Hope everyone is looking forward to a nice weekend. Some of my neighbors have been without power for a few days due to PG&E shutting down preemptively on the two-year anniversary of the Paradise fire. That company is looking very troubled these days.
We sent out the BABA report last night. Had a nice boost this morning. The valuation there is fairly cheap compared to its peers (for obvious geo-political reasons). I like the areas they’re moving into beyond B2C eCommerce which is B2B eCommerce and cloud. There’s a high probability that there could be some momentum here, in my opinion.
Chainlink is up about 60% in the last couple of weeks, and along with Knox’s technical analysis both in the PDF and the forum, I think that one played out nicely with many of our readers getting in around the $1.60 mark. About a month later, it’s at $2.75.
Slack got a big boost today due to coverage that 37 hedge funds have initiated positions. Stock is trading up 9%.
I have an Op-Ed coming out next week in MarketWatch on Netflix. I actually like this company for a very long buy-and-hold but it’s going to get beat up for awhile. Knox will give you some ideas on a dirt cheap price and I will not be initiating a Netflix position myself until I get it dirt cheap. Too much risk due to market perception.
The Op-Ed on Netflix covers the slow proliferation of OTT globally and how Netflix is set up to be the leader as we hit global saturation between 2030-2040. This is the decade when the world will have broadband (we are at roughly 50% access to broadband right now with most of that percentage being very slow speeds).
I believe Netflix could have 1-3 billion subscribers if you figure 50-70% penetration in developed countries and 20% penetration in developing countries with 10 billion population in the 2030 decade. I have a lot of statistics in the upcoming analysis that supports this. But, this stock is going to get really beat up, in my opinion, and I’m on the sidelines for now. It’ll be on my market crash and/or recession shopping list. I’m really curious to see what Knox says on the rock bottom price, as well. He’ll have that for you next week.
It’s my prediction, that no matter what the broader market does, that tech will no longer be seen as a cyclical high-growth play – and rather, as more secular. The market is not ready to accept this yet but I believe they will be proven wrong as tech no longer needs a strong economy to push forward. Some tech companies will continue to report strong earnings, even when safe value stocks do not. I am not sure how the market will react exactly to positive tech earnings, as liquidity tends to trump earnings. But, in the last two major pullbacks, of the dot-com bust and the 2008 loan crisis, technology was not in a position of strength. Many of the internet companies were superfluous. They did not solve a pain, and global economies were not built on them. By 2008, the tech hype cycle had not begun, and in fact, mobile had its start six months prior with the iPhone launch.
You can basically say, at this point, that the most technologically advanced country is the most powerful country. That became more of a reality with cloud computing.
With tech, I’ve stated in previous market updates, that I follow trailing stops. This is a personal decision as the losses on tech growth (even great companies) can happen swiftly. I used Nvidia as an example of why a trailing stop is a great idea – you can always get back in once the stock stabilizes.
Today, nothing happened to the stocks we’ve covered in the PDFs that would be cause for alarm. If you’re new to Roku, then the pullback was alarming, but we had stated many times to not buy at its peak because this stock has a predictable pattern of dropping 50% off competitor announcements (these announcements are immaterial – Comcast -are you kidding me? And Apple is not a competitor as Roku is free ad-supported; not a subscription service. I’ll write some thoughts in the forum on this).
Of the industry verticals across tech, I want to emphasize that connected TV advertising will be a safe haven in the short-term. Brands are allocating budgets to CTV ads and that’s not going to change anytime soon. Roku, Trade Desk and a small cap Telaria was discussed on the forum. My goal is to dig up a few more options here for you to consider. As you know, Roku is my favorite and it’s due to product-market fit – but by all means, choose the CTV ad products/companies that you think fits your portfolio the best. I don’t think you can go wrong.
Cloud stocks will continue to report growth, as well. If I were to rank them, I continue to believe Zoom is the most insulated from a global slowdown. They solve a real problem and they do it cheaper and easier than the competitors. With that said, Workday, Slack and MongoDB should also remain insulated.
