Stocks ended the week on a positive note as volume dwindled ahead of the long weekend. At the beginning of the week, the S&P 500 printed a new high for the bull market. This cured the divergence which had seen the Nasdaq make a new high that temporarily went unconfirmed by the S&P.
Friday, the Nasdaq rose 0.43% vs. the 0.90% gain of our average Watch List component. This type of comparison shows aggressive growth titles to be leading the large technology issues which dominate the Nasdaq, a plus for our style of investing.
It is logical to expect the rally to slow and perhaps pull back as the Nasdaq approaches its former bull market high, now just 5.5% away. This would not be the worst thing in the world, as it would allow the extended nature of numerous leading issues to cool off and possibly present fresh entry points. These secondary entries might take the form of pullbacks, either to the 20 ema or otherwise, and the creation of five-week flat bases.
In '09, Bill O'Neil's How to Make Money in Stocks was revised to include a pattern called a "square box." This is a four-week formation which has a maximum depth from high to low of 15%. Volume should dry up during the pattern. A square box differs from a flat base in that a flat base should be five or more weeks in length. "I've noted this pattern over recent years," O'Neil wrote, "but finally we've studied, measured and classified it."
If you have made mistakes during this rally by not taking certain breakouts, only to watch as they follow through higher, there are a couple of things to consider. First, everyone makes mistakes in this game. We are all learning and making adjustments as the market moves higher. No one buys every single leading stock at exactly the right time.
Second, we are nine weeks into a brand new bull market. Bull markets tend to last three or four years on average. If the past is remotely similar to what the future holds, there should be plenty of opportunity for profitable speculation before this is over.
For position traders, of utmost import will be to allow winners to become bigger winners. As we have discussed in the past, using our three moving averages as exit guides is likely the best solution for most players.
Among the liquid glamours, while most have outperformed during this move, the real leaders in the segment are Facebook (FB), Nvidia (NVDA), and Shopify (SHOP), among others. Amazon.com (AMZN), Apple (AAPL), Microsoft (MSFT), and Netflix (NFLX) have been relative disappointments. AAPL and MSFT were expected to outperform, but not truly lead, as was explained in the videos for premium subscribers as they were added to the Focus List. Plenty of people love AAPL which accounts for its Focus List inclusion.
NFLX has been a surprise in that it has been a market performer since Apr. 1. I held the stock and was giving it a chance to clear its four-week shelf before casting judgment. Last week it came out on sub-par volume and then was sold into, which prompted my exit. NFLX and AMZN were initially beneficiaries of the stay-at-home theme. It is thought that once the country made plans to reopen, these, and other SAH names, became less attractive and softened.
SHOP is the premier growth stock in the market by virtue of its expected growth rate, its deep liquidity, and its relative strength. On numerous occasions since the inception of the service, I have noted its uniqueness: Institutions only wish there were more just like it. It is my hope that most all of you seized the Apr. 16 entry opportunity. If you did not, there should be other opps for this dynamic actor as the move unfolds. It is my largest position.
In the final sentence of this report, you will find a link to an updated trade review, this time stated on an MFE basis.
The following charts may be expanded by clicking on them.
Advanced Micro Devices (AMD)
Beyond Meat (BYND)
Goosehead Insurance (GSHD)
In sum, with an unprecedented amount of money being printed by the Fed, the market has the wind at its back. This is reminiscent of the October-February advance after the Fed's September announcement that it would add reserves through 2020Q1. Further upward revaluation is anticipated. The risks are a second wave of the coronavirus infection rate and further trade tensions with China.
Q: Thank you for another excellent report. Over the last couple of years of trading US stocks I have come to the conclusion that being a weak holder with relatively tight stops, it does not pay to hold through earnings. I have observed that the odds are not 50:50, but more stacked to the negative due to the volatility, as even a stock that could end up having a positive response to earnings, could initially sell off, hitting stops, before turning around and having a positive end outcome.
