“Knowledge = confidence = success.”
— Steve Nison
Shares remain in a classic basing process following the Q1 advance. This process, which has the averages forming textbook cup bases, has been seen too many times in the past to mention. Most often, it resolves itself with further upside, as price moves past the top of the cup.
There is often a pullback prior to, or just after, the right side of the cup is completed. Given that the month of September has historically been the weakest month of the year, it is logical to expect some softening in the averages as they approach the top of their respective cups. The view here is that this would be a plus, not a minus. It would allow the averages and leaders to keep participants honest by rehabbing the wall of worry. This needs to stand for continued upward revaluation.
Leading growth stocks, one by one, swing into position. We have spoken in recent reports about the less-than-average number of basing patterns being formed by the leaders. In part, this is due to the choppy nature of the averages up until three weeks ago.
At that point, the character of the market changed. You can credit this change to the Draghi comments of late July, but the cause is not what’s important. The effect is.
At the surface, shares show enough volume at this time of year. It is not the explosive type of volume seen in the initial phase of many bull markets. But it does not have to be.
Among the names, Apple (AAPL) has been spoken positively here in recent reports. A week ago, it was noted that “…the stock remains potentially buyable, but only to the extent it does not become extended beyond the Aug. 6 high of 624.87 by more than 5% or 6%.” AAPL is now slightly extended past this point, and should not be chased.
Rackspace Hosting (RAX) was noted last week (“The Aug. 8 high of 57.12 represents a potential entry pivot (circled in the below chart), as long as a junior-sized position is used for initial entry.”). As the chart shows, price took out the high of Aug. 8 and remains slightly above that level. Because a junior sized position was suggested for initial entry, a wider-than-normal stop can be used for entry. The Aug. 9 low of the handle at 52.66 is a logical place for a stop loss.
This is admittedly an aggressive entry for a pattern that one will not see in a textbook on chart patterns. In an “iffy” market, this type of pattern would not be considered for entry. The current market is anything but iffy, as we see it, and therefore this type of action in what is still deemed the early phase of an intermediate bull move is accorded our attention.
Acadia Healthcare (ACHC) was mentioned last week (“The 19 level remains the potential pivot for entry.”) Price ultimately took out 19 but did not follow through to break out of the base itself above 19.92. A wide stop of about 10% would be used for this junior-sized initial entry. This would be about the 17 area, and would be about 50 cents below the 50-day moving average. On a junior-sized entry of half of a full position, a 10% stop would be equivalent to a 5% stop on a full position.
Equinix (EQIX) was last noted here July 15 (“We prefer stocks that have already proven their mettle, and we are monitoring EQIX to see if and when it may clear the four-week shelf it is currently in.”). We like the fact that this stock was perhaps the leader among the glamours in the Q1 advance. We prefer stocks that have been there, done that, and that show big earnings estimates (56%/44% for ’12/’13 for EQIX).
The stock can be entered here using a junior-sized position and wide stop of 10% below entry. This would be in the general vicinity of the 50-day moving average.
Alexion Pharmaceuticals (ALXN) is a high-growth biotech vehicle with a good level of earnings stability, probably the best combination growth and stability of any bio.
Technically, price is forming a four-week shelf. In the July 1 report it was noted that ALXN is “at the outer reaches of what might represent a reasonable entry vis-à-vis risk unless one was to use a junior-sized position.” A potential entry would be on a takeout of the July 27 high of 109.96, using a 7% stop loss in case proven incorrect.
Regeneron Pharmaceutical (REGN) has one of the most constructive bases in the glamour complex. Market participants discount an expected 57% jump in earnings for ’13. This, and a big increase in ’12 earnings per share, explain REGN’s 162% move thus far this year.
Technically, price broke out of a four-month pattern last week on big volume, and sits just above the top of the base. An entry could be made at current levels (145.09 was Friday’s close) with the understanding that most biotech issues represent higher risk, the risk of the unknown.
Elsewhere, Fortune Brands (FBHS), The Fresh Market (TFM), and Sally Beauty Holdings (SBH) set up.
In summation, for the past three weeks, the averages move up on volume and tread sideways on lesser volume. The cup patterns they form have historically proven to be precursors of richer quotations. A few more leading stocks begin to perk up in the torpor of the summer’s dog days. A fair amount of opportunities are there for the medium-term operator. It is logical to expect a correction in the September/October period.