November 6, 2019

The Nasdaq Composite has printed three major distribution days so far this week. The on-again, off-again U.S.-China trade talks have created some hesitation on the part of bulls.

In Tuesday’s video, the 9 ema’s role as an overbought/oversold indicator was noted. Thus, Wednesday’s mild weakness was not a surprise. Specifically, when price has shown a large amount of separation between it and the 9, as was the case this week, a short-term pullback has transpired. The distribution of Monday and Tuesday merely confirmed the onset of a softening.

The backdrop remains enticing. Critically, the Fed is cutting short-term rates, which is the most bullish factor that can affect stocks. Beyond that, the breadth of the advance, or the performance of the average stock as defined by the NYSE advance-decline line, confirms new highs in the S&P 500 with new highs of its own.

(The Nasdaq advance-decline line is ignored for general market analysis purposes. It has a long-term downward bias due to the higher incidence of failure among smaller, less-established companies. This does not lend itself well to being a leading indicator as does the NYSE a-d line.)

These reports target 10-12 actionable names from our Watch List. In a risk-on market for growth titles, this might range up to 16 issues. That there have been just five or six actionable stocks in recent reports is a sign of a market in which either growth is out of favor or it is materially extended above basing areas. Presently, it is the former.

For the benefit of basic plan subscribers, System R, a momentum model used for entering both swing and position trades, was introduced in late October for S&P 500 issues. While its express goal is to realize a 67% win rate when targeting 1R gains, it can be tailored to fit each individual trader’s makeup. This means 1R scalps, trim ‘n trails, or position trades are all possible.

(I myself use all three management techniques, depending on the situation at hand.)

Thus far, of the six System R trades signaled, four have been winners and two losers. Two of the winners, TQQQ and DaVita (DVA), went on to take 8R each on an MFE basis (maximum favorable excursion), though of course no one will get out at the top tick. In the case of DVA, a post-earnings jump contributed to the move.

It is to be noted that gains of 8R are the exception and not the rule. Let’s temper our expectations of what is possible. True swing trading is designed to produce consistent singles with some doubles, not 50%-100% home runs. To put this into perspective, an 8R win is the equivalent of risking 6% of a position on a breakout trade and seeing it move up 48%.

The game plan will be to continue to stalk System R setups for S&P 500 issues and leveraged ETFs. While we are still in pilot-buy mode for longs, speculators should use care with any fresh-money buys. The market is simply not conducive to successful speculation as it relates to growth issues. I myself intend to take the System R setups with no exposure to the breakout names discussed below. These stocks are mentioned for those very aggressive players that seek long exposure in this generally unattractive environment for breakout plays.

Acadia Pharmaceuticals (ACAD) is a biotech which has lost money in recent years and is expected to do so this year and next. Sales have increased 46% and 62% in the two recent quarters. A 98 RS stock in a 79 RS group with a B+ acc/dis rating from MarketSmith.

Eight weeks ago, the stock soared 63% on +1,172% volume. It has been consolidating ever since. It is eight days into forming a handle. The entrance pivot is the handle high of 44.10.

This is a very aggressive stock due to its history of losses, expectations for more of the same, and its biotech industry group. The bull thesis here rests on its 98 RS and impressive revenue growth. For aggressive players only. Earnings expected Jan. 29 (unconfirmed).

Crispr Therapeutics (CRSP) is a biotech on the cutting-edge of research. It was on a lot of aggressive traders’ radar screens in early ’18 before correcting in a major way. Losses are expected in ‘19/’20.

Price is working on a three-month consolidation, moving up 31% in just three days last week on a positive earnings report plus speculation of a potential takeover by Vertex Pharmaceuticals (VRTX). The stock is now five days into handle formation.

This is something that is only for very aggressive speculators to consider above either 1) the pattern high of 53.90, or 2) a cheater entrance via the handle high of 52.28. There is a 3% difference between the two entries.

The takeover speculation adds to the elevated risk with this name. Earnings expected Jan. 27 (unconfirmed).

