June 26, 2022

Thursday's Nasdaq follow-through day on slightly above-average volume was followed by Friday's 3.34% gain on Russell-related index rebalancing. This allowed both Nasdaq and S&P 500 to cross their 20 ema lines which gives us the green light to look for long ideas.

Unfortunately, due to this change in trend, two of our three short ideas in the oil area did not pan out. This is another example of what can happen to short positions when the averages reverse course and head higher right after entering a position. The third idea, Advanced Micro Devices (AMD), fell to within a penny of its 1R target and should have been stopped out with a small gain.

(As discussed in Thursday's video, when trading pullbacks in cyclical stocks, it is a good idea to use a level 85%-90% of the way to +1R as a point at which to move a stop to break-even plus a little. This prevents a loss of mental capital that would occur if the stop was still below entry.)

The rotation out of cyclical groups like the metals, steel, coal, fertilizer, shipping, and oil is going into defensive segments like the foods, beverages, tobaccos, household products, utilities, and drugs, among others. These are unattractive, for the most part, due to their slower earnings growth, most in the single-digits. These companies are resistant to recession, which is why they are attractive to institutions.

Better performing groups are biotechs, EVs, and retail - discount & variety. A list of 89 biotechs is included in the Watch List file for those interested. It is unlikely we will hear a lot from technology, much of which rests 50%-70% off its high, for at least a while. A few titles are showing relative strength, such as Crowdstrike Holdings (CRWD), which printed a higher low recently, and is 38% off its high.

Subscribers should realize the days of market leaders boasting sales growth of 40%-70% are over. What will be needed for their return is a buoyant new-issue market or time for some of the recent bull market's winners to rebuild tattered chart patterns. "Some" is the operative word here, as most prior big winners will not return to their former status in the next bull market.

The five-day rally has expanded our Watch List from 11 to 24 issues. There is only a slim menu of pattern setups, but we can expect this to expand over time should this advance continue. The Watch List is shown below using a five-day ROC (rate of change) study, since this is how long the advance has been intact.

As you can see, Li Auto (LI), which has been discussed a number of times, is out front. It is a runaway and wildly extended, having doubled in seven weeks.

The following names are believed to be the most attractive for our style of speculation in the $13+ market. Click to zoom in.

Autozone (AZO)

Evolent Health (EVH)

Honorable mention: Astrazeneca (AZN), not shown, did not make the final cut due to its racing up the right side of its double-bottom pattern. This will be monitored for a more-advantageous entry.

In summation, the averages showed a nice lift-off last week which brought them above their 20 ema lines. With a positive bias, we are now looking for breakout and pullback candidates in this nascent rally. Starting with pilot buys is always a sensible idea when the market turns, as there is no assurance this move will develop into something sustainable.

What we know now is that it is playable, though with caution. This remains a bear market.

Kevin Marder

Trading Lessons
Introduction to the service (38:00)
Money management and risk management (20:27)
Bread and butter pullback (11:10)
Bread and butter pullback: Pt II (15:09)
Bread and butter pullback: Pt III (31:48)
Bread and butter pullback: Pt IV (30:16)
System R
Short-selling (25:53)
Wyckoff spring reversal (2:30) 
5-minute breakup test (8:01)
Screens (21:03)