November 7, 2018

Wednesday’s action in the Nasdaq Composite and S&P 500 met the definition of an O’Neil follow-through day (FTD). This, in combination with better action among leading stocks, will see the aggressive position trader begin to buy the emerging leaders. This was tweeted midway through Wednesday’s trading.

Here is the crux of an FTD: Following a decline in the averages such as recently occurred, the first few days of rally are ignored. Beginning with the fourth day of advance, a session showing a substantial gain on volume greater than the prior day’s is considered an FTD. O’Neil’s first book speaks of the best FTD’s occurring on the fourth through seventh days of rally.

Wednesday was a seventh-day follow-through, with the Naz +2.6% and the S&P +2.1%. It also came on above-average volume, which, while not part of O’Neil’s definition, is obviously a plus.

Following a correction, I do not time re-entries into the market based on waiting for an FTD. For certain, it is a positive that carries some weight as to whether a new advance will hold. But I differ from many others in that I don’t treat an FTD as a be-all, end-all.

Something else I have liked about the market, and which was tweeted Tuesday, is the relative strength of the brokers. They often serve as a leading indicator, peaking ahead of the averages late in a bull market. To see the brokers actually outperform in a mature bull market such as this one has been a plus.

Among the names, Alteryx (AYX) shows an expected loss for ’19, per most analysts. Revenue grew at 54% in the recent quarter and between 50% and 55% in the three quarters prior to that. A 98 RS rank issue.

Technically, price has shown excellent relative strength over the past two-and-a-half weeks. It deserves to be followed after Wednesday’s +10% rise on +84% volume. At present, it does not set up in an attractive manner. Earnings came out Wednesday just after the close, and at this writing price had risen on the report to stand at 61.50. This brings price close to the 63.18 pivot point.

Caredx (CDNA) was profiled in last weekend’s report. The medical product maker expects to move to profitability in ’19 from an expected loss in ’18. This is a 99 RS stock in a 93 RS group.

The thesis centers on the good relative strength shown in the last three weeks plus the constructive six-week base. An entry pivot would be above the 29.60 base high. Earnings are expected Thursday after the close. If a position is taken prior to earnings, its size should be calibrated so that a downside reaction to the report does not put a lot of stress on an account.

(As a general rule, in order to mitigate the risk of being incorrect, a position should be started at one-half or less of a normal-sized position. If this starter position moves in the right direction, one or more add-on positions could be used to fill out a normal-sized position.)

It is always preferable for a stock to be “new merchandise,” something that has come public in the prior two years or so. Still, if a name shows a good technical chart pattern with 20%+ earnings estimates and good relative price strength, it is still considered a candidate for purchase, even if it is an older issue. Crox (CROX) is just such a name.

Earnings are expected to jump 63%/192% in ‘18/’19. A negative is recent sales growth, which was only 6% and 5% in the last two quarters. A 98 RS stock.

Technically, price forms a seven-week, double-bottom pattern which could be taken above the 22.07 base high. Earnings are expected Thursday before the open.

Dexcom (DXCM) should post losses this year and next. Revenue, however, is up 42% and 44% in the recent two quarters. A 99 RS stock with an upsloping RS line for the past four weeks.

The stock is building an attractive eight-week base and can be taken above the base high of 148.56. It is under solid accumulation.

Etsy (ETSY) is a retailer of handmade goods. This year earnings are expected to grow 65%, followed by another 60% in ’19. Revenue swelled 41% in the recent quarter.

(While it is not necessary to look at mutual fund sponsorship, empirically I can say that stocks in the sweet spot of their price moves often have between 400 and 1,100 funds as owners. ETSY funds jumped from 458 to 554 in the recent quarter.)

ETSY was added to the watch list today after surging 24% on earnings amid +464% volume. This puts it close to the top of its seven-week base. This is worth watching, though there is not a technically attractive entry at present. Ideally, a handle or otherwise sideways movement or pullback will occur.

Haemonetics (HAE) should post 23%/29% in the March ‘19/’20 fiscal years. The weak spot with this is the 9% and 7% revenue growth shown in the recent two quarters. This is a 97 RS stock.