I do hedge and have short positions and puts. I do well with these and so do many of my readers. I hear from subscribers frequently on the Uber and Lyft analysis as I’ve always had high conviction here.
I have medium to high conviction on semis being in a similar place. I’m personally a fan of making money on the way down, and if this market is going to be volatile, I don’t see the semiconductors being an exception. We already saw that with Micron dropping 11% in one day. We had covered this via technical analysis, as well.
Snap should have had another announcement on Audience Network by now. I am confident institutions were expecting this announcement, as well. This one needs to be looked again, as it’s been six months and no further word on this.
Below, we have a technical update for you to help guide entries and exits. There was some good discussion on the forum about technical analysis being especially helpful on knowing when to exit to protect gains. We may not control the market, but we can at least use probabilities to manage risk and formulate a game plan.
Technical Analysis
by Knox Ridley
Aerial View
What we are looking at is the weekly chart in the S&P 500 going back to 2012. As some of you know, the RSI measures the internal momentum/strength of the price trend.
When the RSI oscillates above 50 and into oversold levels around 70, this is a healthy uptrend. An example of this is the RSI uptrend from 2014 to 2015, which is highlighted in green arrows.
On the flip side, when the momentum and strength is failing, it can warn us of a trend change. You can see this between 2015-2016. This is a similar pattern to what we are seeing today. The RSI is failing to break through the downtrend resistance. I’ve marked this with red arrows where it is making lower lows while the price is making higher highs and is now approaching the 50-day moving average, which is highlighted in orange.
Close Up View
The market has been trading in an expanding wedge for the last couple of years, which is outlined in the expanding black trend lines. The price has tested the upper trend channel multiple times, and each time has failed to break out.
The important levels that I am watching are the 2725 region. If we break that region, marking a lower low in the 2019 corrections, that will be a major warning. We have one last level to test, which will be 2600. If we break 2600, then we will likely test new December lows. By this level, my stops would have been hit and I’ll wait for things to stabilize.
Past Expanding Wedge Pattern (1990)
The last time we saw an expanding wedge pattern play out on a similar time frame was in late 1990. The yellow section highlighted indicates a 20% drawdown in less than 3 months. So, these moves can be swift once the pressure builds.
Conclusion
When you factor in that the Manufacturing Index reported its first contraction since 2009, coupled with weakening global production, it’s obvious why sentiment is at heightened fear levels. Pundits will claim that manufacturing doesn’t matter in America; that the consumer is all that matters. However, manufacturing mattered in 2008 as it did in 2011 and it matters today.
The reverse side of the argument is that bull markets don’t usually end in a whimper. There have been some theories that October will be painful with the year ending with new highs. For me, the 2725 level and 2600 level are the levels when we will be heading towards a bear market. As of now, I am leaning into caution while holding high conviction tech names with tight stops.
Tech Sector
Like the S&P 500, the tech sector has broken the uptrend started from the 2018 December lows. Tech led the charge up, so will likely lead any charge down. The next support level will be the 50-day moving average, which is highlighted in orange. This is not a good sign and an indication that more downside is likely ahead.
Rotation is underway
The Fifty index tracks and rebalances for the stocks with the most momentum in the market. Technology and Consumer Discretionary takes up over 50% of the total allocation. Notice the rotation out of momentum and into the safe, defensive staples names.
As many of you know, we’ve been discussing the shift in cloud stocks. According to SentimenTrader.com, September 9th marked the biggest one-day shift in momentum since 2009. On this day, value outperformed the best performing stocks YTD – mainly tech momentum stocks. You can read our blogs here and here on similar topics.
Workday – If we break $163.75, we will likely find support around the $141-140 region. This region coincides with the 38.2% retrace and the 168% extension. These are significant Fibonacci levels that will act as strong support. I will look to be a buyer around this region regardless of broad market sentiment. If we break this level, the 50% retrace around $123 will be the next support region.
Roku – We’ve updated you recently on Roku in a separate technical analysis.
Snap – Suggested stop at $14.
