“Those traders who have confidence in their own trades, who trust themselves to do what needs to be done without hesitation, are the ones who become successful.”
Shares move through an extremely choppy market as players position themselves ahead of earnings season.
If there is any stalling at all in the averages, some of the sector ETFs set up as potential short-sale candidates, the semis and oils, especially.
Gold is being watched closely. By one account, sentiment among participants has been near a 10-year low recently. On March 5, Market Vane bulls reached 48%, the lowest since ’03. This number has stayed in the 49%-52% range since.
If anything, gold looks as though it will come in from here, and would be potentially shortable.
It is important to avoid focusing just on the recent weakness of the averages. Keeping up with the relative strength leaders, especially how they have acted in recent sessions, should be emphasized. This is because they may be the better performers on the next leg up in the averages.
Among the names, KB Home (KBH) is presently the leading builder in terms of price strength. The stock has been the quickest in the group to set a new closing high for the five-month advance in the averages. A plus technically is its ability to use the high of its previous shelf, the 20 level, as support. A previous resistance level that later becomes support, as in the case of the 20 area, is a key level indeed. An entrance around Monday’s closing level of 22.19 could be taken, using a junior-sized position with a 7%-8% stop loss in case proven incorrect.
This setup is largely a play on three-day rs, an example of the tennis ball and broken eggs concept that we have discussed many times over the years. Following a correction or pullback in the averages, it is the names that bounce back the fastest to new-high ground that most often lead on the ensuing leg up. These are the tennis balls. The stocks that do nothing but sit there with trivial gains, or no gains at all when the averages rebound, generally are the laggards on the next upleg. They are the broken eggs.
KBH has risen three-straight days and is up 10.8% during this period vs. the 0.1% rise of the Nasdaq Composite and the 0.6% gain of the S&P. Over these three sessions, KBH has gone out just 8 cents, 4 cents, and 2 cents, respectively, from each session high.
This is a v-pattern, and a short one at that. It is therefore higher risk. This is mitigated by the smaller position size.
The fundamentals of KBH are obviously tied to the resurgence in housing. After a loss in ’07-’12, most analysts see a per-share profit of 27 cents in the November ’13 fiscal year, followed by a $1.09 gain in ’14, the latter amounting to a 304% increase. This is likely what the market is responding to.
The building group has had a change of top-dog leadership in recent months, with Pulte Group (PHM), MI Homes (MHO), Ryland Group (RYL), and KBH all taking turns at the tiller.
Another builder, Ryland Group (RYL), is a couple of steps behind KB technically, but still shows price just 4.3% from its high. The stock has the advantage of a more-traditional basing pattern than KB’s, in this case a 10-week cup-with-handle that found support at its 50-day line last week and again four weeks back. The handle is 12.3% deep, within the 10%-12% range that is considered acceptable. The pullbacks are deeper with RYL than KB.
Fundamentally, analysts eye earnings growth of 90%/32% for the ‘13/’14 period. Like KB, the key to this estimate is that the next year’s forecast is so robust. Estimates are always subject to change, but if these continue to show the company to be growing solidly in ’14, further upward revaluation into Q3/Q4 would be more likely than not (save for general market corrections, which take down four of five issues, generally). Ditto for KBH.
RYL can be monitored for a possible breakout entrance above the Mar. 25 high of 42.84, the high of the pattern’s handle.
Angie’s List (ANGI) was discussed in the week-ago report (“For very aggressive speculators, Monday’s [Apr. 1] high of 20.63 serves as a potential entrance pivot. Using a junior-sized initial entry would allow for a slightly wider stop loss to be used, e.g. 8%-10%.”).
While an entrance above Monday’s high of 19.60 could be considered by aggressive players, recent rs is not obvious (compared with something like KBH) and Monday’s volume was 32% below normal. However, the shares are under extreme accumulation, and the highest level possible. Using this level with a stop just under last week’s triple-low in the 18.15-18.21 area (see chart) would offer a 7.5% risk, roughly.
