A Nasdaq market that had rallied 23% in 10 weeks, the quickest since the financial crisis, continued to show signs of wear and tear Wednesday. The fissures in leading names that I spoke about in Tuesday evening’s video – our Watch List names – became a concern Wednesday, as they opened a little wider. Still, about half of our Watch List holds above the 20 ema.
The Nasdaq chart below shows very little out of the ordinary going on.
However, a look sub-surface shows a different picture. To wit, Monday’s Nasdaq decline of 0.23% contrasted with a median 2.6% decline among glamour stocks (our Watch List). And on Wednesday, a Nasdaq fall of 0.93% was outdone by a 1.8% drop in the average glamour.
Among groups, seven of Wednesday’s worst eight performers on the Watch List were medical issues. Small- and mid-cap sectors have borne the brunt of the selling, with small fry underperforming big-caps in six of eight outings. It is unknown whether this is normal rotation out of a hot sector or something more ominous.
The good news is that making a prediction is unnecessary. If we observe how our stocks are acting relative to their moving averages, as well as the presence of any major distribution days, we will have most of the info needed to make sensible decisions on exiting winners.
The Watch List has now been trimmed to 61 names from 75 on Monday. When sorted by % off 52-week high, of the top half of the list, or 30 issues, only a few have broken their 20 ema. For position traders, the 20 is viewed as an excellent barometer of the short-term trend, similar to how the 50 sma represents the medium-term trend.
Having said that, however, the number of actionable issues has dwindled to a few. They are covered below.
Avalara (AVLR) was noted in the Feb. 27 report (“Price is closing in on the handle high of its eight-month, cup-with-handle pattern. The stock can be taken above the 53.88 handle high”).
The comment stands. The heart of any momentum strategy is this: Relative strength begets relative strength. Thus, that AVLR doubled in seven weeks should be viewed as a distinct positive.
Canopy Growth (CGC) was discussed in Sunday’s report (“Price can be taken above the 51.81 cheater entrance pivot”).
Cronos Group (CRON) was discussed in the Feb. 27 report (“…can be taken above the 22.96 cheater entrance pivot”). Tuesday, the stock cleared the pivot, up 10.4% on +21% volume. Price may back and fill in here, possibly opening up an entrance pivot above Wednesday’s high or above the pattern high of 25.10. This will not be added to the Focus List until some clarity emerges.
Evolus (EOLS) was noted in the Feb. 17 report: “The intriguing element here is the double in two weeks and the triple in seven. For very aggressive operators only, EOLS could be taken above the handle high of 30.25.”
The comment stands.
I spoke about Roku (ROKU) in a recent video as having an upward “lean,” a bullish trait. In other words, it jumped 25% recently, then refused to back and fill or pull back. It kept printing higher lows – or leaning higher – and rose 4.5% Wednesday amid the weakness elsewhere in the glamour complex.
ROKU can be watched, but will need to move sideways at some point before it can be considered actionable.
In sum, a Nasdaq market that had moved up faster than any advance since the financial crisis has met up with profit-taking. This is considered normal, healthy, and should serve to illuminate the real market leaders vs. the also-rans. The momentum player can use the moving averages and an analysis of major distribution days as sensible tools with which to exit winning positions as appropriate. In the meantime, the number of pattern setups has dwindled. This is a function of the market's recent success and will call for patience as new patterns are created.
Q: I have a question on Okta which was down today on a sort-of downgrade. I bought in Jan when recommended and was up 20+% in under 3 weeks. Now it's under the 20 dema. Do you prefer selling on the 20 dema violation, or hold thru 8 weeks regardless per Bill's rule?
A: I believe Bill’s eight-week rule applies to stocks that act well and whose initial gain may prove tempting to lock in. In OKTA’s case, I would sell on the 20 ma break, which occurred on an 8% decline with +243% volume. This is a serious break and should override the eight-week rule, in my opinion.
Q: I noticed COUP is building out a 3 weeks tight pattern but there seems to be distribution days within the base (2/13, 2/20, 2/21, 2/28). Would you consider that of any importance or a 'red flag' to then avoid the setup (assuming one wanted to add off of a 3 weeks tight base)? You're the first trader I've heard discuss distribution among individual stocks like this so was curious on your take.
A: I ignore minor distribution days (those that occur on below-average volume) and focus on major distribution days. In COUP’s case, there are now five in three weeks. While some distribution can be expected after a stock like COUP nearly doubles from the Dec. 24 low, five seems excessive.
The first three major distribution days in COUP did not concern me because they were 1.3%, 1.6%, and 1.7%. I considered these de minimus. What concerned me was Monday’s 3.2% loss as its breakout reversed. If I still held the stock, and did not exit on Monday, Wednesday’s 2.8% loss would have had me exit, seeing as how earnings are due Mar. 11.
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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.