July 31, 2019

The stock market continues to represent above-average risk.

For starters, the Nasdaq Composite is eight weeks into a rally following a five-week, 10.8% correction. Yet there has only been one major accumulation day if one doesn’t count June 28, the final day of Q2 when volume swelled due to portfolio balancing. Ditto for the S&P 500.

(While I am not making a prediction, this reminds me of late-September 2007. Following a correction, the S&P rose for six weeks with just one major accumulation day. Then, I looked back in time and noticed this had not occurred since the 1970’s. A market can only go so far without volume. A week later, the index moved into new-high ground on -24% volume. A week after that, the market topped and the 2002-2007 bull was done.)

With some exceptions, recent breakouts do not act well. Failures include Advanced Micro Devices (AMD), Amazon.com (AMZN),  Cornerstone Ondemand (CSOD), Elastic (ESTC), Facebook (FB), Luckin Coffee (LK), Paylocity Holding (PCTY), Servicenow (NOW), Shopify (SHOP), SVMK (SVMK), and Zendesk (ZEN), among others.

And then there is the matter of pattern setups in the growth sector – one can count them on the fingers of one hand.

In light of the above, the position trader of breakouts no longer has the wind at his or her back. Accordingly, risk should be reduced by abstaining from fresh-money breakout buys. Those holding open positions should manage each on a case-by-case basis.

For those who absolutely need to put on long exposure, perhaps because they are running OPM (other people’s money), a few names are discussed below. Any position taken on a breakout should only be taken on confirming volume, i.e. volume that appears to be on track to finish the day 40% to 50% above the average.

Among the names, Dexcom (DXCM) shows major earnings growth estimates of 117%/58% for ‘19/’20. Revenue growth has been big, at 52% and 39% in the recent two quarters. A 94 RS stock in a 90 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. In after-hours trade today following its earnings report, price is trading 2% below the top of its five-month consolidation pattern. DXCM can be taken above the 160.00 high of today.

Etsy (ETSY) is predicted by Wall Street to notch earnings growth of 23%/47% in ‘19/’20. Revenue swelled by 47% and 40% in the recent two quarters. A 94 RS stock in a 78 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).

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).

In sum, muted Nasdaq volume, a number of failed breakouts, and only a few pattern setups make the decision to suspend fresh-money buys an easy one. Let's insist on evidence that the tide has turned before we embark on more breakout buys. The facts are clear.

Q&A

Q: I have many times since 2018 let my profits drop from a substantial gain to zero or worse. It seems to me that anytime I felt good because it was the best day so far this quarter/year then things started to unravel!

As such I was hoping you could teach us how to avoid the same scenario to play out since I believe that I have given up all yesterday gain and more, and wanted to keep some profits this time around. Thanks for your help.

A: In essence, your question has to do with how to exit a winning trade. There is no easy answer to your question, in part because we each have a makeup that is unique to us. When I began using this strategy years ago, I had a tendency to allow a profitable stock too much room in order to give it a chance for a big gain. I then made an adjustment so that I would be a little quicker to exit when a profitable stock began to come in.

Ultimately, from examining our past trades and making an adjustment or two, each trader will learn a sensible way to exit a winning trade. It may not work perfectly on every trade, but it should be an improvement. The place to start off is to look at charts of winning stocks with the 9 ema, 20 ema, and 50 sma on them. Try to determine which m.a. or combination of them best suits your needs.

One technique that I have not mentioned is the idea of protecting a percentage of our gain according to the size of that gain. For example, if a position is up 20%, we may seek to protect half of that 20% gain. If a position is up 40%, perhaps we protect two-thirds of that gain. These are just examples and should not be relied on.

As I did years ago, let the market give you feedback as to whether an adjustment should be made to the way you are handling trade management.

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.