For less-aggressive operators, our comment of Apr. 1, noted in the previous paragraph, stands. The 20.63 pivot referenced is 5%-plus higher than the more-aggressive 19.60 level, and this 5% difference represents a form of “insurance policy.” The market is full of tradeoffs, and this is just one of them. Hold off on entry until the 20.63 area is taken out – one removes the risk of entering at the lower 19.60 level and seeing the rise stall. Enter at 19.60 and one is positioned to use the 20.63 level as an add-on entry.
LinkedIn (LNKD) looks interesting in here, mainly because the tape has been more bearish than bullish. There was the Apr. 1 outside day/engulfing bar, which set the stage for last Wednesday’s 3% drop on volume 20% above average. This has not been an impressive performer for the past fortnight. This is understandable because of the stock’s big move into the 184 high.
Recent volume has been to the downside. We are not at all convinced the next move is up and past the Apr. 1 high. Nevertheless, if it can get past this level, then it is possible the Mar. 22 high of 182.93 could be used as a cheater entrance for a long. It will be best to put any biases in one’s back pocket, and simply take each day’s action as it comes, along with an objective analysis of it.
In the meantime, price lagged the S&P on Monday, and a takeout of Monday’s low says the recent swing low of 165.02 is vulnerable.
Splunk (SPLK) is a recent new issue that came public a year ago. Since then, the stock is up 135%. This is the sort of issue that grabs our attention. Especially when it is a technology title. The database software developer has never earned an annual profit, though sequential revenue growth, a favored metric for younger, profitless outfits like SPLK, was 17% and 25% in the last two quarters, respectively.
Splunk is plenty liquid at $63MM in average volume. Technically, price stands atop a seven-month, cup-with-handle base. Accumulation on the weekly (not shown) has been xlnt since the start of the year, with no serious bouts of distribution.
An aggressive speculator could take the stock above the recent high of 40.63, using a stop below Friday’s swing low of 38.60. This would represent about 5.3% risk.
Sarepta Therapeutics (SRPT) is one of the few names that set up, and is noted here despite a cloud of uncertainty floating above it. The uncertainty stems from whether or not the biotechnology interest will receive accelerated approval for its drug to treat Duchenne muscular dystrophy. If the FDA decides against an accelerated approval, price is at risk to the tune of 15%+.
For this reason, despite the constructive pattern setup, we would hold off on a fresh-money buy of SRPT until after the FDA drama has unfolded.
Workday (WDAY) late last week bounced off strong support at the key 57 level which served as resistance three times since the enterprise software developer went public in October. Price is now brushing up against resistance at the 60 level, which recently served as support.
Worth watching for a possible short-sale opportunity.
Elsewhere, last week’s action made it abundantly clear that these are quite vulnerable: Evercore Partners (EVR), Commvault Systems (CVLT), Winnebago Industries (WGO), Netflix (NFLX), and IXIA (XXIA).
All sliced through their 50-day line, are extended to the down side, and thus do not present attractive short entrance at this time. We would wait for an inevitable rally before considering them shortable.
Northern Tier Energy (NTI) is also in this group and is shortable below Monday’s low at 26.50 using a stop of just over a dollar.
Bonanza Creek Energy (BCEI), not shown, sold down on heavy volume, but found support at its 50-day line, unlike most of the above. This is another worth watching closely for a potential short entrance.
In summation, the averages are exceptionally choppy, with one up day followed by a down day, which is then followed by an up day, etc. In the S&P’s case, it has been up, down, up, down, etc. for the past 14 sessions. For the intermediate-term speculator, long candidates are few and far between, and the long-side player should not try to force the issue by entering extended names. At the same time, a half-dozen titles have come into focus for the short seller. Based upon recent-session outperformance by the discretionarys and retailers, the current softness in the averages does not show signs that it will turn into anything problematic. However, all possibilities are on the table, especially with a Fed meeting on tap for Wednesday.
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