A positive is the 5.8% rise on Wednesday amid +48% volume after its earnings release. The stock is five weeks into forming a cup. It can be taken above the pattern high of 117.56, though preferably it will form a handle or pullback prior to its breakout.

Healthequity (HQY) is predicted to post earnings growth of 25% in the January ’20 fiscal year. Sales growth was 25% in the recent quarter.

Price completed a seven-week base Wednesday, +5.3% on +20% volume. A plus is the RS line, which printed a new high ahead of price. The stock can be taken above Wednesday’s high of 100.87. However, it should be noted that the base high of 99.99 was exceeded Wednesday with limited follow-through. Too, volume was +20%, not the 40%-50% minimum one would want to see on a breakout.

This may be due to the stock needing some digestion after a 25% move up the right side of its base in just the last two weeks. Regardless, it is buyable above 100.87, preferably on solid volume.

(If a purchase is made on questionable volume, it can always be taken with the idea that, if volume does not kick in over the subsequent day or two, the position can be exited. It should be remembered that numerous stocks that went on to become leaders in ’17 and earlier in ’18 came out on mediocre volume.

It should also be noted that many times the first attempt at a breakout will fail by returning back to its base. This should not dissuade you from taking it on the second attempt. I will sometimes take it on a third attempt if the first and second attempts fail.)

Mongodb (MDB) came public a little more than a year ago and tripled in 11 months. While losses are projected for this year and next, revenue is rapid at 61% in the recent quarter. A 99 RS stock and under solid accumulation.

It is forming an eight-week cup-with-handle base with a not-excessive 27% depth. It is preferable to see handles that are 10%-12% deep or less, though many aren’t. This one is 10%. MDB can be taken above the handle high of 84.50.

The unfortunate thing about MDB is that once it breaks out, it does not make it easy to gain entry, either as a starter position or as an add-on situation. This is actually a positive, as the strong price persistency I highlighted in Saturday’s chart has made for an explosive holding in the past. Of course, whether or not this continues in the future is not known.

Omnicell (OMCL) is expected to put up 29% earnings growth in ’19 followed by an estimated 33% this year. This is a highly stable issue in terms of earnings growth over the past 5-7 years. These steady-eddy titles are more in demand now because of the defensive character of this market. A 96 RS stock under extreme accumulation.

Wednesday’s action brought price up 4.8% on +29% volume to just past the top of its eight-week formation. The stock can be taken above Wednesday’s high of 73.23. If there is a negative, it is the 9% revenue growth of its recent quarter being tepid.

Staar Surgical (STAA) was discussed in the Saturday report and was again one of two or three names mentioned in the Monday video. In fact, it was my favored issue. Wednesday it was +13.4% on +89% volume after coming out of a tight flag which served as a cheater entrance.

For those who did not enter, no worries, as it is climbing the right side of the base and has yet to formally break out. Note how little time it is spending on the right side of its base vs. the left side. This is something I have mentioned in the past and is preferable as opposed to price spending more time on the right side.

At this point, it should not be chased. I would watch for a pullback or other lesser-risk setup. Personally, I am looking to add to a position if the opp presents itself.

Tableau Software (DATA) is expected to move from a 30-cent-a-share loss in ’18 to a 17-cent profit in ’19. Revenue has been steady at 33% and 35% in the recent two quarters.

I was attracted to DATA due to its upsloping relative strength line over the past four weeks or so. Wednesday, price was +15% on +335% (i.e. 335% more than the 50-day average of volume). The preference is to allow price to settle down prior to entry. This is in light of the big move of Wednesday.

To sum, the presence of an O’Neil follow-through day on Wednesday improved the probability of the Oct. 29 lows as being a durable bottom. Regardless, the recent action of leading stocks alone presented enough evidence to venture out of cash and into leading issues.

Let’s be alert to any possible failure of this rally by being open-minded and flexible as to anything the market might throw our way. It is important to realize that the Nasdaq Composite, the index associated with growth stocks, is not leading on this rally. Rather, it is a market performer, performing in line with the S&P, not outperforming it. This is not what we have seen in ’17 and earlier this year.

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 a position in STAA, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters.