The view here remains wary following the past seven days of behavior in the averages. Cash remains king due to the quite limited number of pattern setups on the long side. The relatively few names discussed herein is testament to this.
For those who follow the O’Neil follow-through day (FTD) concept, the 11/7 FTD remains intact. It will only be considered a failure if it breaks the 10/29 low in the S&P.
A higher high in the S&P would turn the intermediate-term trend up. While this would be welcome, it is not absolutely essential to see prior to taking one or more long positions.
There are two technical positives. First, there is a positive divergence showing the number of new NYSE lows diminishing at each of the last S&P lows (see chart below). This means the average stock performs better than the narrower blue-chip index.
Second, the market’s outlook for higher interest rates has been tempered. This is evident in the futures market and the outperformance by interest-rate proxies like the utilities, brokers, and financial sector. The market now expects the Fed to stop raising the overnight rate in early ’20. This may seem like a long time away, but markets discount the future into present prices.
Thus, a stronger rally could begin sometime in ’19 as the market discounts (prices in) the coming rate-cutting campaign. To be sure, a lot could happen between now and then. But the outperformance by the above groups are a plus, any way you slice it.
The following names are showing the best tone in the growth sector. It is a small list, and the overall quality is not what it was in ’17 and earlier this year. As always, it is culled from looking at about 1,200 stock charts priced at $13+, and is thus comprehensive in its coverage.
With one exception, Caredx (CDNA), the preference here is to do nothing on the long side until there is more improvement in the averages and better basing action in the growth sector. The names are listed merely to provide ideas in the event the averages firm up in coming sessions.
Alteryx (AYX) was a failed breakout the week before last, in reaction to its earnings report. It found support at its 20 ma and offered a pullback entry, however this occurred during the averages’ pullback and our cautionary mode. A 99 RS stock that has shown superb relative strength over the past four weeks.
A very aggressive trader could use the old base high of 63.18 as a pivot for a breakout play. This would imply the overhead from the 11/8 breakout day is unimportant. The preference here, though, would be to wait for a pullback following any breakout above 63.18.
Following its earnings report, primary offering, and selloff, Caredx (CDNA) has recovered to outperform the S&P in four of the last five sessions. The stock can be taken above Friday’s high of 30.15 which matches the 11/9 high of the handle area.
Chefs’ Warehouse Holding (CHEF) is not a growth stock, but is attractive to large investors due to the vogue for defensive names. Earnings growth is expected to be 77%/27% in ‘18/’19. Revenue grew 11% in the recent quarter. A 98 RS stock. A plus is the past week’s new high in the RS line which came while the stock was 6.3% from the highest closing price.
Price forms a six-week, cup-with-handle base. A very aggressive player might target CHEF above the Nov. 7 handle high of 37.63.
Chipotle Mexican Grill (CMG) is a former growth stock that is in a two-year turnaround. Earnings growth is expected to be 29%/40% in ‘18/’19, though revenue growth was 8% and 9% in the recent two quarters.
Price forms a cup and has pulled back this past week. The preference here is to let the stock move through the 500.98 high of 11/12, a cheater entrance, before possibly targeting a pullback entry. In other words, the conviction level is not high enough to want to take the cheater entrance. This is worth monitoring.
Dexcom (DXCM) is another recent failed breakout related to an earnings release and the averages’ pullback. It is expected to turn a profit for the first time in ’19, and has shown accelerating revenue growth for the last four quarters, with the recent quarter growing at a heady 44% clip. A 99 RS stock.
Price found support late last week at the 50 ma and the top of the prior congestion area. DXCM can be taken above the 11/8 high of 152.14.
Haemonetics (HAE) was another stock that was pressured after releasing its earnings report. Unlike some of the others, it did not break out prior to its decline. A 97 RS stock. It can be taken above the 11/8 high of 116.69.
LHC Group (LHCG) provides long-term health care services and is expected to show earnings growth of 19% in ’19. While 19% is on the borderline of what we prefer to see in terms of estimated earnings growth, it is symptomatic of a market that has lost most of its growth-stock leadership. It has a high level of earnings stability, which makes it attractive to large investors looking for stable, recession-resistant profit growth.
LHCG is forming a head-and-shoulders continuation pattern that has been wide and loose over the past two-and-a-half weeks. As such, it does not offer attractive entrance, but it will be monitored to see if its pattern can tighten up in coming days and weeks. Its RS line moved into new-high ground Friday, despite price being 4.8% from its closing high of 9/28, a plus.
Mongodb (MDB) has recovered nicely from its failed breakout that coincided with this last 11/8-11/14 leg down in the averages. The fact that it is up 23.8% in just three days dictates caution as far as an entry goes on any breakout above the 85.78 high of 11/8.
The preference is to wait for the stock to either break out and then pull back or move sideways for at least a few days whereby a breakout would stand a better chance of succeeding. MDB will be updated in future reports/blog posts.
Twilio (TWLO) is another recent failed breakout, and currently forms a high handle. A 99 RS stock. Thursday it was +7% on +72% volume. This one needs more time to back and fill before presenting attractive entry. There is too much volatility currently.
In sum, the speculative sentiment is still considered to be too weak to support successful long-side speculation. This is evident in the small number of attractive pattern setups. Subscribers should be in a full cash position.
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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2018. 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.