Having observed that at this stage in the market cycle more so than in the last couple of years, holding on to a stock for a longer term gain would probably be worthwhile. I would be grateful for your thoughts on holding through earnings and how to manage it - for example would one consider widening a tight stop or waiting until the close/next day to decide on selling if a poor response to a good report occurs? Many thanks for your guidance.
A: Thank you for the good question. There is no secret way to play earnings if one holds a position into the report. One must assume a worst-case scenario and then calibrate position size so that this scenario would not dent an account by an amount that is beyond one's comfort. For example, if my worst-case scenario is that a stock might plummet 20% in reaction to the report, and I am comfortable with a 1.5% dent in my account, but no more, then my position size should be no more than 7.5%.
Both variables, the "worst-case scenario" and the "maximum account dent," are things each trader must come up with on their own to fit their makeup. For an institutional favorite type of stock, the biggest negative surprise I can recall is CROX in '07, when it dropped about 33%. I hope this is helpful.
Q: As a new subscriber, I was reviewing some of your past videos. You talked about RNG breaking out. I see that the RS line broke out also and has pulled back like RNG to B/O area. Do you reconsider stocks that have pulled back to break out area as a potential buy? Thanks. I am enjoying your service. I have read O'Neil's books but to hear you talk about the stocks in your videos really makes things much clearer.
A: Thanks for your feedback. Your experience is different from mine since I had no one to turn to in the early 'Nineties' pre-Internet days besides IBD. Yes, pullbacks are acceptable but I generally want to see a sign that either price is emerging from the pullback or is likely to. While I cannot get into details because some of it is my IP, I would suggest you look at COUP and PAYC on June 12, 2019. COUP was on the Focus List for that evening.
You will notice that pattern appearing again and again in the pullback ideas that are presented in future videos and Focus Lists. Pullbacks to the 20 ema and 50 sma are also logical areas to expect support.
Q: What is the difference between TradeStation RS line and the MarketSmith RS line? I use ETrade Pro and they are asking me for a certain time period. I see your TradeStation chart uses two data numbers to plot the line.
A: There is only one calculation for RS. It is Data1/Data2, where Data1 would be a stock and Data2 would be whatever you are comparing it to, most commonly S&P 500. There is no lookback period. They might be confusing it with the RSI (relative strength index) which is an overbought/oversold oscillator.
Q: Wanted to confirm/clarify your guidelines on using the 50 and 200 moving averages when scanning for new entries. Is one of your "must" criteria that all new opportunities be trading above the 50 and 200 moving day averages for position trading? Any other "must" criteria? Appreciate your input.
A: Yes, that is correct, both 50 and 200. Also, price tends to be above the 20 ema. But recall that the bulk of my Watch List research consists of manually looking at hundreds of charts each weekend. I first use a screen to filter out size, volume, and price. I then look at about 800-900 charts. For the process, please refer to this link.
During the week, I use volume and a couple of other screens to augment the weekend work. The volume screen should be shown in that blog post.
Q: First day as a subscriber: Bought GDDY. It has pulled back under the breakout. Do you hold for your original stop or do you sell it now into weakness?
A: The entry pivot was 78.99 so the position should not have been taken. Each trader must decide for themselves how they will handle stops such that it fits their own unique makeup as a trader, i.e. temperament, risk tolerance, experience, etc. I prefer to use 5% for most trades and 3% if it is a very aggressive situation. I will also sometimes sell half if price returns to 1% below the pivot and sell the remaining half at -5%. This averages out to -3%.
You can always sell now and then re-enter if price breaks out above the 78.99 pivot. Also, when buying a base breakout, risk is reduced by insisting on volume being at a level that would finish the day at least 40% above the average of volume. In addition, one should always start off with a half-size starter position and then add on if the position moves in the right direction. This is a good risk mitigator when proven incorrect.
