May 29, 2019

Our cautious stance over the past three-and-a-half weeks continues. Stocks have given back more ground this week, as the market discounts the prospect of a slower economy due to the lack of progress in U.S.-China trade talks.

Part of this discounting process is occurring in the bond market, where the 10-year Treasury yield printed a 20-month low close of 2.24%.

It is to be remembered that, ironically, down trends in the stock market usually end amid a climate of worry and bad news. In other words, it gets darkest just before dawn. For this reason, one must focus on the technical action and not the news headlines.

Sentiment will have changed for the better when the market rallies on bad news. We perhaps saw this for one day a week ago, but it could not be sustained.

Shopify (SHOP) is being watched for insight into market sentiment due to its being a 99 RS stock in a 99 RS industry group, the enterprise softwares. As can be seen in the following chart, the action in this leading group has gotten choppy beginning with last week.

Our game plan is to remain in cash until the averages show some confirmation along with better action in the growth-stock leaders. Any rally in the Nasdaq, however, may provide opportunities on the short side.

A market that drops without providing an intermittent rally makes it difficult to short. Twelve days ago, our short setup via a long 2x inverse Russell 2000 trade was negated by the gap open in the market. Since then, there have been no real rallies substantial enough to short into.

The stocks discussed below represent the best long setups in this market. This is our shopping list for when the averages turn and confirm. The view here is that these should not be taken as long as the averages remain in a bearish trend.

Among the names, Appfolio (APPF) is a specialty software interest with earnings estimates of 9%/64% for ‘19/’20. Revenue growth has been steady at 32%-35% in each of the last four quarters. A 97 RS stock in a 98 RS group with acc/dist rating of B+.

APPF traces an eight month cup-with-high-handle. The handle is four weeks long. Ignoring an “elephant bar” three weeks ago in reaction to an earnings report, the handle is 7.5% deep. This is considered shallow, and a plus. The stock can be taken above the 5/17 high of 99.28.

Avalara (AVLR) is another specialty software outfit. Most analysts on Wall Street see positive earnings in ’20 after several years of red ink. Sales rose 33% and 38% in the two recent quarters.

The stock forms a three-week flat shelf with a 12% depth. It would be preferable to see the pattern given another week at least before considering entry if a breakout occurs. Very aggressive players can in the meantime use the 74.02 swing high as an entrance pivot. This assumes improvement in the general market.

Innovative Industrial Properties (IIPR) was discussed in Sunday’s report (“It can be taken above the 93.24 high of its eight-week base”). Earnings expected Aug. 7 (unconfirmed).

Mongodb (MDB) was discussed in May 19's report. The entry pivot is lowered from the pattern high to a cheater position above the 148.00 high of 5/21. Earnings expected June 5 (confirmed).

In sum, we remain in cash pending a turn-and-confirm in the averages and firming in the leading issues. The next rally in the averages may present an opportunity for shorting. Until then, we avoid death by a thousand cuts by protecting precious capital via a cash position.

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 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.