalyst for the move is the expectation of lower interest rates, which has driven this bull market in its entirety since its late-December birth.
Growth-stock leadership strengthened last week, thanks to ongoing firmness in technology. This strength is a double-edged sword. On the one hand, a number of Focus List names put on during June and early July have fared well as they move up week after week. However, the majority of the growth sector is extended and unattractive for fresh-money buys. This is clear if one reviews the 68 issues on the Watch List.
For the time being, then, we must be patient and recognize that a bull market does not always offer a raft of pristine pattern setups suitable for breakout traders every week. In the meantime, the Watch List will continue to be mined for swing/pullback setups.
The following table shows all swing/pullback entries in the six weeks since June 12, excluding three trades involving recent new issues. This is a small sample size and should not be relied upon as an indication of future results. The chart shows the growth of a hypothetical $100,000 account using 1% account risk per trade. It is based on all trades, i.e. both trade-through entry and back door entry. One can see the presence of a couple of winning streaks: Of course, there will eventually be losing streaks. The 75% win rate exceeds my expectation for a 65%-70% win rate.
Among the names, Ciena (CIEN) shows expected earnings growth of 51%/23% in the October ‘19/’20 fiscal years. Sales growth was 20% and 18% in the two recent quarters. A 95 RS stock in a 74 RS group with a B+ acc/dist rating from MarketSmith.
The fiber optic switching specialist forms a four-month, cup-with-handle pattern. The handle has an attractive 11% depth. The formation’s strength lies in the 27% jump on +575% volume of 6/6. The stock can be taken above the 46.44 high of Thursday. Earnings expected Sept. 5 (unconfirmed).
Dexcom (DXCM) shows major earnings growth estimates of 138%/58% for ‘19/’20. Revenue growth has been big, at 53% and 52% in the recent two quarters. A 93 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).
Etsy (ETSY) is predicted by Wall Street to notch earnings growth of 23%/43 in ‘19/’20. Revenue swelled by 47% and 40% in the recent two quarters. A 95 RS stock in a 76 RS group with a B acc/dist rating.
The handmade goods retailer forms a five-month consolidation with a 22% depth. It is buyable on a takeout of the 73.34 high of its pattern. Earnings expected Aug. 1 (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 92 RS group with a C acc/dist rating.
SPLK forms a five-month consolidation with a 25% depth. After taking out the cheater entrance spoken about in Wednesday’s report, it can now be taken above the 143.70 pattern 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 83 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).
Q: Kevin, I just wanted to thank you for your excellent service. You have provided much more than I initially expected, and at a price that I consider a tremendous bargain. And, you continue to add features and benefits to the service, most notably the pullback set-ups.
I have been at this trading game for about 10 years, read many books, tried numerous subscription services, tried many strategies. Alas, I think I have finally arrived at a reasonably confident level of proficiency where I feel I can trade with a positive edge and without much anxiety. It truly took me almost 10 years of trial and error, and I believe it is your service that helped me pull it all together.
A: You are welcome, and thank you for sharing your thoughts with me. I can appreciate where you are coming from. The longer it takes to make progress, the more gratifying it is when one sees the daylight. I do not consider 10 years to be an especially long time. As I recently said on Twitter, confidence changes everything. I am glad you have found that.
Q: If this has already been answered, just let me know where to find it, as I missed a couple of reports recently due to travel.
If price gaps above the entry price on a pullback trade should we buy if it retraces the same day back to the entry level? For example, TQQQ gapped above entry price, so my position was not filled. However, shortly after, price retreated to the entry position and I got filled. In retrospect, it was good because I sold half today for a 1R gain and moved my stop up to entry price + 1% and will do trim and trail from here.
How would you handle this? Would you have left the order in place or have canceled order after gapping above entry? If you would have left order in place would you have canceled order if gap was a larger percentage and felt it would be a sign of weakness if price retraced? As always, thanks for teaching and providing very valuable insight!
A: You are very welcome and thank you for your question. The table above provides a breakdown of the success of the trade-through entry vs. the back-door entry. The latter involves price gapping over the pivot point and then later in the session returning to the pivot.
For the time being, pending more of a sample size that can confirm or disavow the attractiveness of the back-door entry, I am using the trade-through entry. I might suggest combining an analysis of the above data with your own level of risk tolerance in coming to a conclusion.
Q: In today's report you discussed using a trailing stop after reaching 1R in profit. How do you determine what to use as the trailing stop? Is it a specific percentage? Thanks for all your help.
A: Thank you for your question. The answer depends on whether the TF (timeframe) is swing or position trading. For true swing trading, where one seeks to capture as much of a swing as possible, the one-bar trailing stop is preferred. As each bar is completed, the stop is moved to beneath the low of the just-completed bar.
For position trading, an intraday break or end-of-day close below either the 9 ema or 20 ema is preferred. One method combines the two ma’s: A violation of the 9 can be used to exit part of a position and a violation of the 20 can be used to exit the remainder of a position. The 50 ma can also be used as a final line in the sand.
Q: First of all, thanks so much for explaining your approach in position management during earnings season. The information is no doubt very helpful to me (and I'd think others would feel the same way). Secondly, I took a starter position in SPLK today. At the end of regular trading session, the gain is definitely < 10% profit threshold that you consider minimum to keep a position through earnings announcement.
What would you recommend us to do with this SPLK position?
A: First, there are more than three weeks until the Aug. 22 unconfirmed date of SPLK’s earnings report. So it is premature to worry about a decision to hold through the report. Second, no matter what sort of gain one has going into the report, if one wants to hold through the report, one should calibrate their position size according to a worst-case scenario of what might occur post-report. This was covered in Wednesday’s report. Up until the earnings date, the SPLK trade should be managed like any other.
Q: I was hoping you could address the possibility of SSRM as being a potential Short Stroke play in an upcoming Marder Report.
A: I have never studied the short stroke pattern. SSRM seems to approximate the short stroke definition that IBD uses here. My view is that SSRM is extended above its nearest support area and is unattractive for this reason.
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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.