Franco Nevada (FNV) is a gold-oriented company centered on royalty streams. For gold-related issues, the fundamentals such as earnings and sales are less important than is the spot price of gold.

FNV forms an eight-week flat base with a reasonable 12% depth. The pattern high of 101.19 offers a suitable entry pivot pending the release of earnings. Earnings expected Nov. 11 (confirmed).

Qualcomm (QCOM) is no longer a growth stock, but is expected to record earnings growth of 17%/42% for the September ‘20/’21 fiscal years. Sales have been uneven recently, with 73% growth and a 17% decline occurring in the two recent quarters. A 94 RS stock in an 85 RS group with a B- acc/dis rating.

Price has been forming a six-month consolidation. Wednesday’s post-close earnings report has it trading up 5.1% in the after-hours session. This brings it about 1.5% from its pattern high. Given the extended nature of the semiconductor group, let’s allow it to form a handle/pullback/sideways drift before considering entry should it break out in the next day or two. Worth watching.

Wellcare Health Plans (WCG) is a growth stock in the medical-managed care group. Earnings are expected to slow from 38% this year to 12% next. Sales have grown a healthy 51% and 41% in the last two quarters. A 59 RS stock in a 38 RS group with a B acc/dis rating.

WCG has been forming a four-month cup as part of a larger, 13-month consolidation. A week ago, it gapped up and advanced 5.1% on +121% volume in reaction to its earnings report, barely clearing the consolidation. Since then, it has formed a five-day handle. It is buyable above the handle high of 301.06. Earnings expected Jan. 29 (unconfirmed).

In sum, while the general market is on firm footing, this remains an unattractive environment for successful speculation as it relates to position trading breakouts. The fact that there are only five actionable names speaks. Enough said.

Subscriber comment

Q: My main issue is that the service took a turn to focusing on the 1R strategy for swing trading.  I get that in this choppy market position/trend following/CANSLIM/breakout type trading is not in favor.  However, I was not expecting the sudden change in strategy.  Let me know if you change things back and I may give it another shot as I enjoyed your content.

A: There has been no change in strategy during the six weeks you have been a subscriber. It remains a service whose No. 1 focus is breakout trading of growth stocks just the same as I've traded since 1990. However, rather than provide no ideas during periods when growth is out of favor, such as during a bear market, the pullback setups emphasizing stocks with increasing momentum were introduced using S&P 500 issues.

It is not necessary to scalp these ideas for 1R, as is made clear from time to time. A trim and trail technique, whereby 1R is taken on one-half the position, with the stop on the remaining half moved to breakeven and then trailed, may be more profitable for some traders if they can add value on trailing a stop.

For me to track these ideas, I use the 1R profit as a simple measure of whether the ideas of System R are a "winner" or not. In the past, a few different ways of trailing a stop have been discussed.

I recently introduced System R for those swing traders who are so inclined. It has nothing to do with breakout trading of growth stocks, nor does it replace the latter. On June 12, I introduced another pullback setup only for growth stocks, and it achieved a win rate of about 65% on the first 30 trades (excluding three recent IPO trades) before growth began its current period of weakness. Since then, that setup has not been used much since we have largely been in cash.

The objective on any pullback or swing setup/strategy/system is a win rate around 67%. This particular setup has been popular with subscribers, as they can use the entries for either swing trades or position trades. In the event of a missed breakout or adding to a position post-breakout, the pullback entries are useful without having to wait weeks or months for a stock to set up again with the next base or a 50-day m.a. touch.

As far as your point about "if you change things back I may give it another shot," nothing would be done differently with coverage of breakout opportunities vs. how they have been covered and are presently being covered. All opportunities are being discussed via the videos, reports, Watch List, and Focus List, where applicable.

The service cannot decide to add more ideas when they do not exist in the current environment. System R ideas were introduced to complement the service. Removing them does not mean more coverage of growth stock breakouts. The two are mutually exclusive:  One does not affect the other.

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 a position in TQQQ, 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.