June 15, 2018

Stocks have shown next to no kinks in their armor over the past few weeks. Most of the true leaders have already broken out, and it becomes challenging to find those yet to be exploited. The list below reflects a slimmer menu of pattern setups.

Some of the leaders that have already moved up 20%-25% and more should experience some normal profit-taking. This should allow them to build new basing structures. This would be expected to happen when the averages take a breather. These fresh bases are expected to provide more opportunity than issues that have yet to prove themselves by breaking out.

The speculative growth-stock glamours have been where the action is as participants seek to avoid tariff risk in larger, more-cyclical areas. This helps explain the vogue for small-cap titles, which are usually more domestic in their business orientation.

All of this occurs as liquid glamours such as FAANG issues take some time away from the spotlight.

Should the market experience turbulence, the speculative glamours – recent new issues in particular – can be expected to show the most wear. A small amount of that has occurred in Beigene (BGNE), TAL Education Group (TAL), SunlandOnline (STG), and Greentree Hospital Group (GHG). Overall, however, the growth sector has been remarkably resilient.

Among the names, Appian (APPN) is not expected to make money either this year or next. Revenue growth, however, is plump, at 50% and 35% in the last two quarters. The chart pattern, with its deep 42% drop from high to low, is the type one would normally expect to see following a bear market.

Price has risen about 25% in just the past week. For this reason, the stock should be given ample time to build a handle or otherwise lose some of the attention focused on it. It has been under extreme accumulation and shows four days in a row of major accumulation. RS rank of 97. Worth watching.

Array Biopharma (ARRY) is a biotech with losses anticipated for the June ‘18/’19 fiscal years + an erratic record of revenue growth. The stock completed a three-month cup last week and is two days into handle formation. It would be preferable to wait for more backing and filling to take place before considering a breakout entry. Either way, volume should be solidly above average on the breakout day.

Endocyte (ECYT) is another biotech with no earnings expected and no revenue. The stock has formed a four-week pattern from which it attempted to break out last week on +49% volume. Pluses include a 99 RS rank and an A+ accumulation rating. Ideally, price puts in another sideways week before attempting to break out. Should ECYT attempt to come out again in the next few sessions, it can be taken if volume confirms as it did last week.

It is to be noted that numerous leaders will not follow through successfully on their first attempt at a breakout. It will sometimes take two or three attempts to finally find the right combination of buyers that allows it to fully launch.

G1 Therapeutics (GTHX) is a development-stage biotech expected to show losses this year and next, and with no revenue currently. A 98 RS ranked stock under solid accumulation. Price is bouncing off of a v-shaped low as it climbs the right side of a five-week base. Not ready for anything currently, but worth watching due to its volatile character. This is for very aggressive speculators only.

Paycom Software (PAYC) shows nice earnings estimates of 74%/23% for ‘18/’19. Revenue growth has been consistent at 30% and 29% the last two quarters. The stock is in the 99th percentile of industry groups per six-month relative strength. The 118.45 base top can be used as an entrance pivot for a breakout play.

Proofpoint (PFPT) is a good example of a name that failed on its first two attempts at breakout. The current five-week base is the first consolidation pattern that is a full five weeks long. It also had a positive test of its April low. If one examines the width of the price bars during this base, one finds less volatility (narrower bars) than during either of the first or second pullbacks/consolidations.

There is some earnings estimate acceleration from 14% this year to 53% next, an obvious plus. Unless there is a pullback/handle formed, position traders can look at coming in on a takeout of the 130.27 high of the base.

RingCentral (RNG) has estimates of 138%/27% for ‘18/’19. Top-line growth has been 34% for three-straight quarters. Group is 99 RS rank. Moderate accumulation. Beautiful five-week flat base that showed encouraging accumulation over this past week’s swing up. Can be taken on a break above 81.20.

Roku (ROKU) is expected to post a profit for the first time in 2019. Revenue growth of 36% in the most recent quarter. Extreme accumulation, especially in the past three weeks. Price is forming a six-month cup that is a good ways from completion. In the meantime, players should be on the lookout for a pullback to the 20 ma or the 40 area, where there is some recent support.

Realpage (RP) is forecast to post 60% earnings growth this year, but this slides to 19% next year. Sales growth of 26% and 32% in the last two quarters. A 91 RS stock in a 95 RS group. A five-week flat base with a recent bounce off the 50 ma. Can be used for either a cheater entrance above the June 5 high of 61.40 or a traditional entry above the base high of 61.95.

Supernus Pharmaceuticals (SUPN) is a profitable biotech with earnings estimates of 50%/37% for ‘18/’19 and top-line growth of 42%/57% over the last two quarters. Solid accumulation.

Price staged a powerful breakout from an eight-month base on May 11, +14% on +275% volume. The current shelf of four weeks allows price to digest the quick move up. Can be taken above the 58.94 high of 6/4.

2U (TWOU) should show losses in ‘18/’19, though sales growth has been robust, at 51% and 42% in the last two quarters. A 95 RS ranked issue. Mutual fund ownership went from 386 funds to 435 in the most recent period. I tweeted Sunday about how the 400 level of funds seems to be a sweet spot. That level has in numerous cases been a number that begins to feed on itself as the stock’s story becomes more widely accepted by large investors.

Attractive five-week flat base with bullish higher low. A takeout of the 98.58 high of 5/14 makes for an entrance pivot.

In sum, the market has shown next to no structural weaknesses. One concern remains volume in the S&P stocks. This will need to improve, but may not until the uncertainty surrounding the foreign tariff/trade situation clears. Otherwise, breadth is quite solid, while leadership stays outstanding. Better opportunities are expected to come from new bases formed by some of the first names out of the chute, and not so much from the actors that have yet to participate and break out.

This is a good time to guard against complacency setting in.