May 19, 2019

We should continue to respect the downtrend and take fresh-money buys with less aggressiveness than earlier in the year. Speculators should wait to see more technical evidence before diving into fresh-money buys. A pilot buy or two makes the most sense in such a news-driven market.”

The above was written in Wednesday’s report. The next day, Thursday, showed enough percolation among Watch List names to warrant some long exposure. Thus, in Thursday evening’s video, I mentioned that I had taken Shopify (SHOP) and Mongodb (MDB) as pilot buys.

(SHOP was not on the Focus List last week, though it is up 50%+ from our mid-February recommendation. MDB was and is on the Focus List, but at a higher entry point.)

In addition to these two, I also said the most interesting names included Twilio (TWLO), Coupa Software (COUP), Zscaler (ZS), and Cyberark Software (CYBR). CYBR is a higher-risk actor due to its abbreviated consolidation area.

Two Sundays ago, the character of the bull market changed. It was then that the president made a negative comment about the U.S.-China trade talks. Since then, the Nasdaq has surrendered as much as 6.7%.

It is a push-and-pull market, where a tweet about the trade talks might reverse a 1% rally in the Nasdaq and turn it into a 1% loss. For this reason, it is still logical to play things close to the vest, with reduced long exposure helping to mitigate this elevated risk level.

Having said this, there is no denying the better action of the glamours.

Among the names, Chipotle Mexican Grill (CMG) was noted in the May 8 report (“The new entrance pivot is Tuesday’s high of 721.42”). The comment stands.

The RS line is ahead of price, it is a 96 RS stock, and has a B+ acc/dist rating. Earnings expected July 24 (unconfirmed by EarningsWhispers).

Innovative Industrial Properties (IIPR) shows earnings estimates of 108%/38% for ‘19/’20 with triple-digit revenue growth for the past half-dozen quarters. It would follow that sequential revenue growth would be high: It was 42% in the recent quarter, possibly the highest I have seen. It can be taken above the 93.24 high of its eight-week base. Earnings expected Aug. 7 (unconfirmed).

The Russell 2000 ETF (IWM) has rallied in its downtrend. Instead of shorting this, a long position in the 2x inverse R2K ETF (TWM) can be taken above the Friday high of 15.52. This facilitates using a tax-exempt account for this setup. A suggested stop loss would be using the Friday low as a stop pivot. This equates to risk of 3.3%. The setup should be taken on a trade-through basis. This means a gap past the entry point would negate the setup.

For a more aggressive approach, the 3x inverse R2K ETF (TZA) could be taken above Friday’s high, with Friday’s low being a stop pivot. This would equate to 5.0% risk, which makes sense since it is 50% more than the TWM risk.

Mongodb (MDB) shows losses for the January ‘20/’21 fiscal years. Revenue surged 67% and 71% in the two recent quarters. A 99 RS stock in a 91 RS group.

The database software expert forms an eight-week base with a 20% depth, considered normal. MDB can be taken above the 154.80 pattern high, 6% away. Earnings expected June 12 (unconfirmed).

Nextcure (NXTC) came public seven sessions ago. This is a development-stage outfit with no earnings or revenue. Market cap is small, at $449MM.

Recent new issues that appreciate 50% in the first two months of trading are accorded special attention, as these often result in a future market leader. NXTC rose as much as 52% on its opening day. The stock can be taken above the cheater entrance pivot of 20.50.

On a scale of less aggressive, aggressive, and very aggressive, NXTC is a very aggressive actor due to its newness as a public entity and its development-stage status. Earnings date is unknown.

Splunk (SPLK) shows earnings estimates of 26%/34% for the January ‘20/’21 fiscal years. Sales have risen 40% and 35% in the two recent quarters. A 91 RS stock in a 91 RS group with a C acc/dist rating, up from D+ on Wednesday.

The stock can be taken above the 140.75 swing high of its 11-week base. Earnings expected May 23 (confirmed), thus it is preferred to wait until after the report prior to taking a position.

Tufin Software Technology (TUFN) crossed our cheater entrance Wednesday, then reversed Thursday and Friday. I would close the trade should price undercut Friday’s low of 22.65, which would result in 4.3% risk.

In the meantime, TUFN can still be taken above the formal pattern high of 24.89. Earnings date is unknown despite having contacted the company. This adds a higher element of risk.

In sum, given the news-driven aspect of this market, which increases risk, long exposure should be measured. Leading growth stocks act well, though, and an opportunistic player should not turn his or her back on the pattern setups that are available. As always, let's focus on just the daily price/volume action of the leaders and averages, and let that determine additional long exposure.

Q&A

Q: Do you care about the stage of your bases…many of the stocks you focus on seem to be coming out of stage 1 or 2, but not all? Do you use all the O'Neil add-ons? Gaps, 3 Weeks Tight, First and Second Retrace to the 50-day? From your write-ups it sounds like you mostly build a position early and stick with it – until your sell rules kick in.

A: Most stocks had their base count reset during the late '18 bear market. Thus, you have probably only seen 1st and 2nd stage bases since you've been a subscriber to the service. Leaders, especially in the last few years, will sometimes form 4th and higher bases and do quite well.

What matters is what the big money is doing. If it is buying third, fourth, etc stage breakouts and showing sound accumulation, that is more important than what anyone thinks about base counts, including myself.

Only rarely do I buy gaps. Most of the time, a base will form right after the gap, which is what I key on instead of trying to get in on the gap day. I have never used 3 Weeks Tight and would only use a 50-day touch if there is not much distance between it and price. I don't want to buy a touch if price has to travel 20%+ to get there because the stock must then go through a new base-building period at that point. That could take eight weeks, and by then the intermediate-term advance could be over.

If I either miss a breakout or want to add to a position taken on a breakout, I prefer entering on a pullback. This provides me with more opps than waiting for either a 3 Weeks Tight, 50-day moving average touch, or whole new five-week-plus base to form.

Kevin Marder

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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 positions in MDB and SHOP, 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.