Q: I became a member about 12 hours ago. I went through many sections of this website including Education. I appreciate very much your work and I think I did the right choice to sign up. I just need a few clarifications to go ahead. In the focus list (17 May) I see some potential setup ideas. I just need a confirmation if what I see is right. Are they all long breakout trades, right? I assume the Stop Loss would be anywhere below the breaking candle (3-7 %) and letting the target open if the PA allows.
If the market will turn bearish, will you take short trades as well? For a small account, do you think risking 1-2 % on any trade is too conservative or normal? Thank you again.
A: Welcome to the service. All are long breakout ideas except for TDOC which is a pullback idea. Stops can be from 3%-7%. I use 5% on most all trades and 3% on aggressive ones. For someone starting out, 6% might be a good choice, but this is a personal decision and must be made by each trader. In a bear market, we will attempt to long inverse ETFs, e.g. the SQQQ, as well as attempt to short some individual stocks.
In this last Feb 19-Mar 23 bear market, I believe we took two short positions and both were stop-outs. Account risk is a personal decision that is dependent on each trader's unique makeup. One percent of your account is a reasonable level and is probably the most common one that traders use. It is what I use most of the time. To be clear, this means for a $100,000 account, each trade would risk $1,000.
Q: What happened to Greg Kuhn or what is he doing now?
A: Greg is a wealth manager for a large firm in Pennsylvania. Running a hedge fund can be very stressful for most people. Very few people have run an O'Neil style fund for very long. His fund did well during the 'Nineties bull market and then he decided he wanted to do something else with his life. Good for him.
Q Pt I of II: When you get a chance, can you comment on statements like this “Only snails buy breakouts as an initial entry...don't be a slug!” made by your colleague and fellow trader Gil Morales. He often makes the case that breakouts mostly fail and you’re often late to the party by the time the breakout occurs. In fairness, the pocket pivot and buyable gap ups that Gil touts are often also prone to failures, so nothing is immune in an algo-driven market.
Many of the trades we take in high growth names are breakouts themselves. How do we buy breakouts with confidence when seasoned traders decry breakouts as bait for the lemmings?
A: Over time, Gil found something he liked better than breakouts due to his being a very short-term trader. Obviously, breakouts work. Our recent breakout trade review showed a 78% win rate and a reward-to-risk ratio of 2.6:1. Gross gains were 6.7 times gross losses. So I do not understand why you should doubt the process. There is no wrong way to trade, only results.
Q Pt II of II: I must admit that I take a pass on many breakouts that appear extended, and have had my share of breakout failure stop-outs. So while I don’t doubt the process, I do have “trust issues” with a lot of them, so my results don’t mirror the overall Marder Report results. I appreciate all of your hard work and lifetime of trading insight. So it’s not you, it’s me.
A: I might suggest looking at the trade review and doing your own analysis to see how each entry appeared and what its result thus far has been on an MFE basis. This is what I did in 2019 and I realized that a number of straight-up-the-right-side breakouts that did not appear in the Focus List worked. Hence, I made an adjustment during this bull market to allow for more of these to become Focus List buy ideas.
However, as mentioned in the trade review video of 5/13/20, going forward one of the areas of improvement will actually be to make more of these Focus List buy ideas. If these represent higher risk trades to you, then you could reduce account risk on these. E.g. if you use 1% risk, perhaps use 0.5% risk. Or use a tighter stop, and if stopped out, be flexible enough to reenter if need be. Our job as traders is to want what the market wants. If the market wants a certain type of pattern setup, we should, too, want that.
Bottom line: You have to do what you are comfortable doing. To facilitate your review, I have attached an updated trade review from 3/23/20-5/22/20 on an MFE basis.
For intraday ideas and analysis: https://twitter.com/mardermarket
All stock charts created using MarketSmith unless otherwise noted. ©2020 MarketSmith, Incorporated. All other 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 positions in FB, NFLX, SHOP, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.