Work –A safe stop is at $20. If we close at or below $20, something else is playing out.
Zoom – ZM held support around $80-$78, which was the ideal target for a base. However, it has broken this support and currently broke through the 61.8% retrace level around $74.80. Below the 78.6% retrace and we are dealing with something other than a pause in a major uptrend. Stop at $67.75
Chainlink – So far, Link has followed our game plan perfectly. It broke down below the $2 line, and traded down to the $1.70 and $1.50 range, which was dead center in the middle of our target box. Hopefully you layered in some buys at this range. We are currently back above $2. Link below $2 is a buy.
Bitcoin – Bitcoin has been trading within my target range for the last week – between the low $8,000s and high $7,000s. So far, the price action hasn’t confirmed a bottom. Bitcoin below $8,500 is a buy.
Momentum swings in both directions. Last week, we woke up to Roku at a 20% drawdown in a single trading day. In fact, within 2 weeks, Roku’s price has fallen 39% from its all-time highs. If you are new to Roku, it would be easy to panic. However, for those that have been involved with Roku from its IPO didn’t even flinch. Within 2 years of trading, Roku has had 3 drawdowns of around 50% from peak to trough. The largest drawdown has been 64.47%, and without a strong conviction, there’s no way an investor could sleep while holding Roku for the long haul.
Whenever we see the market get it wrong, again, on Roku, and the technical break significant support, as a Roku investor, I don’t get afraid, I get excited. It’s times like these that I look to add to my Roku position as I have personally outlasted every Roku drawdown since it went IPO. The point of this report is to gauge the probability of Roku’s current drawdown, which can act as a reasonable point of entry.
Elliott Wave
Roku’s impulsive chart pattern is unfolding nicely. My primary count has us completing a blow-off top 3rdwave, highlighted in the blue numbers, where the explosive 3rdwave, with peak technical momentum, pierced the upper range of the trend line. We are currently starting the 4thwave down and when we zoom into the 1-day waterfall event, we can see a clear 5-wave pattern down, insinuating a 5-3-5 correction is underway. I estimate this correction will take us to the 50% – 61.8% retrace level ($96-$77), after we get a corrective bounce.
These levels not only coincide with the trendlines developing, but they also coincide with the 100% extension and the 78.6% extension. I see this area as a strong region to expect the pullback to find support, and depending on the broad market, could be an excellent place to add to, or begin building a position.
Basic Technical Analysis
Some of my favorite gauges for market health and actionable decision making is based on basic trendline/momentum data.
First off, I anchored a Volume Weighted Moving Average (AVWAP) to the December low, which is the momentum line highlighted in pink. This moving average clearly shows that, even with a near 40% drawdown, the bulls are still in control. This moving average lines up perfectly with the 200-Day moving average, highlighted in blue. These 2 levels will act as major support as they move into the targeted support ranges, strengthening the support within this region.
Moving onto the broken support regions, you’ll will notice the 3 separate tops (one of which we are currently experiencing). Below these tops you’ll notice the line in the sand support region, highlighted in dotted black. Roku has definitively broken through the current support, after breaking a significant trend line, also highlighted in black. Notice the red arrows. There are 3, all lining up with the exact moment the RSI, MACD and price broke their respective trend lines from the December low.
I would urge you to be cautious trying to buy the dip too soon in Roku. I do believe we will see a corrective bounce from over sold levels, but I expect it to be corrective before we see the final drop into the 50% – 61.8% retrace zones. You’ll notice the histogram in the MACD, dropping to levels we have never seen with Roku. When we see such a sharp drop in the MACD, more times than not, it’s an indication of too soon, too fast, which leads to the very least a bounce. Also, you’ll notice that the RSI is right on the 30 line, indicating oversold levels as well.
However, while we are looking at the RSI, I want you to notice how many times the RSI broke the 40 line, which in a bull market the RSI will usually not break, and then dropped to the 30 line. Three times this occurred, and 2 of those time lead at least a 50% drawdown. I use this as further evidence to hold off on adding to Roku at these levels.
