November 28, 2018

Wednesday’s action constituted an O’Neil follow-through day (FTD) in the Nasdaq Composite, though volume was several percent less than average. The S&P 500 did not qualify as an FTD since Wednesday was the third day up from the low close day. An FTD ignores the first three days of rally unless they all have power.

Wednesday, Fed Chair Powell’s comment that rates are “just below” the range of neutral was discounted by the market for a number of weeks.

For example in Sunday’s report I noted “This makes it all the more interesting to note that the bond market recently concluded the Fed will not raise rates as aggressively in ’19 as the central bank has indicated. The yield on the 10-year Treasury has fallen from a 3.25% high on Oct. 5 to the current 3.05%. Equally, if not more, important, the market has lowered its expectations to 1.5 Fed rate hikes in ’19 with rates peaking in early ’20.”

As well, I showed in a recent video for premium members that interest-rate proxies like the financials, banks, utilities, and brokers have all been outperforming recently. Normally, these segments would be leading the way to the downside – that is, unless the market was sending a different message.

While none of this was info from which to trade, it does show the market’s ability to see better than anyone.

If anything else, the market’s belief that the overnight rate the Fed controls will only rise once in ’19 reduces the chance of a 12- to 18-month bear market in stocks.

For now.

Wednesday’s action in the averages left a little something to be desired volume-wise. Still, it is a signal, along with our watch list names’ behavior, that one or a few pilot buys can be taken.

A dose of conservatism here is preferred. This means junior starter positions should be used as one wades in to the market (more on this later in the report). Diving right in to a 100% long portfolio exposure is not recommended.

Amedisys (AMED) was discussed in Sunday’s report (“Due to the pronounced downtrend in the averages, it is preferable to ignore a base breakout and see if the market allows it some follow-through. If so, a pullback entry can be contemplated.”)

The stock broke out Wednesday, +8.3% on +30% volume. While price is 5% from its pivot (breakout point), and is thus not considered extended, I would instead be looking for a pullback opportunity. This will be relayed to premium subscribers via the private blog.

Atricure (ATRC) is a medical systems maker with losses anticipated this year and next. A 97 RS stock under solid accumulation.

Price forms an eight-week consolidation. It sits just beneath a cheater entrance pivot of 33.95 (11/8 high). Despite this, and given that we have yet to see breakouts follow through, it would be preferable to postpone entry until price can challenge the 36.49 base high.

Canada Goose Holdings (GOOS) was mentioned Sunday (“This is one worth watching for signs that the speculative sentiment has returned to the market.). This can be considered on a takeout of the 72.27 high of 11/14.

Caredx (CDNA) has been discussed previously. It failed to come out a couple of times during which the averages were weak. The stage is set a little differently now, and price can be taken above the 11/16 high of 30.15.

Codexis (CDXS) is a biotech expecting losses in ‘18/’19. Sales, however, jumped 70% in the recent quarter. A 99 RS stock. In Sunday’s report, it was noted that “This is one of the best bases in the market. Like the other names on this list, this is not something that can be bought until the market shows it favors breakouts.”

Wednesday, price broke out of a two-month cup, +7.2% on +45% volume. While the stock is 4% past its pivot and not yet considered extended, the preference here is to wait for a pullback to materialize before considering entry. For very aggressive types, it could be bought around Wednesday’s closing level using a junior starter position, and would be acceptable.

Chipotle Mexican Grill (CMG) is in the second year of a turnaround. Earnings are expected to grow 29%/40% in ‘18/’19. A weak spot is revenue, which grew only 8%-9% in each of the last two quarters. Thus, it appears earnings are not growing organically, but are coming from cost-cutting. A 95 RS stock under solid accumulation.

Price could be taken above 11/12’s high of 500.98 as a cheater entrance. Like with other cheater entrances, if this one works, an add-on position could be taken on a breakout from the base.

Euronet Worldwide (EEFT) was mentioned Sunday (“This is a candidate for a breakout play should the market begin rewarding such setups”).

Wednesday, price rose 3.3% on +86% volume. It can be taken above the 120.12 base high of 10/3.

LHC Group (LHCG) was discussed Nov. 18 (“…it does not offer attractive entrance, but it will be monitored to see if its pattern can tighten up in coming days and weeks”). A couple of positives are its high earnings stability (just 7% standard deviation, when < 15% is considered good) and the 430 mutual funds that own it (400-1,100 is considered a sweet spot for medium-sized growers).

Price moved out of its nine-week base Wednesday, +4.6%, though on just +7% volume. While price is 4% above its pivot and could still be taken here, Wednesday’s lukewarm volume on a breakout day might augur for watching to see if a pullback closer to 100 occurs, which would reduce risk.

Omnicell (OMCL) was noted Sunday (“This one merits watching should the general market firm up”). It failed on a breakout attempt 11/8. Wednesday, it cleared its consolidation, +4.5% on +24% volume. Volume was disappointing in that it was below the 40%-50% increase above its moving average that is preferred.

Given that it sits 4% past its pivot, it is not considered materially extended above prior support. Thus, it can be taken here or waited for a pullback entry once it begins to trend.

PRA Health Sciences (PRAH) is a healthcare research provider with 28%/16% earnings growth expected in ‘18/’19. A 94 RS stock under extreme accumulation. Wednesday was impressive, +6.1% on +50% volume, and a close pennies below the session high. This places PRAH 1% from its entrance pivot.

In light of its 19% advance in the past six days from low to high, the preference here would be to give price a chance to pull back or form a handle prior to considering entrance. More-aggressive players might take the 112.88 breakout point without waiting for any backing and filling. If so, a junior starter position should be used (if one is not always used).

Sunrun (RUN) was added to the watch list this week. This solar system installer is expected to grow earnings at 44% in ’19 after an estimated -9% growth in ’18. Revenue swelled 42% in the recent quarter.

A cheater entrance at 13.77 was cleared Tuesday as price rose 3% on +110% volume. The 16.45 base high can be targeted for a breakout play unless something more advantageous in the way of patterns appears in the meantime. Worth watching.

Twilio (TWLO) was discussed in the Nov. 18 report (“This one needs more time to back and fill before presenting attractive entry. There is too much volatility currently”).

The first breakout attempt failed 2.5 weeks ago, along with several other leaders’ breakout attempts. Wednesday, price was +6.1% on +40% volume. Let’s let the stock approach its base high of 98.89 before contemplating entry. This is a rare bird, a growth stock in technology whose ’19 earnings growth estimate is 45%, with 68% sales growth in the recent quarter.

What makes it rare is that most growth stocks sit far below their old high.

Vanda Pharmaceuticals (VNDA) is a biotech with 100% earnings growth expected in ’19. Revenue grew 19% in the recent quarter. This is a turnaround play after losing money last year.

The stock attempted to come out 2.5 weeks ago along with other growth names, but failed. Its consolidation pattern is a bit loose. This is higher risk, due to it being a bio. The positives are the ’19 estimate and its being under solid accumulation. The stock is buyable above the 25.07 high of 11/8.

(One will go a long way toward helping mitigate risk by starting a position that is “junior-sized” or half a normal-sized position, or less. I prefer to start with a ¼-sized to ½-sized position initially and then add to it one or more times if price moves in the desired correction. If I am wrong initially, I lose very little.

In sum, the speculative sentiment has improved somewhat with Wednesday's behavior in the averages. This is not a time to back up the truck, but it is a time to put on one or a few pilot buys. We should keep in mind that none of these breakouts have proven themselves by following through. Thus, the jury is still out on this new rally.

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.