“Character is higher than intellect.”
–Ralph Waldo Emerson
Despite Thursday’s morning reversal and Friday’s follow-through higher, shares remain in a 5% reaction without any accumulation days in four weeks. Leading stocks corroborate the behavior of the averages. Few growth titles set up. For intermediate-term speculators, or those seeking to hold a winning position for several weeks to several months, a high cash position is appropriate due to the lack of setups.
A “high cash position” does not necessarily mean a 100% cash position. That depends upon the unique makeup of each speculator as far as risk tolerance, temperament, and experience, etcetera go.
Among the names, Alnylam Pharmaceuticals (ALNY) is a 93 relative strength stock in a 99 rs industry group. The stock is about halfway up a 10-month, double-bottom base. The past two weeks have seen price form a tight handle. This occurs after price moves up and out of a flat pattern as shown in the below chart. The 79.88 high of the handle can be used as an entrance pivot provided volume appears to be solidly above average at the break out.
Chipotle Mexican Gill (CMG) continues to charge ahead, with earnings expected to be up 32% this year and 28% next year. In response to earnings, the stock staged a thunderous breakout on 7/22, up 12% on volume five times normal. Everyone that wanted to get in, got in on that day. Since then, price has hewed to a tight range. The range high of 697.93 set on 8/21 can be used as a standard breakout pivot. Earnings are expected on 10/20 after the close.
Facebook (FB) has seen little accumulation as it drifts higher. We did take it on the pullback three weeks ago but offed it on the general market weakness. It is not something we are looking at seriously at this point. If we were going to target it, it would be on a pullback, not breakout. It would be more interesting to us if it came down to the 70 level or at least below the 73.07 swing low. We would not blindly take it at those levels, but at the least it might create a new pattern setup.
Gilead Sciences (GILD) is a 97 rs stock in a 99 rs group. This sets up as a standard breakout entrance, using the 110.64 consolidation high as the pivot.
Insys Therapeutics (INSY) is another 97 rs stock in a 99 rs group, the bios. Accumulation has picked up in the last eight sessions, especially on the days shown by arrows in the below chart. We would be watching this for a pullback opportunity.
Mobileye (MBLY) has been discussed on the Twitter feed and MarketWatch column. The big attractions here are twofold: a) the major accelerating earnings estimate of 46% for ’14 to 105% for ’15, and b) the ability of the stock to go from a new issue price of 25 on 8/01 to 58 in just five-plus weeks. The latter shows that there is “something going on” with this title. We do not need to know what that something is, only that something unusual is transpiring.
Technically, the stock came out of a four-week cup on Friday, but went out below the lip. This is one where we would prefer a pullback entrance instead of playing the breakout. Ergo, we would be monitoring it for the time being. Price has found support at the 20 ema four or five times, a moderate plus. This is a 99 rs stock.
Palo Alto Networks (PANW) is a favored name. Of extreme import are the beefy estimates of 72%/100% for the July ‘15/’16 fiscal years. The stock is a 99 rs issue in a 98 rs group. The recent purported hack of accounts at J.P. Morgan ostensibly fueled some late-week buying last week.
PANW on Friday broke out of a tight, three-week flat shelf, +6.6% on +179% volume. The stock is potentially buyable around Friday’s closing level of 104.70. This leaves it close to the shelf top of 102.45 and not far from the psych level of 100, below which a stop could be placed. A preferred entrance would be a pullback closer to par (100).
Tekmira Pharmaceuticals (TKMR) was first noted on the Twitter feed on 8/29 (“…most int’g, added to watchlist”) and again on 9/04 (“Setting up as pullback entrance”) in addition to five subsequent tweets. There are no earnings or revenue data to lean on here. Observation number one: What we liked most was the stock having previously moved from 7 to 31 in three months. We always give preference to a name that has already proven itself to be leadership material. Subsequent to the move to 31, TKMR went through an inevitable correction. Observation number two: Price then went from 8 to 26 in three weeks. This was the tipoff that something was going on.
The below chart shows the stock being supported several times by the 20 ema as it formed a wide, handle-like structure of eight weeks. Price then blasted out last week on heavy volume. Buying now would be tantamount to chasing the stock. This is one to monitor.
Truecar (TRUE) has a few things going for it. Next year should see the Internet content provider score a profit for the first year. For ’15, most analysts eye 14 cents a share vs. the six-cent loss expected for ’14. Another plus is the move from its IPO date at 9 in May to 25 in September. This obviously shows something is going on. Price recently found obviously support at its 50-day line. This is a 99 rs stock in a 95 rs group.
While attractive entrance does not present itself currently, the last two days of trade (gains of 9% and 5%, both on heavy volume) show the stock is perking up and perhaps ready to make a run in due course. Worth watching for a setup.
Twitter (TWTR) is a favored issue. The social media platform shows a 6-cent-a-share loss for ’13, an estimated 10-cent profit for ’14, and a 37-cent profit in ’15, the latter representing a 270% growth rate over the prior year. We took a starter position on the pullback three weeks ago and added to it on last week’s pullback. One could take a position around Friday’s close of 53.94 since price is not yet extended, using a stop below the 50 level. (However, it is to be noted that relying on a three-week congestion pattern for support is different from relying on the support that a five- or six-week base provides. Therefore, our preference would be to wait for a pullback as the next entrance.)
Zendesk (ZEN) is an enterprise software developer with no earnings and excellent sequential quarterly revenue growth. It is thin at just $5.9MM a day in average daily dollar volume. Friday it leaped up from the bottom of its base, +17% on +153% volume and can now be monitored by those who prefer smaller issues.
In summation, the Nasdaq Composite is in the midst of a 5.3% reaction. In a bull market experiencing a correction or during an outright bear market, we look to the September-October period as having more-than-usual potential for a meaningful low. This is not a prediction, merely something we have our radar in tune for. Should shares continue lower into correction territory (8%+), we would be watching for volume to pick up amid increasing pessimism. It is to be remembered that good lows are made by sellers, not buyers.
Kevin Marder
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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Gil Morales & Company LLC (“GMC”), Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held positions in PANW and TWTR, though positions are subject to change at any time and without notice.