In conclusion, I believe the $96 level will be the next support region that Roku will react to. It’s due for a bounce, I’m expecting at minimum to the $115-$120 region, but this bounce should be corrective before we drop to the 61.6% region. I will look to add to my position around this price cluster.
Most of my readers know that I’ve been critical of Uber and Lyft since before either went public. I have a decent repertoire of analysis on these companies dating back to March 14th (see below at end of this update for quick reference). This was at the height of the IPO exuberance when many Wall Street experts predicted these IPOs would be a success.
I updated my thoughts in a new article published today on MarketWatch. I’m writing some additional analysis for my premium readers, including why I think Uber is the weaker company due to it’s contribution margin and a few other key metrics. Knox is going to publish some TA on where he thinks these companies will ultimately end up.
I’d like to point out that during the cloud software sell-off, we were working hard to provide our readers with a few good ideas. We published on Workday, Zoom, Slack and Okta. Three of these we nailed on what support would be (Zoom, Slack and Okta), and continue to believe Workday will come back to the levels in our scenarios. We were pumping out the information as we wanted to give our readers a few stocks we thought would hold support and warn on the one stock we were concerned about (Okta). Keep in mind, we wrote on Okta before anyone could have predicted the cloud software pullback.
We are not financial advisors, rather we work hard to pick the right stocks through tech industry analysis, and to follow this with the right entry. Nobody is right 100% of the time, and we won’t be either. But, it doesn’t hurt to point out when our hard work pays off. Knox especially hit a few home runs on TA this month.
To summarize:
Our chart for Zoom on Sept 5th called for a 61.8% retrace to $78.00 – the stock hit exactly this number on Sep 9th and bounced back. We stated we’d love get the stock at this price in the PDF and chatted with some readers on the forum about entry here.
On Slack, which was a blog update on Sept 4th, we called for a $25 support range or a $10-$12 billion valuation when Slack was priced at $31. On Sept 9th, we hit $24.92, and even this volatile stock that has negative market sentiment, has held support for about 10 days.
On Okta, we published a technical chart showing a retrace to $104 when the stock was priced between $127-$133. This was a bold call at the time. Alternatively, Knox suggested any Okta bulls to wait until the stock broke $142 as buying pressure was slowing down and there was higher probability the stock would go through a pullback.
Workday hit the $172 support that Knox wrote out in the scenarios on August 28th. We are still waiting to see if we can get the $190, although this is taking longer than expected due to the cloud software pullback. Workday has a financial analyst day planned for October 15th. I am curious to see if they will debrief the financial analysts on their machine learning strategy and progress there. I’m not sure the financial markets are fully aware of Workday’s strategy with ML. I’ve been seeing this at tech conference keynotes over the past few months and feel I am ahead of momentum here.
Regarding Roku, we had quite a few readers ask us about Roku when momentum pushed the price into the $160s. We encouraged them (frequently!) to wait for a better entry. I like $120 but Knox has other ideas in the $100-$111 area. He’s working on this update. In short, with the recent shift in momentum names, we want to see how price reacts in September. Anyone who has followed Roku longer than a year knows that a %10 up/down day is very normal. Stay tuned. p.s. You’re also aware this is one of my favorite trends in tech in the short-term (connected TV ads), and why I like Roku over a few of the others in the space, so keep that in mind. This is available under the PDFs for anyone new to the site.
Of course, this is anyone’s game. It could all change tomorrow. Stay nimble! We do put trailing stops on our positions right now in the event there is a sudden reversal. Nvidia at $290 is a perfect example. We were able to ride this up and take gains when we hit our stop and re-evaluate and re-enter at new support a month or so later. Note: We haven’t built our full position in this stock just yet.
I typically will lean towards a stop of 20-25% in this market environment. After that, I re-evaluate before I enter again. However, high conviction stocks like, Roku, which we’ve owned with a cost basis of $29 for over a year, we will hold with no stops, as long as the story remains unchanged.
