I see trading more as a sporting challenge and try to erase the thought of the money.”
Shares broke out of a textbook, nine-week, head-and-shoulders continuation pattern Tuesday, though Wednesday’s Fed meeting and press conference kept a lid on volume.
As the below chart shows, the Naz closed well in four straight sessions highlighted by the gray rectangle, and in particular, the reversal day at “1”. The next day, the market threw down its hand for all to see, gapping up and closing well, at “2.”
The next two days, signified by “3,” showed drying volume and price range, and, again, price going out near the intraday high.
The above sequence of events, at least as seen through our eyes, was all positive. As we watched this unfold, it did not tell us with absolute certainty that the market would definitively head higher without anything negative occurring. But at least, on a day-to-day basis, this type of analysis did provide an objective understanding of what was more likely to happen than not.
In other words, it provided us with an “edge,” which is all that we are looking for.
Otherwise, conviction remains lukewarm. We would not penalize the market for this, in part owing to the holiday conditions of last week.
We are not yet concerned over the lack of volume on this six-week advance. With another couple of weeks of advance, we would. This is the question mark, if there is one.
As for the head-and-shoulders continuation pattern in the averages, there is nothing magical about such a pattern. It is what it is. As with any basing pattern, following the breakout, price will then need to show follow-through. This process could take days or weeks. Thus, there should not be the expectation of price making an automatic run for the roses from here. If it happens, it happens. But the speculator should be playing things on a day-to-day basis, making no assumptions.
What matters is to stay in the here-and-now. That means assessing each day, at the margin, the health of the averages and leaders. And being flexible enough to change course when the market does.
For some of you, hopefully many of you, this is preaching to the choir. If so, consider yourselves fortunate. Because there are many more participants who do not know what flexibility is, let alone having a plan for attacking the markets. If you are in this latter category, we might suggest reading any of William O’Neil’s books.
Among the names, for the most part, the speculative growth stock glamours that have been coming out of ledges have done so on below-average volume. This is due in part to caution surrounding upcoming earnings reports, and many are due out on Thursday (28) and Friday (29). But even beyond this, the low volume has been present for most of the six-week advance off the Mar 16 low.
One name that is still setting up is Nxp Semiconductors (NXP), which we mentioned in our last report as “worth watching.” Since then, the stock has based constructively, and could potentially be taken above the 4/8 high of 34.80. Earnings are expected pre-open Wed May 4. The main selling points are the ’11/’12 estimates of 108%/30%, the strong industry group, the good intermediate-term accumulation, the recent volume dry-up, the good absorption of a late-March secondary offering, and the trebling in price over the past six months.
Qlik Technologies (QLIK) is another name that has the potential for a big move on its earnings report, expected out after Thursday’s (28) close. In the meantime, we would consider taking it above the 4/21 high of 30.20. The stock is in a top group, is under extreme accumulation, has estimates of 60%/50% for ’11/’12, and has rising sponsorship since it went public last summer. This has good liquidity, but also is expected to show great volatility after the release. For aggressive players only.
The top-acting liquid gold is Allied Nevada Gold (ANV), which is up about twentyfold in this bull market. Although we would prefer to play any metal via its unlevered or levered ETF, ANV may be for those who prefer the titles themselves. With ’11/’12 estimates of 181%/116%, very good accumulation, rising sponsorship, a three-week ledge, and a May 5 earnings release date, aggressive participants might consider entry above the 4/11 high of 41.46, using a junior position due to the lack of a proper five-week-or-more base and the looming earnings report. (Another leading gold, Gold Resource Corp. (GORO), also sets up, however it has an average daily dollar volume of about $7MM, too illiquid and volatile for our taste.)
With over $200MM in average daily dollar volume, recent new issue Qihoo 360 Technology (QIHU) is being monitored due to its doubling on its first day of trade (indicative of a lot of speculation and volatility) and its high sequential revenue growth over the past three quarters. It is attempting to find its sea legs in the wake of its IPO, and is expected to release earnings later this week, although the exact timing of its report could not be verified. Worth watching, for now.
Polypore International (PPO). As mentioned in our last report, a possible pivot would be the 4/5 high of 60.50. The stock has been a consistent leader since the beginning of this bull, shows good ’11/’12 estimates of 32%/29%, and is in a top group. The company is expected to release earnings after the close of trading on Wed May 4.
Although Broadsoft (BSFT) sits close to 20% off its high, its solid growth in institutional sponsorship, beefy ’11/’12 estimates of 48%/65%, good sequential revenue growth, ability to move up 500%+ in the 10 months since its IPO, ability to respect its 50-day moving average, and top group have our attention in case the stock perks up while in base-building mode. At this preliminary stage, the 4/4 high of 49.85 might possibly be used as an initial entry for a junior position, though this may change as the stock shows more of its hand. BSFT is expected to announce earnings prior to the open on Monday May 9.
Netflix (NFLX) may also be monitored for a potential assault on the 4/25 high of 254.98. We would note that the ’11/’12 Street earnings estimates have recently been lifted to 50%/45%.
The real story, of course, has been the dollar. Our opinion, as mentioned on a number of occasions, is that it will continue to weaken, amid normal pullbacks against the trend, until such time as the markets gain comfort that Washington has a credible plan to cut the budget deficit. In light of the California experience, where the legislative and executive branches of government have not, for many years, been able to agree on a plan to address a similar problem, we do not believe Washington will succeed.
The simple fact of the matter is that politicians will always do what will get them re-elected. After all, they have to put food on the table at night. And few politicians will go against the public’s will when it comes to cutting entitlement spending. This is because polls indicate that citizens do not want to see their Medicare and Social Security benefits reduced. See here for the facts: http://www.pollingreport.com/health.htm . This ABC News/Washington Post Poll, taken April 14-17, indicates, among other things, that 78% of those polled oppose cuts in Medicare in order to reduce the national debt.
And because entitlements such as Medicare and Social Security represent the lion’s share of the runaway growth in federal spending (not discretionary spending, which may only represent about 20% of the federal budget), we do not see any credible plan surfacing to reduce the nation’s debt. This is expected to lead to the loss of the dollar’s role as the world’s reserve currency, likely to be replaced by the yuan.
We are reminded of superstar Kobe Bryant, who, when asked in ’07 what advice he had for Laker management to turn around the-then struggling fortunes of a storied franchise, had this to say:
“Do something and do it now.”
Fortunately for the Lakers, something was done, and the team recovered to appear in the NBA Finals each of the next three years, winning two titles.
Will the buck be so fortunate?
In summation, shares have successfully completed a needed nine-week period of digestion of their prior gains. Volume is suspect, but not to the point where it is a major concern. Most glamours have already emerged from patterns over the past dozen sessions. A few still set up, some of which are listed above.