November 21, 2018

Wednesday’s advance in the averages is considered a reflex rally, where a couple of days of substantial markdowns and the undercut of a key Nasdaq low induced buying.

For those tracking the O’Neil follow-through day concept, the Nasdaq’s undercut of its Oct. 29 low on Tuesday made this FTD a failure.

A look at the chart below shows volume on this descent to be less than on the prior decline of late October. This is a mild plus, reflecting diminished selling pressure, and is what one wants to see during the test of a prior low.

However, Wednesday’s showing in the Naz was a disappointment, despite its +0.92% move. The liquid glamours behaved poorly, specifically the FAANG names. Some of their gains notwithstanding, all but Facebook (FB) closed below their open, as did the Naz and S&P.

This sets up a questionable start for Friday’s holiday-shortened session. It does nothing to dispel the notion that further markdowns are in store for these important bellwethers of the speculative sentiment.

In Sunday’s report, a review of the best actors in the growth sector was punctuated by the comment that none should be taken on the long side except for possibly Caredx (CDNA). (The latter did not reach the suggested entrance pivot.)

The reason for this caution was the downturn in the averages. As always, the best long-side charts will be featured in these reports no matter the state of the averages’ health. While market tops tend to take a while to form, market bottoms often form quickly, in a matter of several days sometimes. Having the right watch list and names at our fingertips helps to keep missed opportunities at a minimum.

On the short side, the focus is on the FAANG stocks and inverse ETFs. At present, both are extended and do not offer attractive entry. These will be discussed in the Sunday report.

Among the names, Autolus (AUTL) is a recent new issue, coming out in June at 17, and earlier this month hitting a high of 53. Attention is paid to recent new issues like this one that advance 50% or more in their first two months or so of activity. A 99 RS stock under extreme accumulation.

This is a very thinly-traded issue. While market cap is a respectable $1.8B, ADDV (average daily dollar volume) is just $2.3MM (MM = million), far below the $25MM-$30MM that is preferable.

AUTL moved up 50% over the past three days. While it does not offer attractive entrance, its high relative strength amid a turbulent market merits monitoring in coming sessions.

Bilibili (BILI) is a Chinese content provider that came public last March at 11.50 and nearly doubled in less than three months. It is expected to book a profit next year after an expected loss this year and losses in the ’15-’17 period. Revenue grew a heady 43% in the recent quarter. A 97 RS stock under solid accumulation.

BILI forms an ascending base type of structure. Today, following its earnings release, it attempted to break out of a seven-week range, +11.3% on +363% volume, but sellers forced it back into the pattern. This is worth watching.

Caredx (CDNA) continues to form one of the best-looking bases in the growth sector. In Sunday’s report, it was noted that “The stock can be taken above Friday’s high of 30.15 which matches the 11/9 high of the handle area.” Since then, price never touched the 30.15 high.

Given the pronounced downtrends in the averages, CDNA should not be taken if it breaks out. It appears likely it can become a leader if and when the general market embarks on an uptrend, but until then caution is the watchword.

Chefs’ Warehouse Holding (CHEF) was discussed in Sunday’s report (“A very aggressive player might target CHEF above the Nov. 7 handle high of 37.63”). While the setup remains intact, the additional general market weakness this week dictates more caution than was the case on Sunday. Therefore, CHEF is a name worth watching but not acting on, for the time being. ADDV is $16.4MM, so a little less than desired in terms of liquidity.

Chipotle Mexican Grill (CMG) was mentioned in Sunday’s report (“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). The comment stands.

Guardant Health (GH) is one of the best actors among recent new issues, jumping as much as 87% on its opening day. The medical services stock is forecast to post red ink both this year and next, though sales have grown 90% and 95% in the last two quarters.

GH forms its first base, with a duration of five weeks. The depth of this pattern is 30%, considered reasonable in light of the 64% run-up prior to the beginning of the consolidation. While a cheater entrance pivot exists at the 11/5 swing high of 40.98, this is best not used. The reason is that a five-week duration is a bit short for a 30%-deep consolidation. Twenty percent would be considered more appropriate.

Thus, the pattern high of 44.25 set 10/18 is considered the optimal choice of pivot.

Y-mabs Therapeutics (YMAB) is a development-stage biotech outfit that is a recent new issue. There are no earnings or revenue, meaning it must be “traded off the chart.” Coming public in September, it vaulted 94% in its first seven days.

Ordinarily, the 26.44 swing high of 11/8 might be considered a cheater entrance pivot. However, in light of the general market condition and YMAB’s thinner liquidity (ADDV of $4.3MM, market cap of $830MM), it is worth waiting for price to round out its pattern before entry is considered.

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, let alone the sogginess of the averages. Subscribers should be in a full cash position.

Kevin Marder

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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.