I’m headed to a few tech conferences: AdvertisingWeek in NYC and Strata Data Conference this week and TechCrunch Disrupt the following week. AdvertisingWeek should help me understand where we are in ads, especially with connected TV ads (don’t want to miss any small caps) and programmatic. Strata Data Conference is all about machine learning and big data. Lastly, TechCrunch is second to none for the startup ecosystem, which eventually grow into successful IPOs.
I’ll drop the Uber and Lyft PDF by Monday at the latest. We are working on a new Roku chart too.
I believe Slack will be one of the better turnaround stories. The question is timing and valuation. Due to weak technicals going into earnings, I am on the sidelines on a product that I believe has some of the best key metrics in the industry right now. I’m waiting because the probability of Slack selling off on any perceived weakness is higher than Slack rallying.
Now, Slack could rally, and that’s a chance that anyone reading this should carefully consider. I wrote in MarketWatch today why I like the product, especially for the net retention rate and stickiness. This is why I have a high conviction that Slack will have a profitable turnaround in the future.
As you’ll see in the analysis, I do not see Microsoft as a primary threat (but let’s hope the market does see Microsoft as insurmountable obstacle so that we can get the stock cheap). As a tech analyst, it is one of my strengths to truly understand the competitive positioning of products compared to financial analysts, who are numbers driven and removed from the startup scene.
Even with Microsoft Teams growing faster than Slack, this will not be a concern for Slack’s trajectory long-term. Slack is taking market share from Microsoft, not the other way around. Regardless, there’s room for both — and Slack is a pure play stock with the right key metrics.
Note: Microsoft is a recommendation of mine for cloud infrastructure-as-a-service and enterprise software revenue segments.
Slack’s profit and loss statement is more positive than its first appearance for a few reasons. To start, the company does not monetize the majority of its users. The company is doing this to gain market share, yet Slack can monetize when the market begins to hit saturation (which will not occur anytime soon as Slack has tapped an estimated 5% of the market). But, when the company is ready – that revenue will be there waiting.
Also, consider that the Slack messaging app is only 5 years old. The product launched publicly in February of 2014. Meanwhile, it already has similar financials as Okta, which launched in 2009. Zoom video has 3 years on Slack, launched in 2011. In startup years, that’s a substantial amount of time.
The third is that Slack is a data powerhouse as messaging is a superior form of data. This is not related to the P&L, but is a future driver of revenue and is a benefit currently invisible in the financial statements. The store of data that Slack has will convert to revenue in the future.
Now, back to the main question – timing and valuation. I would love to get Slack at a $10 billion valuation as I believe the company will grow to a $50 billion valuation once the market for enterprise B2B messaging matures and all of Slack’s integrations are fully understood. I would settle for a $12 billion valuation.
My hope is that Wall Street beats this stock up on the slowing growth and that sell-side analysts don’t want to take the risk on initiating a position until the herd is more positive on the company. The technicals on this stock are weak at $14.5 billion, and that was Slack’s mistake to price high rather than earn its market cap over a series of earnings reports.
I’m rolling the dice that I can get Slack cheaper than where it is today with the understanding this will be a long term holding of mine by early 2020. Nobody can tell you for sure what will happen with an earnings report (or the market’s reaction) – everything is a probability.
Knox has been watching Slack closely since the DPO and he has some thoughts for you on entry.
Technical Analysis
By Knox Ridley
Since its DPO, Slack has been in an obvious downtrend, making lower highs and lower lows. On one hand, because the price action is so new with limited inputs, there is not a lot of information to make an in-depth technical report on Slack.
However, as we mostly see with new IPOs with a fundamental story that is not fully understood, as well as no earnings to spark a reaction, price will typically align with Fibonacci ratios quite succinctly, as can be seen in the chart below.
Support/Resistance Targets
In a corrective move, we commonly see 3 moves in the downtrend, where the third move is usually the same length as the first move, and at times will extend to a ratio of the first move. This is exactly what we are seeing in Slack today.
