“Notice that the stiffest tree is most easily cracked, while the bamboo or willow survives by bending with the wind.” — Bruce Lee
Friday’s Nasdaq downdraft got everyone’s attention, given its being the second-worst day in 22 months. Moreover, volume was the second-heaviest for a downday in nine months.
The Naz has shed 5.8% from its high four weeks ago to Friday’s low. This compares with the 1.8% loss in the S&P 500. As the below chart shows, the Nasdaq forms an expanding triangle, or megaphone pattern. This transpires as price prints a clear succession of lower highs and lower lows.
Friday’s move was led by the social medias, bios, and brokers. While the former two are in keeping with the four-week decline’s focus on high-expectation glamours, the brokers’ weakness says something about the bearish sentiment spreading to the broader market.
In particular, for decades the brokers have acted as a leading indicator of a primary market top. Seeing them lag the S&P 500, then, is a minus, though any signal they are giving is likely months away from coming to fruition. Recently, the group has been pressured by regulators looking into the practice of payment-for-order-flow, a significant contributor to revenue for some firms. The practice was discussed in Michael Lewis’ latest book on high-frequency trading (HFT).
Otherwise, the true health of a market can best be judged by the rally after a correction in the averages, especially its breadth, volume, and leadership. In light of the recent discrepancy in performance between small-capitalization and growth names vs large-capitalization issues, the next intermediate advance may show fewer stocks participating, i.e. deteriorating breadth. This is something we will be watching for.
The interesting aspect of this decline is the uniformity of losses in leading titles. Institutions are making very little distinction between senior glamours, such as Biogen (BIIB) and Priceline.com (PCLN), and junior glamours like Pandora (P) and Palo Alto Networks (PANW).
As mentioned a week ago, long-side pattern setups are fewer than at any time since ’12.
Among the names, Aercap Holdings (AER) was noted here in last week’s report: “An aggressive speculator could consider using the 43.69 high of 2/28 as an entrance pivot for a standard breakout.” The comment stands. This would assume general market tone had improved.
Auspex Pharmaceuticals (ASPX) is a development-stage biotech company that went public just two months ago and promptly tripled in its first six weeks. Yet its loss off the top is 16.9% vs. the 18.2% loss of the iShares Nasdaq Biotech ETF (IBB), when it might be expected to have dropped more. This is worth watching, but does not offer attractive entrance yet due to the sketchy market climate.
Diamondback Energy (FANG) broke out of a five-week pattern a week ago, as was discussed in last week’s report. To its credit, it has held right around the lip despite the carnage in many shares. Its broad sector, energy, is the top-performer. As mentioned in the week-ago report, the breakout did not interest us, as the general market had shown enough deterioration to keep us away from most new commitments. But worth watching, as it shows it has leadership credentials in what is otherwise a very tough market.
Glycomimetics (GLYC) is an itty-bitty biotech, a teen-aged issue ($15.77) trading 188k shares a day on average ($2.97MM a day in average dollar volume). It came public 12 weeks ago and moved up 137% in nine weeks. Like ASPX above, it is a tertiary glamour that would be expected to fall more than the biotech index. Yet it has held up slightly better. Worth watching.
Sierra Wireless (SWIR) is a cyclical company expected to grow earnings by 109%/73% in ‘14/’15. This is a 91 rs stock in a 94 rs group. The stock’s three-month pattern is being watched in the event the averages firm up, with the 24.84 point serving as a possible cheater entrance.
Staar Surgical (STAA) was noted here last week: “Price forms a two-week ledge pattern and is worth watching.” The comment stands. This is a thin issue ($5.2MM average volume per day) and hence contains higher risk. The 4/01 high of 19.28 serves as a potential entrance pivot.
Tesla Motors (TSLA) is worth watching to see if it can fill out its current basing pattern. Thursday’s high may possibly be used as a cheater entrance, though it is premature to plan for this at this time without knowing what market tone will be like. One of the few stocks to score triple-digit estimates for both ’14 and ’15.
Zillow (Z) reported earnings in ’13 that were less than half what it made in ’12. In ’14 it is expected to make about a third what it made in ’13. Nevertheless, stock of the online provider of real estate data stays fairly buoyant as most analysts eye net of 69 cents a share in ’15, well above ‘14’s six cents a share.
Technically, Z forms a seven-month base and is under extreme accumulation. At this stage, the 102.20 high of 3/21 makes for a possible entrance pivot in the absence of a cheater pivot. Much depends upon the general market climate for this issue and all others in this report.
Cara Therapeutics (CARA) develops pain-relief solutions. The stock vaulted more than 100% in its first four weeks as a public entity in February. As a development-stage concern, CARA has no earnings estimates and little in the way of revenue. One would be essentially “buying off the chart.” This is another we are watching to see how it responds to any firming in the averages.
In summation, pattern setups are fewer than at any time since ’12. A generous cash position is advised for the medium-term speculator in high relative-strength shares.
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