“I neither have nor adhere to an inflexible system. I modify my terms and conditions according to circumstances.”
— Jesse Livermore
Prior to last week, we had been talking about being on the lookout for a positive test of a prior low by the Nasdaq as being the first step in the index putting in a durable bottom to this decline.
The test began Tuesday of last week when both Nasdaq and SPX declined on heavy volume. In the Nasdaq’s case, a positive test came the next day, Wednesday. On that day, price slightly undercut Tuesday’s low before reversing to go out near its session high on the second-heaviest volume in over three months. This is shown in the below chart.
Wednesday’s positive test in the Naz and SPX was confirmed by the three most important glamours (from a sentiment standpoint): Twitter (TWTR), which added 3.5% and closed at a seven-month high; Facebook (FB), which bounced off the 50 ma and went out just below its session high; and Palo Alto Networks (PANW), which bounced off the 20 ma and went out just below its session high.
Thursday saw a 2.0% loss in the Naz on still-heavy volume, but lighter than Wednesday’s. Price held up below the two recent lows of Oct. 2 and Wednesday, which meant that Wednesday’s positive test remained intact. Moreover, two of the three important leaders held up, with TWTR losing a minor fraction (< 0.5%), and PANW up a minor fraction. FB, which has shown very little demand for some time, dropped 2.0%, the same as the Nasdaq.
As the chart shows, Friday’s 2.3% Nasdaq loss made the test a failure. Volume was the second-heaviest in seven months. The important glamours confirmed.
At this stage, the next rally in the Naz or SPX will be watched to see if its subsequent pullback can positively test the prior low. Some definitive lows are printed without price ever putting in a test. This might transpire in a situation in which a follow-through day occurs.
Follow-through days are of more interest when a correction (at least 8%) takes place in an average. Since the Nasdaq is now off 7.3% from its high three weeks ago, follow-through action becomes more meaningful if it should occur. With that said, we are mindful of the fact that one or a few of the outstanding leaders of a new cycle begin prancing on the tape before a follow-through day. In the MarketWatch column some time back, we illustrated this by showing charts of how Baidu (BIDU) and Equinix (EQIX) did this in the past.
For this reason, we spend less time concerning ourselves with follow-through action, and more time studying the action of the leading stocks during a correction.
Otherwise, over the past couple of weeks, there have been more short-sale setups than any time in recent memory. At present there are no long-side pattern setups among growth issues.
Along these lines, the following list represents the names we are paying attention to, however most have some work ahead of them in terms of backing and filling. We view TWTR, PANW, FB, and MBLY as offering the most valuable information as to the speculative sentiment among institutions. We will continue to watch these with interest. It is to be noted that this list of four issues can and will change.
Among the names, Agio Pharmaceuticals (AGIO) has no earnings. The development-stage outfit’s focus is on cancer and rare genetic disorders of metabolism. Technically, it came public 15 months ago and is up as much as 286% since then. This is a 99 rs stock in a 99 rs group. Given its 66% move in just two weeks – which has been followed by a two-week ledge that is only 16% deep – its extreme accumulation over the intermediate-term, and its ability to hold up better than most all other growth titles, this is worth watching for the development of an attractive setup.
Alnylam Pharmaceuticals (ALNY) is another development-stage biotech with no earnings. This is a 95 rs stock in a 99 rs group. Price has been basing the past three weeks in what is a 9.8% deep pattern. As highlighted in the below chart, there is prominent support in the 70-71 range including the 50 ma, though we would not be buying any pullback due to the general market conditions. Worth watching.
Facebook (FB) made sense to us as a pullback four weeks ago. But other than at that time, we have been skeptical about the stock. It was one thing for volume to be lax during August’s summer doldrums. But there was precious little accumulation during September. It is possible the stock is over-owned by large investors.
At this point, FB is in a short-term downtrend, and we would be watching it more for a short setup than a pullback in an uptrend. Two recent distribution days (10/01 and Friday) are not encouraging for bulls.
As noted last week, Gilead Sciences (GILD) “…sets up as a standard breakout entrance, using the 110.64 consolidation high as the pivot.” The comment stands. As a mild plus, price found demand close to its 50 ma last week. However, there has been some disconcerting distribution in the base. Worth watching.
Gopro (GPRO) is a 99 rs stock in a 99 rs group. This stock is clearly overheated. It is a 99 rs stock in a 99 rs group and under extreme accumulation. In another cycle, GPRO would not be discussed here. But given the technical damage done to the growth complex, it is included here as something to watch in coming weeks. In the interim, we would not take it on a break to a new high.
Palo Alto Networks (PANW) is a failed breakout, as the below chart shows. This is not a stock we wanted to buy on any breakout. Hence, we took a position on 10/2, which so happened to be the day before price broke out of a three-week shelf. The initial pullback post-breakout appeared normal, and price found support at its 20 ma. There was no reason to sell on Thursday, despite a very-short-term momentum model flashing a Nasdaq sell signal for Friday. We exited Friday.
Repligen (RGEN) is a 98 rs stock in a 99 group, the bios. This is a thinner issue that may not appeal to some speculators ($8.6MM average daily dollar volume). It definitely needs to put in more time as it is about halfway up the right side of its base.
Truecar (TRUE) has a lot of revenue momentum and is slated to turn an annual profit for the first time in ’15, per most analysts. Clearly, the market likes the fundamental story. It is a 99 rs stock in a 94 rs group. In addition to its revenue momentum, it is of interest due to a) its moving from an IPO price of 9 in May to a recent high of 25 in just five months, which includes a double in only seven weeks that was subsequently followed by a 33% retracement, considered normal for such a large move in a compressed timeframe, b) its high relative price strength prior to Thursday/Friday, and c) a series of accumulation days beginning with its finding support at its 50 ma which was at the bottom of its pattern.
After more than doubling in seven weeks, TRUE is in the midst of forming a five-week cup. Price was off nearly 10% Friday, which is evidence, in part, of its not being institutionally sponsored to any great degree.
At the moment, this is one of those issues that is worth watching due to its leadership potential should the market embark on a new advance. In a matter of days, however, it could easily be offed to a great degree if the severity of this general market comedown continues, rendering it a watch-list exit.
Twitter (TWTR), acted quite well from a relative strength basis through Thursday. This was a name that we felt was more pullback-oriented and less breakout-oriented. Accordingly, we took it on the last two pullbacks.
For breakout players, it was noted in last week’s report that “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.),” though in light of Friday’s failed test in the Nasdaq and SPX, we would not be using Friday’s reversal bar as a pullback entrance.
Like PANW, described above, there was no reason for us to exit TWTR prior to Friday, despite the sell signal flashed by our very-short-term momentum model. In most cases, we prefer to let price confirm any model signal prior to taking action. The position was exited Friday. At this point, we will continue to watch TWTR closely, both for sentiment purposes and for an eventual entrance.
Elsewhere, Alibaba Group (BABA) is worth watching out of the corner of one’s eye. This is a liquid glamour with a terrific earnings history and high level of earnings stability. It needs to put in more time, but merits a position on a watch list.
In summation, there are no long-side setups for an intermediate-term speculator. One can watch for the next test by either the Nasdaq or S&P. This means a rally must occur, followed by a return to the vicinity of the prior low. Follow-through action can also be looked for. Keep your eye on the averages and leaders. They will provide you with all the information necessary.
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