The B wave retraced almost exactly 50% of the A Wave’s initial move, as shown in the first red resistance line around $38.45. Then Slack trended to nearly the exact length of the A Wave (100% extension) around $31.25, before making a corrective bounce to the $35 region, a price cluster that will hold significance for Slack to break through in a bullish move, which is highlighted by the green dotted line.
Another phenomenon we see in technical analysis is the significance of round numbers. This is evident in the support/resistance region around $30. Slack respected this region with force until recently breaking below it, signifying a new leg down, at which point it became strong resistance. I view this price cluster a significant psychological support/resistance.
Slack has found support again around the price cluster that coincides with the 1.382% extension of the A Wave’s which is between $28.50 region. As you can see, Slack has traded within the trend channel, highlighted by the blue lines, and seems to be looking to break out to the upside, even after making this last push towards this region.
Internal Strength
AVWAPS
I attached a Anchored Volume Weighted Moving Average (AVWAP) to the 4 major bounces, which indicated the lower highs within the downtrend. The AVWAP shows the price of Slack from each of these specific emotional points, which signify failed breakouts and the commencement of the downtrend to new lows.
The AVWAP is like a voting machine that not only looks at the price, but the amount of shares that was purchased at that price. Because of these factors, it’s a very accurate tool for seeing the exact moving averages that need to be reclaimed in an uptrend. These trends are shown in black, and represents the trend we are currently in.
As you can see, Slack has a lot of work to do in order for the bulls to regain control. These moving average will act as significant resistance on any uptrend, and once reclaimed in full, will be a strong statement that the bulls are in control. I will want to see these Slack begin taking back these AVWAPs before committing fully to the uptrend.
Relative Strength Index
At first glance, Slack’s RSI is quite weak. It’s spent the majority of its time below the 50 line, and like we see in downtrends, the 60 line of the RSI is not broken. Reclaiming the 60 line in the RSI will be crucial for Slack to get out its current downtrend.
However, there is a pattern developing in the RSI that is one of my favorite signals to trade – Positive Divergence. This is highlighted in the chart, where the price is making lower lows and the RSI is making higher lows. It’s a strong indication that selling pressure is letting up, at least temporarily, and that a reversal could be underway. Whether this reversal is corrective or the beginning of an uptrend, is too soon to tell.
It’s always dangerous to trade a stock in a defined downtrend. However, we believe Slack is a fantastic long-term play. If you want to roll the dice at the $28 region, make sure that you have very tight stops in this market, and at most, put a stop in just under to 200% extension at $24.
There is less risk at $35 or above (bullish pattern), or at the 200% extension at $24, than where it is currently priced.
Okta, like most Cloud stocks, has been on an epic run since going public. However, Okta’s price action is showing signs of slowing down. With 5 waves up from the beginning of this long-term uptrend, which started in late 2017, Okta’s final 5thwave in green had its own extended 5thwave, noted in magenta. When a stock completes it’s larger degree 5thwave structure, like we see in green, I tend to get cautious.
Okta has taken out its 8-day, 21-day, and 50-day Moving Averages. As long as the 200-day is not breached, Okta can rebound and continue this uptrend, which would reset my primary count above, and see Okta extend further before taking a breather.
Let’s start with the price trend line in blue, which started off the December lows in 2018.
You’ll notice a clear uptrend that the price action respected, even in the June correction of this year. Note that at the peak of this uptrend, just above the maroon arrow, Okta’s price broke through this trendline with force. Also, if you look at the RSI leading up to this moment, you’ll see it making lower lows while the price action is making higher highs, which is signaling weakness, and a coming pullback. This is a very typical pattern we see just before a pullback.
Furthermore, my 2 favorite momentum indicators, the MACD and RSI, both showed the same uptrend within these indicators. At the exact same moment, highlighted with the maroon arrows as well, you’ll notice that they too broke their uptrend.
