May 27, 2020

After an initial selloff, the Nasdaq staged an upside reversal nearly 90 minutes into Wednesday's session, salvaging a win amid its heaviest volume of the nine-week bull market. For the second-straight day, market participants reacted to news of various states' reopening by bidding economically-sensitive shares higher at the expense of the growth sector.

The day's action is considered normal, as there is always a point in a bull market when participants begin favoring issues with cheaper multiples (of earnings, i.e. price-earnings ratios) vs. the premium-priced growth sector. As well, numerous growth titles had more than doubled off the Mar. 23 bear market bottoms and appeared ripe for profit-taking, just based on the numbers.

Some had moved up 20%-25% or more from their base breakouts, which often is enough to invite profit-taking and a new base-building period.

It is unknown whether this two-day underperformance by the Nasdaq vs. the S&P represents anything durable. It is logical to expect it would not sustain if the U.S. experiences a second wave of Covid-19. However, we will continue to stick to our knitting without basing our game plan on anything beyond a day-to-day analysis of the major averages and leading stocks.

To enlarge the following charts, please click on them.

Advanced Micro Devices (AMD)

Beyond Meat (BYND)

Freshpet (FRPT)

Godaddy (GDDY)

Goosehead Insurance (GSHD)

Hubspot (HUBS)

Solaredge Technologies (SEDG)

Square (SQ)

 

TAL Education Group (TAL)

Tesla (TSLA)

ProShs Ultra Pro QQQ (TQQQ) is the 3x QQQ ETF. It staged a classic reversal on higher volume today after a clean touch of the 20-day line. It can be taken above today's high of 80.04. A gap is okay, since this ideally would be used as a position trade.

Chart TradeStation

In sum, the brand new bull market continues. In spite of the two-day underperformance of growth titles, we should be taking fresh-money buys as usual.

Q&A

Q: Do you buy as soon as the stock triggers after the opening or do you wait 5 to 15 minutes?  Also,  If the stock triggers and immediately pulls back before you buy, do you adjust your trigger to the high of the pull back bar?  Thanks.

A: I like to get into a stock as soon as it crosses the pivot by a tick. At the open, a less-aggressive way to do this would be to wait until the opening five-minute bar closes and then enter on a break of the opening bar’s high. This gives you some indication that the market is showing follow-through.

To me, waiting for the first 15 minutes to elapse prior to entry gives price too much opportunity to move out and score a gain before entry. I always fine-tune my entry via a five-minute chart, but this is unnecessary, especially for those using buy stop orders who cannot watch the market during the day. If the stock triggers and immediately pulls back before I buy, I then seek to enter above the high of the pullback bar. These are excellent questions, Ed, and I thank you for them.

Q: When looking at companies with strong earnings/sales growth in line with good technical characteristics, do you compare the growth based on sequential quarters or Y-o-Y for that specific quarter?  I believe the MarketSmith shows Y-o-Y on the bottom of the chart. Thank you.

A: The standard is year-over-year. Very few people know about sequential growth. Most of the time I look at yoy since some industries are cyclical and this removes the cyclicality aspect. Sequential is something I picked up in ‘99 due to the large number of young leaders that were not profitable at that time. It is best used with companies growing rapidly who have yet to produce an annual profit. This is due to its being more sensitive to changes.

Q: Should we use a simple moving average or exponential moving average to gauge points for follow up buying? I am thinking EMA but would be interested to hear your thoughts given your knowledge of the O'Neil method. I am also not well versed in follow up buying. I know a 3 week tight pattern is a good place to add, but how do you buy off the 10 week MA? Do you wait until it touches and then starts moving up above the 10 week before you buy? Volume doesn't seem to be a big concern? Would be interested to hear your thoughts on this.

A: I prefer 9 ema, 20 ema, 50 sma. It is easier to use the 50 day line as a place to enter rather than the 10-week since a daily chart allows for more detail. Once price touches the line or is about ready to touch the line, I would enter on a break of that bar's high. A stop would be below that bar's low to keep risk fairly tight. Volume is unimportant, though it would be a plus if it expanded on the first day up from the moving average.

Q: You've gone over these types of things before but how do you personally handle big drops (relatively speaking). For example, I got stopped out of MDB today. I had what I thought was a fairly generous hard stop (10 MA) and it dropped quite a bit and took me out and then of course rebounded. Is this an instance where you would wait for a close below the 10 even though it dropped like a stone initially or one where you would get stopped out but still have the comfort to re-enter. I got out with a +10% profit so I'm not too frustrated but then I could also still be in it. 

Same question with TQQQ. I had a break even +1% stop on so again, I didn't lose money but it also rebounded. Do you have a hard and fast rule about waiting for a close below a MA or do you just play it by ear? Thank you.

A: I like to play it by ear since the context of each stock is different depending on how much I am up on the stock, what the general market is doing (v important factor), and my year-to-date performance. With that said, I tend to err on the side of caution because I believe I can reenter a position if it is sold. This is especially the case if price ends up printing a reversal bar for that day. However, this may not be the best decision for those who are not fluent with reentries.

I did not enjoy exiting TQQQ with a small profit today, but it printed a reversal bar and I would opportunistically seek to reenter tomorrow. Thanks for the good question.

Kevin Marder

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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 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.