November 7, 2021

Stocks powered higher in the latter portion of last week, with the Nasdaq up 16 days in the last 18 outings. As you can see, volume is much different on this move vis-à-vis the preceding period.

The move is underpinned by the Oct. 22 reversal day in the 10-year yield which ended up being the high of the head of a head-and-shoulders top. Note the material seven basis-point drop on Friday.

The big picture is a market no longer subscribing to the prospect of higher inflation. The 10-year yield tells you that, as does the preference for growth stocks over cyclicals.

Within the list, consumer discretionary is the leading broad sector, with nothing else even close. Its outperformance began in mid-August, well in advance of the Sept market correction.

Technology is also leading the pack.

Our approach to the semiconductors has been to take positions in the No. 1 and No. 2 players, Nvidia (NVDA) and Advanced Micro Devices (AMD), plus Direxion Semiconductor Bull 3x ETF (SOXL). From entry, NVDA is +33% in 12 days, AMD +8% in four days, and SOXL +23% in five days.

The following chart shows the benefit of buying relative strength issues in the semi segment. Note that the start date is Oct. 4, the low day in the Nasdaq.

Meanwhile, I have not applied System R to a new advance such as the one that began with the Oct. 4 Nasdaq low. The reason is that I figured breakouts would be better for returns than something like System R. However, after looking at some of our Focus List names, I can see that by using System R we can get a head start on some of these emerging leaders before they break out.

I am not big on options, however a combo of R + calls may be the most profitable situation I know of, provided that it occurs at the start of what appears to be a fresh advance -- not exactly the case now. The key here is R's high win rate at the start of a move. (As a rough estimate, a stock that rises 10% should see the call option rise about 10x, or 100%.) I hope to make a video showing the entries of some of our triggered trades if R had been used.

Otherwise, the market remains devoid of fresh opportunities for the breakout player. Last week I began looking for System R opportunities and I will continue to do this. Since we know the first pullback in a new advance tends to be a high-probability play, we will be watching to see which leaders come in. Some may not come in at all. These are likely to be the real leaders, and we will use our knowledge of creative entries to get in them if they fit our rule book.

The following names are believed to be the most attractive in the $13+ market for our strategy of momentum-based speculation.

Denbury (DEN)

Sentinelone (S)

Xpeng (XPEV)

In summation, most emerging leaders have already moved out, leaving a void of fresh pattern setups for the breakout player. Any pullback here would not be a surprise, seeing as how the Nasdaq is up 16 of 18 sessions. Let's be open-minded about what could happen, including the potential for new opps in leaders should they pull back.

Kevin Marder

Trading Lessons
Introduction to the service video (38:00)
Money management and risk management video (20:27)
Bread and butter pullback video (11:10)
Bread and butter pullback: Pt II video (15:09)
Bread and butter pullback: Pt III video (31:48)
Bread and butter pullback: Pt IV video (30:16)
System R
Short-selling video (25:53)