This outside day pattern is a rather notable pattern where a single day of trading engulfs the prior day’s high and low. What makes this pattern strong is that it engulfed not only the day prior, but nearly 2 weeks of trading days before it. It also dramatically closed below the prior days and it did so on heavy volume. You’ll see that what followed was the beginning of a trend change. When I see a moment where multiple trendlines are broke, as well as an outside day reversal pattern, I take note of a possible reversal in sentiment – the extent to which is yet to be seen.
However, it’s worth noting that the buying pressure is still strong with Okta. Until the RSI breaks the 40 line, and the $118 support is broken, Okta could continue higher.
Relative Strength Index
Looking at the RSI, we see the buying pressure that is still evident in Okta. In the first chart, which shows a longer time frame, you’ll notice a similar RSI trend that was broken. When a momentum trend breaks, it typically signals a correction is imminent; however, the extent to which is always in question.
Keep in mind that the 40 line is a crucial support for a bullish continuation; notice how this line played out in each trend break, which is noted by the first line of maroon arrows, which occurred in June of 2018. The RSI trend broke, as price began to retrace. However, the RSI held the 40 line, and began a new uptrend, which was a rather shallow pull back.
The next RSI trend break occurred in October of 2018, also noted by a line of maroon arrows. This time, the RSI collapsed beyond the 40 line into bearish momentum territory. What followed was roughly a 40% pullback.
Where we are today, is more similar to the first example of the RSI trendline breaking, so far. The RSI broke its trend line, but has held support at the 40 line. The price action today is in a holding pattern, which can be noted in the RSI holding a tight pattern between the 60 and 40 line.
More information is needed from earnings to determine if we get a continuation of the bull trend, or a further retrace.
Where we are:
As stated, Okta’s price action is slowing. It has broken numerous trend lines, both in price and momentum, and signaled a possible sentiment change with the Outside Day Reversal Pattern shown. However, it has yet to follow through both on price and momentum, showing that the buyers are still very excited about this stock. The earnings report will likely be the catalyst for the direction of this stock as well as the trading plan you might want to follow.
It should be noted, with a Price to Sales hovering around 34, coupled with no earnings, Okta is priced to perfection. If Okta’s price breaks the $118 support, we will likely see a deeper correction that can take us to the green box highlighted in the chart, which I have as likely targets around key retracements, highlighted in black.
On the other hand, if Okta’s price breaks to all new highs, around $142, we can see an extension of the uptrend. If you decide to play the continuation of this momentum, it will be crucial that you put tight stops in place – $142, but no lower than $118.
Last month, Alibaba.com expanded into the United States when Alibaba Group opened its business-to-business online marketplace to US companies and will allow US manufacturers, distributors and wholesalers to sell their products. The size of the B2B market is more than five times that of online retail at $23.9 trillion.
Trade war tensions can certainly put Alibaba’s global ambition and stock gains in question. Alibaba Cloud is one segment that will continue its growth despite fluctuating trade war news. China’s IaaS market was worth $1.2 billion in 2018 compared to the United States at $40 billion. One day, Alibaba’s cloud profits will surpass e-commerce profits, which is not a bold claim as this is what happened with Amazon with $25.7 billion in revenue last year with AWS reporting $7.3 billion in operating income compared to Amazon North America reporting $7.27 billion.
Alibaba’s margins are slimmer than Wall Street would like to see due to investments in cloud services and other areas, but overall, Wall Street has a Strong Buy on BABA with a low 12-month estimate of $195 and a high estimate of $280 with average price target of $218. The stock has underperformed the S&P 500 with -10% returns over the past 12 months. Due to the market shedding over 500 points today, Alibaba is trading below its 200-day moving average and 50-day moving average.
There’s a high probability that Alibaba beats earnings when it reports before market open tomorrow .A few other points adding to the higher probability:
Alibaba’s last earnings report beat by $0.33 and GAAP EPS beat of $1.47 beat by $0.96
Revenue last quarter grew 51% YoY or 39% excluding acquired businesses
Revenue of $13.93B beat by $600M last quarter
com had strong earnings, giving us a small glimpse into China’s e-commerce market last quarter
According to MarketWatch, analysts surveyed by FactSet expect that Alibaba earned 10.32 Renminbi a share for the June quarter, or $1.46, up from 8.04 RMB, or $1.17 a share, in the year-earlier period.
