“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do so, you are dead.”
–Paul Tudor Jones
There were more breakouts this week than any week in years, in our opinion. That this behavior occurs not at the end of a long move (e.g. March ’00) after breadth has already peaked, but at another point in the cycle, is bullish. Many of these resulted from upside earnings surprises and gap opens. Gaps are trickier to play but can reap the right kind of rewards if played right.
The Nasdaq chart below shows the unidirectional move off the June 24 low. In a new trend, an overbought market that stays overbought is very bullish. This is what occurred in the current market, as the modest pullback of the past fortnight was a harbinger of things to come. The little dip outlined in green was the market’s “correction” of the prior move up.
Most speak of this bull market as getting long in the tooth because it began in March ’09. Yet, at the same time, most define a bear market as a 20% decline in the averages. And in ’11, on an intraday basis, the Nasdaq Composite dropped 20.4% and the S&P 500 fell 21.6%, qualifying for bear market status. A case can therefore be made that this bull market is two years old, not four. In either case, this has the feeling of a middle-inning move, not a late-inning move. A middle-inning move because
a) Federal Reserve policy is accommodative,
b) Breadth has not peaked, and
c) Interest-sensitive segments like the financials, banks, and brokers have yet to diverge from the averages.
In Thursday’s MarketWatch column, we discussed the two ways to trade earnings. Rather than rehash it, the story is linked here. The hope is that it may lessen the fear and anxiety of trading earnings season.
While one should refrain from chasing stocks that are extended beyond their most recent support areas, one should also be monitoring the recent gap stocks. These are some of the most powerful names in the market. They should not be ignored. They will pull back at some point, perhaps forming another base or shelf pattern that may provide the next entrance.
Among the names, Bonanza Creek Energy (BCEI) is one of the three frackers to which we are paying particular attention. Earnings growth estimates are for 53%/55% in ‘13/’14. Thursday the stock poked its nose above the high of a four-month base, and closed just a few pennies below it. This can be watched for follow-through Friday or early next week.
Cabot Oil & Gas (COG) is another of the three fracking plays that have been a focus in the last few months. Earnings growth is estimated to be a hefty 142% this year and 69% in ’14. The stock has essentially been marking time the last three months as it works off a nice winter advance. Price cleared a nicely-condensed, eight-week base a week ago on volume 150% above average, rising 7% that day. This was your signal that further gains might be forthcoming. Since then, price has traced a tight, five-day range, and can potentially be entered on a takeout of the 7/25 high of 78.07. Earnings are already out of the way.
Mannkind (MNKD) is an $8 stock, which may disqualify it from some watch lists. However it is included here for those who like “pre-teen” stocks, especially since it is quite liquid at $66MM per day in average dollar volume. We consider “liquid” to be an issue with at least $25MM-$30MM in average dollar volume per day. The attraction here is twofold: It is a 99 relative strength stock and it is in an industry group (biotech) that is leading the market with a 98 rs rank. There have only been losses to this date. Price cleared the top of a seven-week pattern during Thursday’s session, then closed the session three cents below the base top. Volume was 32% above average, and may be held in check due to an upcoming earnings report. The stock can be watched for follow-through Friday or early next week.
Financial Engines (FNGN) has been a nice, steady performer for some time. Earnings growth estimates at the provider of portfolio management services are 38%/23% in ‘13/’14. Price is working on a tight, four-week shelf with a depth of just 6.5%. A potential entrance would be a takeout of the 7/9 high of 49.79.
Cornerstone Ondemand (CSOD), a software developer, is expected to go from a loss of 18 cents a share in ’13 to a profit of 1 cent a share in’14. Its group has a 96 relative strength. It recently found support at its 50-day line, a plus, and is working on a six-week base. A potential entrance can be made above the 7/12 high of 46.31. Earnings are due out early this month.
Regeneron Pharmaceutical (REGN) is in the hot biotech group. It develops drugs to treat eye and inflammatory conditions, and also cancer. Earnings growth is estimated to be 59% in ’14. The stock is building a two-month, cup-with-handle base as it works off the excesses of a 78% run-up during the spring. The 7/22 high of 282.27 represents the top of the cup’s handle, and a potential entrance for a speculator.
Zale (ZLC) is a turnaround play that began when results hit bottom in ’10. Stock of the jewelry-store operator went from $1 to the current $9. This is on the thin side at $10MM in average daily dollar volume. Nevertheless, this is a 98 rs stock forming a flat base with a depth of 19%. Earnings are expected out in late August. A takeout of the 9.85 high of 6/17 is the top of the base, and represents a potential entrance for the speculator.
Responsys (MKTG) is an enterprise software developer that is expected to post earnings growth of 33% in ’14. Its industry group has shown relative strength in the past six months in the top few percent of all groups. MKTG is forming a constructive, five-week flat base with a 12% depth. Earnings are expected out shortly. A potential entrance can be had above the 6/27 high of 15.10.
Santarus (SNTS) develops drugs to treat gastrointestinal conditions. Earnings are expected to explode by 215%/65% in ’13/’14. The stock has been a big winner, the type that we prefer because it has already proven it has what it takes to attract institutional money and become a big leader. SNTS recently cleared a seven-week double-bottom base but had limited follow-through. Price is now working on a three-week shelf pattern that found support at its 50-day line, a plus. This pattern has mostly held up above the majority of its prior base. A potential aggressive entry would be above its high of 25.99 set 7/15. Earnings are expected out shortly.
Celldex Therapeutics (CLDX) is a development-stage biotech company, a good example of a leading stock (99 relative price strength) in a leading group. As such, the company has not earned a profit on an annual basis, and is not expected to in ‘13/’14. Following a 63% run-up in two weeks, price forms a four-week shelf. A takeout of the 7/8 high at 21.98 would present an aggressive speculator with a potential entrance. Earnings are expected in early August.
In summation, this is one of the more powerful markets seen since the ‘Nineties Bubble Era. A number of leading stocks have recently gapped out of patterns. While these are not mentioned in this report, they should be monitored in coming days and weeks for new buy points. We would suggest looking at our new Twitter feed (https://twitter.com/mardermarket) for intraday ideas and real-time analysis. In addition, the Facebook page contains timely ideas not found in other of our reports.
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