June 30, 2019

The averages emerged from a three-day pullback in good shape. Friday's annual Russell index re-balancing distorted some data, principally volume, so the larger prints in some names for that session should be treated with a grain of salt.

The Focus List has expanded to 10 names, with most being of the breakout variety. This was in contrast to what was seen late last week with its swing trader setups, and illustrates the flexibility of the service. We take what the market gives us, and do not try to force the issue.

The Watch List has ballooned from Thursday’s 63 names to 79 currently. Some of this is due to the action of recent new issues (recent IPOs). As a result, four recent new issues are included in the discussion below. These represent higher risk, which should be weighed by each subscriber to ascertain whether they fit one's unique personal makeup.

Meanwhile, the swing setups continue to work well for us. More of these can be expected as this advance takes further shape.

Among the names, 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 93 RS stock in an 89 RS group with a B+ acc/dist rating.

Price forms a four-month cup. The key day was 6/10, when price jumped 9.9% on +257% volume to clear a bottoming formation. DXCM can be taken above the 157.50 high of June 20. Earnings expected July 31 (unconfirmed).

Kratos Defense & Security Solutions (KTOS) is predicted by most Wall Street analysts to record earnings growth of 50%/47% in ‘19/’20. Sales grew -1% and 12% in the two recent quarters. A 98 RS stock in a 94 RS group with an A acc/dist rating.

The stock forms a three-week shelf with a 9.9% depth. Friday, it exceeded its 22.86 pattern high by 12 cents before closing just above it by three cents. It can be taken above Friday’s high of 22.98. This is a higher-risk setup due to the pattern being less than the five-week minimum for a flat base. Earnings expected Aug. 7 (unconfirmed).

Luckin Coffee (LK) is a recent new issue that vaulted as much as 53% in its opening day six weeks ago. (Recent IPOs that rise as much as 50% or more during the first two months of trading are favored for subsequent setups.) Most analysts expect losses for ‘19/’20. Sales growth is not applicable since there was next to none in the year-ago quarters.

Price has been basing since the stock went public. It can be taken above the 6/18 high of 21.80 as a cheater entrance. This is a higher-risk name due to it being Chinese and a recently issued stock. Expected earnings date unavailable.

Silk Road Medical (SILK) is a recent new issue. Most analysts eye losses for ‘19/’20. Sales jumped 222% and 124% in the recent two quarters. A 95 RS stock in a 66 RS stock with a B acc/dist rating.

SILK forms a three-week consolidation with a 17.7% depth. It can be taken as a cheater entrance above the 6/20 high of 50.02. Earnings expected Aug. 7 (unconfirmed).

Smartsheet (SMAR) shows losses expected for the January ‘20/’21 fiscal years. Revenue growth has been blistering, at 58% and 55% in the recent two quarters. A 97 RS stock in a 99 RS group with an A- acc/dist rating.

Our recent SMAR buy idea for June 18 resulted in a failed breakout which retreated 5.9% from pivot. Since the criteria for a breakout stop out is at least a 6% decline from entry, SMAR can be considered a stop out.

The stock can be entered on a takeout of the 49.04 high of its recent base. Earnings expected Sept. 4 (unconfirmed).

Transmedics Group (TMDX) is a dynamic younger outfit which came public eight weeks ago. After nearly a double in its opening three weeks, the developer of systems used in organ transplants has settled into its first base, a five-week affair with 22% depth.

The Street forecasts losses for this year and next, while sales growth has been explosive at 68% and 86% in the last two quarters. A 96 RS stock in a 66 RS group. It can be taken on a break above its pattern high of 31.54. Earnings expected Sept. 11 (unconfirmed).

Twist Bioscience (TWST) came public last October and more than doubled in its opening two-and-a-half weeks. The biotech is expected to log losses in the September ‘19/’20 fiscal years. Revenue soared 167% and 120% in the recent two quarters. Sequential revenue growth was 18% in the recent quarter, quite impressive. A 98 RS stock in an 84 RS group.

The stock forms an 11-week consolidation. It can be taken above the 30.50 high of its five-day handle. Earnings expected July 30 (unconfirmed).

Slack Technologies (WORK) came public in a “direct listing” seven days ago, not an IPO, so an initial pop was not to be seen. Losses are expected in the January ‘20/’21 fiscal years, while sales surged 78% and 67% in the two recent quarters.

As an aggressive play, WORK can be taken above Friday’s high of 37.50 with a suggested stop pivot of 36.20, for risk of 3.5%. This is considered a pullback setup. Earnings expected Mar. 10 (unconfirmed).

In sum, both averages and leading growth stocks appear set for upward revaluation. It is important that we not force anything, but rather let the market and the setups come to us.

Q&A

Q: Kevin, I love your service. I have been trying to learn to trade for 3 years with lots of up and downs. I have spent most of my time trying to master the O’Neil method, CANSLIM. I have read a number of other authors but principally trying to better develop my approach to O’Neil.

I am committed to being a consistent trader [and have] spent a good deal of time trying to develop a trading plan. At the moment I am principally using your service as a learning source. I am studying your Intermediate Term Trading Course. I have a lot of questions but will try to understand before writing you. One stands out at the moment.

Page 21: Do you think this passage accurately outlines your thoughts on Stop Losses?