I am personally buying a call before earnings and will build a larger position if BABA pulls back per Knox’s technical analysis below. This way, I stand to gain no matter what happens tomorrow and regardless of what the market decides to do over the next few months.
Note: I plan to dedicate a full research report to this stock as there are a few more positives to consider for building long-term positions.
Alibaba Technicals:
Technical analysis provided by Knox Ridley.
Relative Strength Index: RSI trends in red (bearish internals), yellow (neutral internals), green (bullish internals). Alibaba, on its most recent move, broke 60 and reversed back into red. This can change quickly, but Alibaba is currently showing weak buying pressure. Alibaba broke it’s RSI trendline from green to red mid-2019 and has struggled to regain green territory.
BABA is trading on its 200-day Simple Average after testing many times since mid-2018. It’s currently at an inflection point and trading within a wedge pattern, which is highlighted in blue.
The wedge pattern is a trading range that comes to a point, that forces the price action to trade in a very narrow band and builds momentum for a break-out or a break-down. Fundamentals are strong while broader market is weak, and therefore, we have two scenarios for you and will be watching the $148 support and the $180 resistance.
Scenario 1: BABA has traded along the blue trendline for many years and this has been major support. If BABA breaks down below this long term trendline, which coincides with the bottom of the wedge, then we will test the $148 support and this is a warning sign (and a gift). If this breaks, we will update you on entry for a bigger position.
Scenario 2: BABA reports strong earnings and continues along the blue trend line or breaks above the wedge and reaches the $180 resistance. If you like this scenario, consider buying an out of the money call.
A more detailed report on bitcoin will follow in the coming weeks. In summary, we see BTC trading to $60,000 plus in the coming years. The fundamental thesis supports the price action on this move, and we will publish this for you in mid-September. The question is – will we have a major retrace before this move, or will we breakout from here, leaving these levels behind?
BTC’s price has been relatively stable over the last couple weeks, trading within a very tight range. If you look at the blue lines in the chart, you’ll notice that BTC is coming to the point of a trading pattern known as a wedge. A wedge is a defined trading range that tightens to a point, where price builds up momentum before it makes a decision to break out or break down.
Scenarios:
My primary count has BTC breaking down to the $9,600 support region and then retracing to $8,000-$7,000, which coincides with the .382% retrace.
My secondary count is that BTC breaks out from here, reaching new highs above $13,875.
$4800 is the must-hold point for this bull market
Taking out insurance and allocating 20% of your BTC position today at current prices is something to consider, and planning to add to the position depending on if the price breaks up or breaks down. You can add the remaining 80% in tranches depending on if we break out or break down.
I’m personally holding BTC with a 40% stop, and viewing $4800 as the must hold point for this bull market. This would be a welcomed and final pullback, although appears to be more elusive. as the price has remained steady for an extended period. Please only allocate a small portion of your portfolio to BTC. This is highly speculative and very volatile.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
There’s reason for caution today. Right now, the chart above shows that the market is flashing yellow. We have closed below the 200-day EMA, broke through the bottom channel of the Bollinger band with force and turned down right at the midline. We’re seeing a noticeable elevation of volume, pushing stocks down. And, most telling, is the RSI of the broad market. Look at the last 2 times it dipped below 50 and couldn’t break that level. In short, in downturns, the RSI usually stays below 50 and does not break 60, and in bull markets, it usually stays above 50 and does not break 40.
I took the 3% down day last week to be a warning. When you consider SPY to be the ETF tracking the greatest 500 stocks in the United States, you come to realize just how diversified this index is, which should put into perspective how violent a 3% move in one day is. We are not recommending selling stocks, but we are recommending that you mind your trailing stops, and be patient with entry into other names. Some of our stocks tested support, and are currently right above their recommended support levels. Let’s see what the market decides to do before adding or initiating any positions.
