March 25, 2020

With its back against the wall, the Nasdaq Composite struggles to break clear of a week-long congestion area signified by the twin horizontal lines in the chart below. Monday's action was constructive, as price successfully tested the low of three days' prior. Tuesday followed through from the test in explosive fashion with good close. Today had the index probing still higher before being turned back on a delay in the signing of the stimulus bill.

Overall, not a bad way to start the week.

By one measure, the market's rally attempt is tantamount to sailing into a headwind. As posted on Twitter, according to Bespoke: "Looking at the S&P 500’s 10 best days on record, today’s gain doesn’t share the greatest company. Of the 9 other days on the list, they all either occurred during the Great Depression or the Financial Crisis.” In other words, the 10 biggest up days in history occurred during a bear market.

While this statistic obviously speaks, to blindly expect the market to adhere to historical precedent would go against our philosophy of focusing on the price/volume behavior of the averages and the action of leading stocks. Moreover, if you follow news headlines closely, you must be sure to divorce them from what you see technically in the market (this is covered in the Q&A below). In particular, a market will usually bottom when the backdrop is at its worst. Waiting for the infection rate to peak and roll over before you wade back into the market is sub-optimal and may cause missed opportunities.

Leading stocks continue to work on repairing the technical damage done to their patterns. Of the names discussed below, their suggested entries are indeed very aggressive. They cater to the very aggressive subscriber more than to less-aggressive players. Thus, for most, they are premature to speak of being actionable. For those of you who are uncomfortable entering anything except the breakout of a pattern high, there is no rush to buy anything. Let's let the market come to us.

At present, the Watch List contains 30 stocks. It will be important to assess whether the number of attractive issues increases or decreases.

Docusign (DOCU)

GSX Techedu (GSX) is the most attractive technically of the three names mentioned in this report. It shows the least volatility and most encouraging basing pattern. For very aggressive players, the entry pivot is 42.88.

Cloudflare (NET). This should be confirmed by volume. Despite the horizontal "pivot line" drawn in the chart, NET needs to put in more time prior to entry.

In sum, cash is king for all but very aggressive operators. It is unclear whether the Nasdaq's Monday low was the low or merely a short-term low. Of course, time will tell. While welcome, O'Neil follow-through days, should the market print one, generally do not work in a bear market.

Q&A

Q: How do the normal swing-trading, trade-through rules for gaps apply for shorts? Still ok to take it on a gap or is it higher risk?

A: Very good question. In this market, for the time being it might be difficult to find a trade-through entry. Once things settle down, that may change. Whereas I might take a back-door entry on a long, I may not be quite so eager for a short. The whole reason why I don’t like gaps on swing entries is that you then have to use a different stop which means a different 1R target which will 1) be a bit farther from the natural pivot than on a trade-through, and 2) not be just below the other side of the signal bar, which acts as support, to a degree (for longs, and resistance for shorts). I hope this is clear. 

Ultimately, the decision is yours to make. A gap is higher risk but it is relative to how big the gap is. E.g. I used to use a rule whereby a gap of no more than 0.25R or 0.3R was acceptable.

Q: I wanted to ask if you read any of the articles out on the news at all, pretty dire stuff for the economy and markets, and if so, how do you avoid it affecting you psychologically?  You've seen so much more than I have and been through some really nasty bear markets and economic downturns, does this one feel similar or is it different, and if so, in a better or worse way?

A: I am a news junkie, but I never let it influence my thinking about the market. In particular, I stay away from news sources that have anything to do with people talking about the market, e.g. financial TV. If this influences your thinking, then you should not expose yourself to such publications. It’s as simple as that. You need to get a handle on this because you want to be in a zone of comfort, not one of worry and stress and confusion. I have laid out what I consider to be the emerging leaders in the Watch List. Your focus should be on the Watch List names and the averages, and nothing else.

The things that make this bear mkt unique: 1) first time Nasdaq Composite has outperformed in a bear since it was created in ’71, and 2) no bear market has ever seen this speed of descent off the bull market top. It is the quickest to 20% decline and quickest to 30% decline.

Kevin Marder

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

All charts created using TradeStation. ©2001-2020 TradeStation Technologies. 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 FactSet. Expected earnings release dates provided by EarningsWhispers.