After a stock breaks out from its basing pattern, though, I will raise my stop-loss at certain breakpoints. Following a 20% move above my purchase price, I raise my stop-loss point to 4-5% below my cost. Once the stock increases in excess of 25%, I raise my stop to my cost. I never want to let a profitable position of this magnitude turn into a loss.

A: Thank you for your question. I applaud your use of some hard-and-fast rules related to how to move a stop on a winning position. Actually, that was my co-author Greg Kuhn’s answer that you refer to on page 21 of the course. I think that through trial and error, each trader will arrive at their own modus operandi of managing a winning trade.

The guideline I have previously mentioned for position trading breakouts is to consider raising the s/l to breakeven or breakeven + 1% upon price rising 8% above entry. When price is up 15%, consider moving s/l to 5% above entry. When price is up 20%-25%, consider exiting half if not the entire position.

This is considerably tighter than what you use, but it is just a guideline and must be fine-tuned by each trader to fit his or her unique makeup of temperament, risk tolerance, experience, etc.

I generally start a breakout-related position trade with a 5% stop. However, if the PA (price action) is suspect or a certain amount of time elapses after entry, I sometimes tighten my s/l. I prefer using 3% for what I believe to be a higher-risk setup.

For swing setups, i.e. pullbacks and an occasional reversal, I most often use the other side of the signal bar (i.e. the low of yesterday’s bar) as a stop pivot. In the event of a narrow-range signal bar, I prefer to place the s/l below the low of the bar that precedes the signal bar. In the event of a wide-range signal bar, I prefer to use something less than placing the s/l below the low of the signal bar.

The preceding paragraph came about as a result of my experience with short-term trading in the last 10 years. I cut my teeth in short-term trading in the spot currency market, aka forex. I found that the vast majority of forex systems and traders placed an s/l below the most recent swing low. Practically no one in that arena was using the technique that I describe.

My problem with using the most recent swing low as a stop pivot is that R increases, which makes trading for 1R in profit, or any type of profit, more challenging. Obviously, the smaller the risk, the easier it is to take +1R, +2R, etc.

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Q (from June 20, 2019): I hope your week is going well. Curious about your thoughts on stocks like OMCL. I saw this move through the 84.50 area two days ago and then move through the 85.50 area yesterday, considered buying on both days but there was not big volume either day and then the big volume comes in today but it was pretty quick and the stock moved straight up to 88.50. What are your thoughts on buying on these type of cheater entries if you are not getting the volume confirmation? Also curious your thoughts on buying stocks like MDB on a pullback. Really wanted to take a position in this stock and saw it move back through the 171.50 area but volume was not up on the day so I did not take a position. Do you need a volume confirmation when buying stocks like MDB when they are starting to move back up after a pullback? 

A: I do not consider strong volume to be as important with a cheater entrance as opposed to a top-of-the-base entry. OMCL was not particularly attractive to me given its single-digit estimate for ’20 and its pedestrian revenue growth for the last two qtrs. The base was quite constructive, and I can see why you were attracted to it. At some point, I believe one has to narrow down the candidates by using names with better numbers. Otherwise, one is tempted to buy every breakout in sight. Sometimes the volume will come in on the day or two after the breakout day. I do not use volume in swing trader setups.

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Kevin, Thank you for sharing the subscriber's message on today's (06/19) Marder Report. I feel exactly the same way as described. As you mention, it's one day at a time, but for now I feel that I'm headed in the right direction thanks to the valuable information you provide in a straightforward and easy to understand manner. I truly appreciate the time and effort that you put into the service provided. 

You are very welcome. I am glad you are seeing the potential of the service. I believe the best is yet to come. Thank you for taking the time to share this with me.

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Kevin, tonight’s newsletter began with swing trade profits and I can attest to that! I have enjoyed the pullback trades recently. I picked up QTWO ($70.96 entry) and have a 10% return from entry, still in currently, if stops are hit tomorrow I will exit with a 1.5R return. Also, I entered BYND at around $147 and exited at $190, for a 4R return! Very happy about that one! Finally I picked up GH, was sitting at a small profit on initial shares but added a small position at near yesterday's high and if exits are hit tomorrow I would be at a minimal loss of 2.5%. Overall, I am extremely pleased with the pullback buys mentioned recently and that style meshes well with my trading personality. I have been pleased with the service since inception and I am excited to see how it is evolving.

This is really great news. Very happy to see you take some of these pullbacks. Thank you for sharing this.

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Q:  For the research you mentioned in your tweet about strategies/setups, what do you like to use for backtesting? I’m guessing Tradestation? Trying to find a good tool to test position sizing/profit taking strategies. I’ve used Ninja Trader but it doesn’t have the right tools. Haven’t wanted to shell out for TradeStation yet.

A: I am not a programmer and the setups I use are not mechanical, they are perhaps 70% rules based and 30% discretionary. So when I backtest, I do it manually by looking at back history on charts. Ninja is great for day trading futures since you can place orders directly on the chart which facilitates precise, to-the-tick entries. I know of a couple of people who were able to negotiate a reduced cost for TradeStation. That was years ago, and I would think in today's competitive climate for trading platforms it could still be done.

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Q: I hope your week is going well. In today's report you mentioned the Volatility Contraction setup a couple of times. Can you provide some examples of this setup?

A: COUP on 6/12 for 6/13 entry. EVBG on 6/27 for 6/28 entry. Stay tuned: There will be others.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

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.